Textiles. Finally, policy cottons on to manmade fibre sector

Indian policy makers, for decades, had preferred a textile policy that significantly favoured cotton. The reasons are not far to seek. India is the largest producer of cotton in the world accounting for 25 per cent of global output. At around 125 lakh hectares, the country has the largest acreage under cotton with six million or so farmers growing the fibre.

Despite the support, India’s cotton dominated textile exports have faltered over the years. Share of readymade garments (RMG) in the nation’s export basket has fallen from 11 per cent in 2001 to 4 per cent in 2020. Cotton yarn’s share has halved since the turn of the century. Overall share of textile exports has dived sharply from 24 per cent to 11 per cent in the last two decades. This is because the world has moved away from natural fibres like cotton to man-made fibres (MMF) such as polyester, viscose and Kevlar. MMF-based RMG today accounts for 70 per cent of the global trade (will be 80 per cent by 2025) and India’s share in that is a mere 2 per cent. This, despite the fact that it is the second largest producer of MMF.

Other textile majors have adapted to the change. China’s share in MMF textiles (as of 2019) is 38 per cent while new entrants Bangladesh and Vietnam have already mopped up 9 per cent and 6 per cent share respectively. Continued focus on cotton even after the fashion shifted away from it has proved to be India’s undoing and no government, despite the data staring at the face, had the political will to make the course correction.

The change began when Prime Minister Narendra Modi met eight representatives from the textile industry in December 2019. He had called them to understand the steps to be taken to revive the textile sector (a major employment generator) and boost exports.

In the 2020-21 Budget, the government removed the anti-dumping duty levied on purified terephthalic acid (PTA), a key raw material to make Polyester Staple Fibre — a MMF. Now PSF is available in India at international prices.

Textile parks push

In February 2021, the government announced the Mega Investment Textiles Parks (MITRA) policy under which seven large integrated textile parks, each spread over 1,000 acres, will be set up in the next three years. The industry representatives had said that such infrastructure would help smaller players scale up rapidly (critical for competitiveness) apart from attracting foreign direct investment. Along with capital will come latest technology and modern processes, they had argued. MITRA will benefit both cotton and MMF segments.

In August, the government scrapped the anti-dumping duty on viscose staple fibre (VSF), another critical input for MMF textiles. This was quickly followed by Remission of Duties and Taxes on Export Products (RoDTEP) scheme to reduce the tax burden on exporters and make them more competitive.

Earlier this month a production-linked incentive (PLI) scheme for textiles with focus on MMF and technical textiles was announced involving incentives worth ₹10,683 crore. Experts have called the scheme attractive and expect investments of at least ₹25,000 crore to ₹30,000 crore in the MMF space including in ramping up raw material capacity, processing facilities and setting up of design studios. If implemented properly, the PLI scheme will bridge India’s gap with its competitors when it comes to MMF capabilities.

Will these measures help India regain its dominance in textile exports? They will, no doubt, help the country increase its share in the MMF pie globally. But any talk of regaining lost glory is premature. Consider this: according to CRISIL, in the US where import duties are same for India and its competitors, Bangladesh and Vietnam offer their products 34 per cent and 19 per cent cheaper respectively. A lot more needs to be done for Indian exporters to become competitive.

Tax matters

GST structure for MMF is inverted. GST on fibre is 18 per cent, on yarn 12 per cent and 5 per cent on fabric. This needs to be corrected as MMF manufacturers are unable to take input credit in full and this adds to their cost. In the case of cotton, GST is uniformly 5 per cent. It is time for a fibre neutral policy.

Indian exporters also lose their cost competitiveness on account of higher power and logistics cost Labour is pricey too. Monthly wages in Bangladesh ($101), Sri Lanka ($148) and Vietnam ($216) is a lot lower than India ($257). More reforms and investment in infrastructure are needed to bring these costs down. Automation, especially in RMG, will help increase productivity and reduce costs.

Till the time Indian exporters gain competitiveness, it is important for the government to incentivise them. Bangladesh and Vietnam are going out of the way to do so. Indian government’s allocation towards incentives for the textile sector have, on the other hand, reduced sharply. It is almost 70 per cent lower in FY21 and 56 per cent in FY22 over FY20.

Another critical element is the market access. Competitors have moved fast to stitch preferential trade agreements with importing countries. Vietnam has FTAs with the UK, Canada and the EU. It has a most favoured nation status with the US. Bangladesh exports to Canada and the EU at zero duty on account of its least developed nation status. It also has a FTA with UK. India, for its part, is struggling to improve its pathetic record in concluding FTAs. Talks with EU, Canada and Australia have seen no progress for ages. The US has said that it is not interested in a trade pact with India. If all goes well we may have a deal with the UK next year. Without preferential access, Indian exports will face strong headwinds.

Textiles is one sector that is already self-sufficient and with little more support, can grab a strong share of the global market. In other words, it has the potential to showcase the success of Modi government’s Atmanirbhar Bharat initiative.