A look into textile manufacturing in India
Mitul has decided to set up a factory. He read reports of a new textile law, which should bring investment and customers to the country, and he wants to capitalise on it. He should be able to start with a small investment, as there are good places for rent, lots of people to hire and little capital investment, as he only needs some furniture and 5-10 sewing machines to start with.
What does the textile industry provide to India?
India has a working age population of more than 800 million. The textile industry, being labour intensive, can help create the jobs these people desperately need to work themselves out of poverty. In July 2016, IndiaSpend reported that the textile industry had created 499,000 jobs over the last three years, the largest creator of Indian formal sector jobs.
The textile industry is also an export-led sector. Whether it is the raw materials or ready-made garments, billions of dollars’ worth of goods are exported by India each year, which helps bring in foreign currency, foreign direct investment (FDI) and jobs to the country.
As Mitul gets started, he finds that setting up his own factory is harder than he thought. The incorporation process took some time, but he expected this as everything to do with the government takes time in India. More problematic was getting both customers and the material. The market is very competitive, and it is not possible to go to the West to promote his factory. So he tries to meet buyers through his friends and contacts. However, buyers are usually inundated with such requests, and find it difficult to distinguish between the various suppliers. Cost is usually the only selling point, which means Mitul needs to scale up his business.
The material has been difficult to obtain also. Cotton prices are at a high, which is being passed down to the mills, then the weavers and eventually to him. He wonders if he can make a profit with material prices going up and buyers squeezing his sales price.
Where are the headwinds?
There is greater competition from other countries. India was the second largest apparel exporter, after China, until Bangladesh surpassed it in 2003. In 2011, Vietnam also surpassed India. This is in part due to the preferential access in terms of duties given to Bangladesh by the EU and the USA, and Vietnam by the USA as part of the Trans-Pacific Partnership trading bloc. Both countries also continue to grow faster than India. It is yet to be seen how FDI is impacted in Bangladesh after the recent terrorist attack in a Dhaka café popular with foreigners. The Rana Plaza disaster in Bangladesh, which claimed more than 1,100 lives, saw calls for reform, but did not drive FDI away. Foreign buyers are still more sensitive to price changes than loss of life.
The cotton crop output for 2016 will likely decline due to crop damage in major producing states according to an article in The Business Standard. The Cotton Advisory Board (CAB) has lowered its forecast to 33.8 million bales for 2016 against 38.6 million bales in 2015, a 12.4% decrease. This has inevitable raised prices in India for the apparel industry, and reduced exports as cotton from other countries is relatively cheaper. Though this is problematic in the short term, we would not suggest this is a structural issue that will influence long-term policy. However, it is yet to be seen how individual farmers, mills and apparel producers survive the reduced crop and increased prices. Some have already gone out of business.
Mitul is invested now, so he will make do. He will produce as quickly as he can to increase his margin. However, he has found this is also problematic. Though there are a lot of people who say they can sew and lots of schools out there that teach people to sew, there are few good sewing machinists.
What can the government do to help?
First, we would implore the Indian government not to think of this as a zero sum game between developing nations. There has to be co-operation on an international level. The gains made by Bangladesh and Vietnam are to the detriment of the Indian worker, but they are also to the detriment of the Bangladeshi and Vietnamese worker if international working standards are not adhered to and living wages not provided. Essentially, producing countries need to work together so there is not a race to the bottom where their citizens are the most adversely affected through low wages, slavery, pollution, etc.
India must concentrate on its advantages. As India grows, there are likely to be other countries with lower wages. Even China’s share is now waning as wages rise, so they are refocussing on technology. India has an advantage over other countries in this sector, as it controls all aspects of the value chain from growing cotton to final garment production. With all production in country, streamlining the value-chain by removing unnecessary barriers will help. For instance, removing taxes at state borders and replacing them with GST should help improve productivity. In addition, India has a strong internal market, so there is always a base of demand for clothing.
Data from the Ministry of Textiles shows that funds provided for technology upgrades has dwindled over the last decade. The new package recently announced by the Modi government should help with this, but it is yet to be seen if and how much of this money will be used for productive technology improvements. Productivity in India lags other producing countries so new technology is required, but so is the upskilling of staff to use the new technology. The government needs to help on this front.
Finally we would suggest that the red tape on setting up a company needs to be reduced. Corporate secretaries in India regularly inform us that it takes between 3-6 months to set up a company which is then ready to export, and that is everything runs smoothly. In a country where a delay is another way of asking for a bribe, corruption also has to be tackled.
Like Mitul, we are currently going through this process. The challenges that Mitul faces are real challenges. We are in the fortunate position of funding our own production facility, and providing training so that good, honest hard-working people get the right skills, and then become productive.
About the Author
Sukhdev is a British Indian, who has lived and worked in a number of cities including London, New York, Boston, Vilnius, Bogota and Dubai, where he resides with his wife. He currently works to help start-up companies that have a social impact. His latest venture is Chanzez, which will produce (not source) clothing ethically and use profits generated in the production countries solely to fund social impact projects such as school scholarships. Sukhdev is a CFA charter holder with an MBA with top honours from Columbia Business School in New York, an MSc from The London School of Economics and a BSc (Hons) from Aston University in Birmingham, England.