Far East Journal of Psychology and Business

Vol. 2 No 2, February 2011

Changing Structure of Indian Textiles Industry after MFA (Multi Fiber Agreement) Phase out: A Global Perspective
Dr. Asiya Chaudhary Assistant Professor Department of Commerce, Aligarh Muslim University, Aligarh, India E-mail: asiyaac@rediffmail.com ABSTRACT Indian textile enjoys a rich heritage and the origin of textiles in India traces back to the Indus valley Civilization where people used homespun cotton for weaving their clothes. If we talk about the Indian Textiles Industry in the present era, it is one of the leading industries in the world. The WTO has played an important role in the growth and development of the textiles industry at global level. Various steps have been taken to uplift the sector. In the year 1995, WTO had renewed its MFA and adopted Agreement on Textiles and Clothing (ATC) which stated that all quotas on textiles and clothing shall be removed among the WTO member countries by 2005. The MFA phased out and the textiles trade got integrated in to GATT provisions by 2005. The world T&C export had grown from US$ 272.43 billion in 1994 to US$ 530 bn in 2006, registering almost a two-fold rise. World textile and clothing trade rose by 9.7% to US$530 bn in 2006, by 10.6% to US$583 bn in 2007. As expected, the implementation of ATC had brought about structural changes in the international trade arena on textiles & clothing. In the years, during the post-quota period, India has emerged as a major sourcing destination for new buyers. As a measure of growing interest in the Indian textile and clothing sector a number of buyers have opened their sourcing/ liaison office in India. The paper focuses on the changes in the Textiles exports of different countries after the MFA (Multi Fiber Agreement). Special focus is on the Indian Textiles Industry and its position in the world in terms of textiles and clothing exports. The paper explores the changes in the exports and profits of the Indian textiles exporters. Further it investigates the role of FDI in the industry and what Indian Government is doing for the promotion of the industry. Keywords: Textiles Industry, Multi Fiber Agreement, Agreement on Textiles and Clothing, World/Global Trade. Paper Type: Research Paper

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INTORDUCTION Since time immemorial textiles and clothing constitute the basic needs of the mankind. It satisfies one of the physiological needs and therefore its demand has always been and shall always be ever-growing. Indian textile enjoys a rich heritage and the origin of textiles in India traces back to the Indus valley Civilization where people used homespun cotton for weaving their clothes. If we talk about the Indian Textiles Industry in the present era, it is one of the leading industries in the world. Though was predominantly unorganized industry prior to liberalization, the scenario started transforming soon after 1991, when India liberalized its economy. The Indian textiles industry has witnessed a phenomenal growth since then through Industrial Policy 1991 and development of globalization and Indian textile industry took place simultaneously since then. The process of globalization and Indian textile industry development was the effect of rapid acceptance of 'open market' policy by the developing countries, much in the lines of the developed countries of the world. The WTO has played an important role in the growth and development of the textiles industry at global level. Various steps have been taken to uplift the sector. In the year 1995, WTO had removed its MFA and adopted Agreement on Textiles and Clothing (ATC) which stated that all quotas on textiles and clothing shall be removed among the WTO member countries by 2005. The MFA phased out and the textiles trade got integrated in to GATT provisions by 2005. The MFA reined the textiles trade for more than 20 years and structured and shaped the textiles industry of different countries in different manner. The MFA was purportedly designed to provide developing countries with guaranteed and growing access to markets of developed countries while allowing governments of developed countries to prevent disruption of their domestic industries1. But the countries like China, Korea, India, etc. (rich in textiles production) remained at disadvantageous position and witnessed a negative pinch as their production and exporting capacity always remained in excess to the quotas. On the other hand some countries got an opportunity to develop their industry in order to fulfill the quotas that were allotted to them. It was the positive face of the restrictive regime. After the MFA phased out the world T&C export had grown from US$ 272.43 billion in 1994 to US$ 530 bn in 2006, registering almost a two-fold rise. World textile and clothing trade rose by 9.7% to US$530 bn in 2006, by 10.6% to US$583 bn in 2007. As expected, the implementation of ATC had brought about structural changes in the international trade arena on textiles & clothing. In the years, after the phasing out of the Agreement, the structural changes in world trade of textiles and clothing continued unabatedly. It is observed that the export of clothing has exceeded the textiles exports from 1994 onwards. In the post-quota period, India has emerged as a major sourcing destination for new buyers. As a measure of growing interest in the Indian textile and clothing sector a number of buyers have opened their sourcing/ liaison office in India. Objectives The following are objectives of the author in developing this paper: 1. To find out the impact of the MFA phase out on:
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a. Production of Textiles & Clothing. b.Indian textiles exports. 2. Indian Textiles Industry on the global fronts; 3. Evaluate the role of FDI in the industry; and 4. Role of the government in promoting the industry. Hypothesis 1. H0 = The first hypothesis is the null hypothesis, that there is no impact of MFA Phase out on the Indian Textiles & Clothing Exports ; H1 = The alternative hypothesis is that there is a positive impact of MFA phase out on the Indian Textiles & Clothing Exports. 2. H0 = The second hypothesis is the null hypotheses i.e. there is no impact on the profit margins of the Indian textiles & Clothing exporters H1 = The alternative hypothesis is that there profit margins have improved after the MFA Phase out.

