Post MFA impact on the textile industry in India

Abstract

EXECUTIVE SUMMARY The abolishment of quotas is considered to be a beneficial move for developing countries, especially for China and India. While China seems to be ready to take advantage of quota removal, India is largely unprepared for the increased competition that will accompany quota removal. The structure of the Indian Textile industry is both complex and unique. It employs co-automated technology. It is dominated by a fast expanding decentralized or unorganized small scale manufacturing segment and a declining, vertically integrated, large-scale composite mill segment. It is dominated by the small-scale sector. This might be seen as a major advantage, for example, in comparison to China and can establish us as a niche player. This might also be seen as a major disadvantage since it makes uniform quality across large lots difficult to achieve. The ATC was formulated to liberalise trade in textiles and clothing and aimed at a phased elimination of quotas along with increased market access for developing countries. Various studies on the quota elimination and its impacts have concluded that there would be significant gains for Asian countries, including India. However, the gains are expected to be disproportionately distributed between China and the other Asian producers, with China getting the lion’s share. Clothing and textile trade in the post quota era is dominated by the issues of preferential tariff agreements and rules of origin. Also there is a proliferation ofnon tariff measures like labour law, environmental safety and security compliances employed by developed countries. The performance of Indian exports has improved in the post quota scenario, with apparel doing better than textiles. Most of the items that were earlier quota constrained have shown significant surges in 2005 exports. At the overall level however, it is seen that India has witnessed the second highest growth after China. The major constraints that limit the growth of Indian Textile Industry are its fragmented structure brought about by pro-poor government policies, biastowards cotton fibre, poor infrastructure and supply chain and lack of investments. The reform process will have to happen at two levels to improve the status of industry. At the policy level excise reforms and labour reforms with the aim of reducing the disincentives to operating in factory mode are needed. At the firm level, the emphasis should be on evolving a well chalked out strategy aimed at improvement in the levels of productivity and efficiency, quality control, faster product innovation, quick response to consumer demand and the ability to move up value chains by adding brand names. It must be noted that even after the abolishment of quotas, restrictions are still possible in the form of Anti-dumping duties, countervailing duties, safeguards or non tariff barriers. We feel that safeguards and non tariff barriers are the most likely to be used in the coming years to restrict our exports. To summarise, the abolishment of the MFA and the lapse of quotas has been a great boon for Indian textile and clothing exports. However, the threat of China taking over virtually the entire world trade hangs ominously over the Indian industry. Whether it will be able to face up to China will depend on the efficacy of its reform process and the resourcefulness of its Industry.