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Lack of export earnings has restricted the modernization of the textile sector in India and elsewhere. China -- including Hong Kong's quota -- has modern machinery and cheap finance, giving it a huge advantage over others in the late 1990s. This advantage continues today.
It is cotton-related, high-end, high-margin business that is leading India's resurgence in this vital industry. Cotton textiles are an ancient art form in India; cotton has been grown there since 2000 BC. Herodotus, the Greek historian, first spoke of it in the third century BC. He called it "wool that grows in the fields." Clothing made from it was considered fit for a king.
Vasco De Gamma was the first to export cotton textiles from India back to Portugal in 1497. The British came to Bengal in 1757 to kill the textile trade in favor of British exports. They began the highly profitable trade of exporting raw cotton to England and cotton textiles from Manchester to India.
Today world trade in textiles is in excess of US$400 billion; with 60 percent in synthetics and 40 percent in cotton. India, China, Pakistan, Egypt and the United States are all leading growers of cotton. Cotton textiles made in India and Pakistan have an edge because of finer quality and better design and dying techniques, whereas the Chinese are far ahead in fiber blend products. This has been another clever move by the Chinese to circumvent the U.S. quota system.
On Dec. 31, 2004, the textiles and clothing exports quota system, as imposed by major importers in the United States and Europe, ceased. Instead the trade was to be governed by World Trade Organization rules. Market forces will determine who sells what to whom.
It was expected that China would gain the most from this relaxation, as they had the manufacturing and marketing muscle. Then the United States re-imposed quotas on certain sensitive items imported from China, to protect local manufacturers. This somewhat negated the Chinese advantage, but still Chinese imports surged.
In the first 11 months of 2007, China exported about US$160 billion in textiles and apparel to the world, which is about 20 percent higher than the previous year. This was about 15 percent of China's total exports. The United States, Japan and the European Union were the main customers, with imports of US$25, $19 and $27 billion respectively.
All the above happened because the United States and Europe wished it to happen. Trade relations between China and the United States have been governed by profits. Huge profits from inexpensive imports sold to consumers at slightly lower prices have spurred more imports. The politicians who decided on this policy, and fair market practices, have become prisoners of short-term prosperity and have turned a blind eye to Chinese excesses. The same happens with the European Union and Japan.
Mindful of an upcoming end to the "quota regime," Indian textile and apparel manufacturers began an investment spree to modernize. It was not on the same scale as China's, however. By the time the Multi Fiber Arrangement – Quota System expired in 2004 India had invested US$12.5 billion in textile industry modernization.
A host of sick mills were either closed or rehabilitated. This investment brought India moderate gains. Exports in 2007 were expected to reach US$20 billion, up from a meager $4 billion in 1999. Also, total textile output in the country increased to $55 billion in 2007.
An additional investment of US$35 billion is planned in the next five years. It should raise India's exports to about $50 billion in 2010 and $85 billion in 2012. This is peanuts compared to China's textile exports of $160 -$170 billion today and still surging. India is concentrating on high-end, high-margin cotton apparel, which is making the difference. This will ultimately win India a huge market share.
India's textile production statistics are staggering. The industry itself employs about 35 million people, both in organized and unorganized sectors. India has 25 million acres of land under cotton cultivation out of a total of about 180 million acres of cultivated land. Cotton production is staggering at about 140 million bales annually. Cotton cultivation employs 60 million men and women directly in the rural areas who grow and harvest cotton.
As India was very strictly controlled by the MFA, a great number of mills were declared technically inadequate. Internally the price and output were controlled. Labor unrest did not help. It was not until the liberalization began in 1992 that investment into this sector began.
Even then modernization was not on a grand scale. Foreign direct investment was limited. The government, with its strict rules and bureaucratic muddle, was not helping. It stifled investment. Only when the MFA demise was in the cards did the industry and the government wake up and begin the task of modernization.
Cotton apparel is the present generation's choicest wear. Finer material fetches higher prices. China is the largest cotton producer, with a higher yield per acre. India has overtaken the United States to become the second largest producer of cotton. China, India and Pakistan together produce 55 percent of the world's output.
Indian cotton is of finer quality. Upgrading the mills will put Indian textiles and apparel on a par with Chinese output. In addition both countries have low labor costs, but there are one or two substantial differences: Chinese mill owners get finance at a much cheaper rate than the Indians and the marketing network of "Made in China" apparel is much bigger than India's. Hence today the advantage belongs to China, but it is not for long.
The elimination of quotas created a strong competitive environment between China and India. Chinese products are in direct competition with Indian product in certain market segments, after Washington re-imposed quotas on certain items. In years to come this rivalry is likely to heat up. The advantage will go to the one with lower prices, which in turn is dictated by the unit manufacturing costs, quality and innovation at home. India is likely to have the advantage if modernization proceeds as envisaged.
Since last year Indian exporters have suffered a bit with the appreciating rupee. Temporarily about 800,000 workers are idle. As the rupee adjusts to new levels, exports will again resurge with higher productivity and export incentives. The same applies to the Chinese, whose currency has also appreciated. A host of smaller exporting countries may gain a bit, but India and China's marketing prowess will win back the lost market share.
India for the next 10 years will be chasing China's advantage in textiles. Sooner rather than later, China's advantage will be neutralized with a mix of investments, finer quality and quicker response to the market forces by India. There is no likelihood that India will overtake China in the synthetic blend category. It is cotton that must play a key role in India's resurgence. It is India that will clothe the fine people of this world with finer clothes.
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(Hari Sud is a retired vice president of C-I-L Inc., a former investment strategies analyst and international relations manager. A graduate of Punjab University and the University of Missouri, he has lived in Canada for the past 34 years. ©Copyright Hari Sud.)
