Indian textile exports, which lag those from China, Vietnam and Bangladesh, could get a boost from a slew of schemes, including PLI and the mega textiles parks initiative. Preferential access for Indian exporters, following the expected signing of trade deals with the UK, US and the EU, will also increase their attractiveness.
The share of textiles in India’s merchandise exports has been progressively falling – from 24 per cent in 2001 to 11 per cent in 2020. Then, India’s share in the global trade in cotton yarn has also fallen from 29 per cent in 2015 to 23 per cent in 2020. In readymade garments (RMG), which generates the highest margins in the textiles value chain, the country has been unable to increase its share from 3-4 per cent over the past decade.
A Crisil study on the textiles sector says: “Lack of free trade agreements (FTAs) and significant improvement in peer competitiveness have caused this.” High costs are another important factor. China, Vietnam and Bangladesh have mainly benefitted and gained market share across important markets like the US and the European Union at India’s cost.
To revive the sector and make it competitive vis-à-vis its rivals in China, Vietnam, Bangladesh and elsewhere the government has come out with a slew of schemes such as the setting up of mega textile parks, which was announced by Finance Minister Nirmala Sitharaman in the last Budget, the production-linked incentive scheme (PLI) and the Remission of Duties and Taxes on Export Products (RoDTEP) scheme, which cut the incidence of tax on exporters.
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According to the Crisil research report, the recently announced PLI scheme for man-made fibres (MMF) and technical textiles is expected to improve the potential of MMF-based RMG exports where India’s share has been weak.
“Along with the integrated textile parks scheme, the PLI scheme may help the sector enhance its export share over the medium to long term, if implemented well. However, continuous support in terms of trade negotiations, more investments to improve infrastructure at larger scale may be needed. India is in a favourable position with China facing political backlash globally but capitalising on this opportunity would need continuous and concerted effort,” the report said.
A calculation by Crisil shows the PLI scheme can potentially generate incremental revenues of $20 billion on additional investments of $3.3-4 billion. It estimated that this could lead to a capacity addition of 2.5-3 million tonnes and generate an internal rate of return of 17-18 per cent for investing companies.
The scheme can, thus, be a gamechanger for the Indian textiles sector if it is implemented well.
However, the ratings body does not expect the RoDTEP scheme to lead to any significant increase in incentives for textiles and garments exports. Hence, it is unlikely to result in much incremental benefits for the sector, which makes up about 11 per cent of India’s merchandise exports of $313 billion and is the second-largest employer in the country providing direct employment to 45 million people and indirect employment to associated sectors of another 60 million.
The report highlights some key shortcomings of the sector. It pointed out that even as China, which still dominates the global trade in textiles and apparels, has been steadily losing market share over the past five years, it was countries like Bangladesh and Vietnam that benefitted most from it. India has been unable to capitalise on the opportunity. “Further, Indian textiles players were pushed to the brink in 2020 as the Government of India reduced export incentives in line with guidelines of the World Trade Organization,” the report added.
Crisil pointed out that Vietnam and Bangladesh offer better incentives to their RMG sector. They provide cash incentives, zero import duties on raw materials and machinery, tax relief and/or incentives on investments.
In India, the allocation for incentives have been on a downward graph after fiscal 2020 and this can have a negative impact on the competitiveness of Indian exporters.
“India lags in man-made fibre (MMF)-based RMG global trade. Though MMF-based RMG constitutes 65-70 per cent of global trade, for India, it accounts for 35-40 per cent. India’s share in global MMF-based RMG trade stands at a mere 2 per cent despite it being the second-largest MMF producer, whereas China, Bangladesh and Vietnam accounted for 38 per cent, 9 per cent and 6 per cent, respectively, in calendar 2019,” the report said.
The main reason for this is the cost competitiveness of companies in China, Vietnam and Bangladesh, which benefit from trade agreements their countries have with the EU and the US. “In the US, despite similar import duties, Bangladesh and Vietnam are offering products at 34 per cent and 19 per cent lower price as compared to India, whereas in the UK, Bangladesh, the largest MMF garments importer in the EU, is offering at 33 per cent discounted price,” the report added.
In the wake of the tensions between the US and China, Washington has banned imports of cotton and cotton goods from China’s Xinjiang province, which accounts for more than 80 per cent of China’s cotton production. Since this region is the world’s largest cotton producing area, accounting for about a fifth of global trade, this decision is bound to impact the entire textile value chain across the world and open up new opportunities for countries like India.
“Consequently, several RMG brands started looking for alternatives globally and this led to a spike in Indian-originated RMG exports in or since March 2021. This trend is expected to underpin India’s exports trajectory providing it a much-needed opportunity to re-establish relations with global brands,” the report said.
It pointed out that during the January-May 2021 period, the exports of cotton yarn, fabrics and made-ups from India have grown sharply by 69 per cent and RMG exports have grown 39 per cent. Even raw cotton exports have shot up 55 per cent over the October 2020-May 2021 period to 5.8 million bales as the US and Brazil struggled with lower cotton output.
However, the EU and the US, the world’s biggest textiles consuming markets have remained a challenge for Indian exporters. “Despite the EU and the US being the largest RMG export destinations for India with 32 per cent and 27 per cent share in fiscal 2020, respectively, India was unable to increase its presence there. While Bangladesh was able to improve its share in EU exports due to low cost of labour after abolition of quota system for developing nations, Vietnam increased its share in US exports as it acquired most favoured nation (MFN) status in 2001,” the report said.
With the world resetting its ties with China and with companies in the West looking at diversifying their supply chains away from China, a potentially huge market opportunity could open up for the Indian textiles sector.
“For this, India will have to revamp its product portfolio, restructure incentive schemes and reduce cost. Trade agreements with leading destinations provide easy access. Both Vietnam and Bangladesh succeeded in signing preferential trade agreements, which helped them with competitive pricing,” the report said, pointing out that these two countries are delivering the right products at the right price points.
India is negotiating a limited trade deal – as well as a Free Trade Agreement (FTA) – with the UK, which accounts for 10 per cent of India’s RMG exports. Once it materialises, Indian textile exports to the Britain, on which import duties of 8-12 per cent are levied, are likely to become more competitive vis-à-vis exports from Bangladesh and Vietnam, both of which signed FTAs with the UK recently.
India is also negotiating similar deals with the US and the EU. India’s Commerce & Industry Minister Piyush Goyal had said a few months ago that a limited trade deal with the US is likely to be signed soon and this would be followed by a full-fledged FTA with Washington.
Trade talks with the EU have stalled. Despite some recent show of urgency, experts don’t expect any dramatic forward movement on this front in the near future. However, a limited deal for a few items, including textiles, could be possible in the light of their mutual suspicion about China.
Then, to gain a larger share of the global market, Indian exporters have to increase their output and exports of MMF garments. This is why the Modi government’s new PLI scheme for textiles includes MMF and technical textiles. The total allocation for the incentive scheme is about $1.5 billion.
“In addition to PLI scheme, which offers incentives, players may need to build scale and integration to further reduce costs and become more competitive in export markets. The recently launched Mega Investment Textiles Parks (MITRA) scheme by the Government in Union Budget 2021-22 can play a key role,” the report added.
There is a big window of opportunity opening up for Indian textiles exporters. The government is alive to the possibilities and has rolled out a slew of incentives – though, as pointed out above, more will be better. Now, it’s up to individual units in the sector and for potential investors under the PLI and MITRA schemes to ride the opportunity, close the gap with their global rivals, and establish the country’s footprint in this important sector.