India’s Cotton Industry Blossoms
March 10, 2009 The Indian economy showed a commendable performance during 2005/06, led mainly by sustained growth in the industry and service sectors. The economy is on the fulcrum of a fundamentally strong growth path, marked by 8% growth in GDP, rising foreign exchange reserves close to $160 billion (USD), high inflows of foreign direct investment and about a 25% surge in exports. The industrial sector registered a strong growth in 2005/06, on the back of robust and broad-based manufacturing activity. The manufacturing sector recorded a growth of 9% during this period. The merchandise trade continued to register a strong growth of 24.7% in 2005/06 on top of 26.4% growth in the previous year. Current trends suggest that India is well on the way of reaching exports of $125 billion in the coming year. Imports also continued to maintain the tempo of high growth with both oil and non-oil imports showing a rise. Imports were valued at $140 billion out of which the non-oil component was $97 billion.
Cotton Exports Continue to Increase
Exports of cotton textiles such as cotton yarn, cotton fabrics and cotton made-ups for the fiscal year 2005/06 show that exports have risen from $3.79 billion in 2004/05 to $4.87 billion in 2005/06, registering a growth of 28.5%. Exports have recorded a positive growth not only in the leading markets of the U.S. and the EU, but also in the rest of the world. This augurs well for India’s exports considering that import quotas were removed only 18 months ago. We need to maintain the momentum of exports in spite of higher oil prices, rising inflation and reported economic slowdowns in the Euro Zone and U.S. markets.
The composition of exports in the textile basket shows that cotton made-ups have come into their own, commanding a share of almost 50%. Exports have also grown by 39% in value, rising from $1.72 billion in 2004/05 to $2.40 billion in 2005/06.
Cotton yarn, on the other hand, accounted for about 30% of total exports, growing by about 33.42% in volume and 27.39% in dollar terms, rising from $1.14 billion in fiscal year 2004/05 to $1.46 billion in 2005/06. In terms of quantity, exports have reached a level of 546 million kgs. in 2005/06, marginally lower than the highest of 554 million kgs. achieved in 1999/2000.
Exports of fabrics also showed an improvement, registering a growth of 9.15% during 2005/06, rising from $928 million in 2004/05 to $1.01 billion. The share of fabrics in total exports has, however, been declining over the years, reaching 20% in 2005/06 from 24.46% in 2004/05.
Imports into U.S. and EU
Import data available from the two largest importing countries/economic blocs, the U.S. and EU, show that India has been the second largest gainer after China. While India’s imports of textiles into U.S. during the period January-June 2006 increased by 14.40%, they rose by 10% in the European Union during January-April 2006. India’s growth rate was higher than the overall rate of growth in imports into the EU from all sources. In the case of the U.S., all major supplying countries with the exception of China, India and Pakistan have lost their market shares in the current year.
The above data clearly show that India has been able to withstand the rigors of open competition and has in fact strengthened its position in the leading markets of the U.S. and EU.
While India’s performance in the post-quota period has been creditable, there is an imperative need to devise a cohesive strategy to meet with needs of a changing international trading environment and address some of the issues causing impediments to export.
Changing International Trading Environment
The dismantling of the quota regime at the end of 2004 was a landmark event in the history of international trade in textiles and clothing. Yet developed countries continue to find ways to distort world trade through high tariffs for textile products, protection of preferences, and greater reliance on Regional Trading Arrangements (RTAs) and Free Trade Agreements (FTAs). Coupled with these efforts, there has been a growing tendency amongst importers and retailers to impose strong codes of conduct, which in many cases take the shape of non-tariff barriers.
India needs to keep a vigil on the evolving international trading environment and ensure that it takes full advantage of the multilateral process under WTO to ensure an equitable trading regime. At the same time, we need to seek bilateral agreements and forge strategic alliances with neighboring countries in South and South East Asia, leveraging our competitive advantage in the textile and clothing sector.
Impediments to Export Growth
While impediments to the export growth at the international level should be better addressed by negotiating strategies, there are many areas, which require the attention of government, to enable India to retain and build on its competitive edge in exports. Some of these are: reduction in transaction costs, need for neutralization of all unrebated taxes, permitting import of capital goods at zero duty, and labor reforms.
These issues have been persistently pursued by the council at various forums including at the Board of Trade. Even though the Government of India is fully sensitized regarding the importance of these issues, no viable solution has emerged so far. I once again urge government to accord a top priority to resolving these issues, so that the cost disadvantage of approximately 10% suffered by the Indian exporters is mitigated.
Government Initiatives
While the issues mentioned in the preceding paragraphs do deserve urgent attention of the government, I must hasten to add that the government has extended encouraging support to the industry by initiating several supportive measures.
They include reduction in excise duty on all man-made fibers and filament yarns from 16% to 8%; reduction in the peak rate of customs duty from 15% to 12.5%; and curtailing the customs duty on textile machinery from 15% to 10%.
Supportive measures also could provide a higher allocation for the Textile Upgradation Fund and introduce a credit linked capital subsidy scheme for the processing sector.
These steps are timely and will put the industry on the growth path required to realize the vision of a market size of $85 billion by 2010.
Roadmap for Future Growth
The industry has already set out a vision for the future to achieve a market size of $85 billion by 2010. Some steps have already been taken to facilitate the process. However, there is an urgent need to fine-tune some of the ongoing schemes with a view to derive optimum value.
For instance, the focused approach under the Technology Mission on Cotton has led to significant improvement in India’s yield per hectare, which has risen to 467 kgs. from 300 kgs. in the past.
The quality of cotton has improved considerably and India is fast emerging as a leading exporter of cotton in the world. While effective steps are being taken to reduce contamination and improve ginning facilities, the time has come for India to embark on a program to brand Indian cotton and realize higher value.
Another scheme that needs to be modified so as to provide a thrust to Indian textile exports is the scheme of Integrated Textile Parks. While the textile parks are expected to provide quality infrastructure to the textile industry, there is a need to develop these Parks on the basis of product segmentation and not on the basis of “all products in all Parks.”
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