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Fragmented capacities stifle growth

May 19, 2010  by: Rahul  Points: 25   Category: Social  Earning $0.85   Views: 1083

Fragmented capacities stifle growth. this time it took an exogenous crisis to magnify the structural deficiencies that lie underneath. The textile business has often been hyped as the industry of promise


The threads are coming apart again. And, this time it took an exogenous crisis to magnify the structural deficiencies that lie underneath. The textile business has often been hyped as the industry of promise, for driving job creation, exports earnings and industrial growth in the economy.

But, with the rupee value appreciating against the dollar over the past few months, the textile industry is back to doing what it does best, crying for government intervention and an unending supply of incentives. Over the past few weeks, newspapers and magazines have been writing about how the rise of the rupee, 14% since October 2006, has hit the textile industry hard and, consequently, how thousands of workers have been rendered jobless.

It's also been reported that exports from the sector, initially targeted at $25 billion for 2007-08, may now amount to only $18 billion. In comparison, exports during 2006-07 amounted to over $19 billion. The chairman of a textile industry association even redefined hyperbole when he recently predicted that the textile sector would throw up an army of over half-a-million unemployed people by the end of the year, unless the government takes immediate steps.

While there might be a lot of truth in all these dire predictions and doomsday scenarios, it highlights once again how the Indian textile sector, despite all its promise and potential, has fallen short of expectations. And, the reasons for that do not seem to have changed over the past few years, a combination of lopsided government policies and a skewed industry structure.

In some ways, the current crisis also presents the government with an opportunity to set right all the wrongs perpetrated over the years. However, the government's response so far has been to provide only tax-based incentives that allow the industry to keep its head above water but does not address either the infrastructural impediments or even some of the core imperfections.

The Indian textile sector does have a lot of positives going for it. Read any fact-sheet on the industry and you will be told how India is the third largest cotton producer in the world, second largest producer of cotton yarn and textiles, how it has over 60% of the world's installed looms, 22% of the global spindle age, how it has wage rates 40%-50% lower than most developed countries (positioning the sector, therefore, as an ideal outsourcing base), and so on. But, these facts and figures also hide the real reason behind the basic infirmities.

The world's third largest cotton producer and second largest in cotton yarns and textiles should have automatically made India one of the world's largest cotton garment and apparel exporters as well. But, according to a CII-Ernst & Young joint study of the Indian textile sector, India's current share in the global apparel and textiles market is only $14 billion, compared to a global market of $450 billion, a paltry share of only 3%. This means the industry is producing large quantities of yarn and exporting vast amounts of it as well, but is unable to produce quality fabric or ready-made garments that can be exported.

So, where's the hitch? The problem lies in the industry structure. It is too fragmented and consists of too many small players who have not bothered to either create sustainable and strong brands or even create markets for themselves.
According to a background paper on the industry prepared by the India Brand Equity Foundation in 2006, "India's textile industry comprises mostly small-scale, non-integrated spinning, weaving, finishing, and apparel making enterprises." The operative term is "non-integrated".

For example, at the bottom end of the chain, at the spinning level alone, there are 1,135 small scale and 1,564 large units. In the weaving/knitting segment, there are 3.9 million handloom units, 1.8 million power loom units, and only 0.1 million units in the organized sector.

In addition, there are 2,100 processing units and 77,000 units (mostly small scale) in the garment/ apparel segment. No wonder, despite the presence of so many weavers/ knitters, India's fabric imports from both the US and EU have grown over the years. This fractured condition is also reflected in the large number of export promotion councils and industry associations.

There's yet another problem. While the spinning sector has acquired some scale, comprising several large private sector players, it's the opposite in the weaving sector, leading to fragmentation and questionable quality. But, why has this divergence happened?

The answer: deregulation and delicensing that took place in spinning seems to have encouraged consolidation, while an overhang of antiquated government regulations and promotion policies aimed at pleasing vote banks seems be weighing down the weaving/knitting sector. As a consequence, many Indian textile companies that want to move up the value chain and grow are all now looking overseas, either through greenfield plants or by acquiring existing units.

What this clearly shows is that the industry needs composite mills with scales of economy. Tragically, there are about only 280 large mills, that can loosely be called composite mills, integrating the entire chain of spinning, weaving and sometimes even fabric finishing. But, they account for only about 3% of industry output.

According to the CII-Ernst&Young study, "This unique industry structure is primarily a legacy of government policies that have favoured labour-intensive, small-scale firms as against large-scale firms." Unlike the west, fragmentation of capacities has also led to the absence of any branding and, hence, the inability of producers to command a premium over normal, commodity prices.

The government has made many announcements to remedy some of these ailments. For instance, the prime minister has suggested the setting up of a committee comprising members from the ministries of finance, textile, commerce and industry, National Manufacturing Competition Council and various industry leaders to figure out a "durable, productive and pragmatic solution to the problems of the textile industry".

The textile ministry is also setting up a new apex company that will not only represent all sectors of the industry but will also provide trade facilitation, branding inputs and R&D help. But, again these do not seem to attack the virus that's eating away at the core of the industry.


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