LITERATRUE REVIEW After doing substantial spade work it was found that though lots of work was done on the impact of the MFA phase out but there are gaps existing related to impact on different sectors of the textiles and clothing industry in India. The author makes efforts to study the changing dimensions of the Indian textiles industry through the operating profits and FDI in the textiles industry. Globe at a Glance Trends in Worlds Textiles Trade after the MFA Phase out Table1: Trends in Worlds Textiles Trade after the MFA Phase out 3 Export/ Import Textiles Exports from Asia to Africa Textiles Exports from Asia to Europe Textiles Exports Asia to North America Asia to the Middle East Intra-North American Textiles Trade Intra-European Textiles Trade Asian Clothing Exports to Europe Asian Clothing Exports to North America 2006 increased by 19% increased by 11% increased by 9% ----Decreased by 1% ----increased by 39% Increased by 15%.
3

2007 increased by 18% increased by 16% --------Decreased by 5% ----Decreased by .3% -----

2008 increased by 20% --------Increased by 18%. Decreased by 8% Decreased by 3%. increased by 17% Decreased by 3%

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Intra-North American Clothing Trade Clothing Exports from South and Central America to North America. Asian exports to Commonwealth of Independent States (CIS) Countries World's Biggest Textile Exporter Followed by

declined by 9% declined by 6%

declined by 16% declined by 7%

declined by 4% declined by 5%

Increased by 95%. EU25 China

-----

Increased by 13%

Biggest Textile Importer Followed by

EU25

EU27 China, Hong Kong, the USA, South Korea, Taiwan, India, Turkey, Pakistan and Japan. EU27 USA, China, Hong Kong, Japan, Turkey, Mexico, Vietnam, Canada and Russia. EU 46% USA -24% Japan -7% Remaining- Hong Kong, Russia, Canada, Switzerland, the United Arab Emirates, South Korea and Australia.

Biggest Clothing Importer

EU 44% USA -26% Japan -7%

EU27 China, the USA, Hong Kong, South Korea, India, Turkey, Taiwan, Japan and Pakistan. EU27 USA, China Hong Kong, Japan, Vietnam, Turkey, Russia, Mexico and the United Arab Emirates (UAE). EU 47% USA -22% Japan -7% Russia- 6% Remaining- Hong Kong, Canada, Switzerland, the UAE, Australia and South Korea

From the table it can be inferred that in 2006 textiles, exports from Asia to Africa and Europe, increased by 19% and 11% respectively, while those from Asia to North America rose by a respectable 9%. But intra-North American textile trade fell by 1%. In clothing, Asian exports to Europe surged by 39% while those to North America rose by 15%. However, intra-North American trade declined by 9% and exports from South and Central America to North America fell in value by 6%. The world's biggest textile exporter in 2006 was the EU25, followed by China. The EU25 was also the biggest textile importer, followed by the USA-although China
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ranked as high as third among the world's leading textile importers. In clothing, China became the world's leading exporter, ahead of the EU25-even when EU intra-trade is included. As for clothing imports, 44% of the world total went to EU countries in 2006, while the USA took 26% and Japan 7%. In 2007 textiles, exports from Asia to Africa increased by 18%, while those from Asia to Europe rose by 16%. But intra-North American textile trade fell by 5%. In clothing, Asian exports to Commonwealth of Independent States (CIS) countries surged by 95%. However, exports from Asia to Europe fell, albeit by a marginal 0.3%. At the same time, intra- North American trade declined by 16% and exports from South and Central America to North America fell by 7%. The worlds biggest textile exporter in 2007 was the EU27, followed by China, Hong Kong, the USA, South Korea, Taiwan, India, Turkey, Pakistan and Japan. The EU27 remained biggest textile importer, followed by the USAalthough China ranked as high as third, followed by Hong Kong, Japan, Turkey, Mexico, Vietnam, Canada and Russia. In clothing, China was the worlds leading exporter for the second year running, followed by the EU27, Hong Kong, Turkey, Bangladesh, India, Vietnam, Indonesia, Mexico and the USA. As for clothing imports, 46% of the world total went to EU countries in 2007, while the USA took 24% and Japan took 7%. The countries which followed in importance had only small shares and included Hong Kong, Russia, Canada, Switzerland, the United Arab Emirates, South Korea and Australia. In 2008 textiles, exports from Asia to Africa increased by 20%, while those from Asia to the Middle East rose by 18%. But intra-North American trade fell by 8% and intra-European trade by 3%. In clothing, Asian exports to Europe rose by 17% and to Commonwealth of Independent States (CIS) countries by 14%. However, trade with North America was affected badly. Exports from South and Central America to North America declined by 5%, intra-North American trade was down by 4% and Asian exports to North America fell by 3%. Reflecting these trends, the US textile and clothing trade deficit fell in 2008 for the first time since1991by 3.8% to US$88.65 bn, of which clothing accounted for 88%. The EU27 deficit, however, continued to riseby 8.8% to US$69.12 bn. At this level it equated to 78% of the US deficit compared with 69% a year earlier. Offsetting these deficits, China was the country with the worlds biggest surplus, followed by India, Turkey, Italy and Pakistan. The worlds biggest textile exporter in 2008 was the EU27, followed by China, the USA, Hong Kong, South Korea, India, Turkey, Taiwan, Japan and Pakistan. The EU27 was also the biggest textile importer, followed by the USAalthough China ranked as high as third, followed by Hong Kong, Japan, Vietnam, Turkey, Russia, Mexico and the United Arab Emirates (UAE).In clothing, China was the worlds leading exporter for the third year running, followed by the EU27, Hong Kong, Turkey, Bangladesh, India, Vietnam, Indonesia, Mexico and the USA. As for clothing imports, 47% of the world total went to EU countries in 2008, while the USA took 22%, Japan 7% and Russia 6%. Next in importance were Hong Kong, Canada, Switzerland, the UAE, Australia and South Korea but each of these had only small shares. As expected, the implementation of ATC has brought about structural changes in the international trade arena on textiles & clothing. In the years, after the phasing out of the Agreement, the structural changes in world trade of textiles and clothing continued unabatedly. It is observed that the export of clothing has exceeded the textiles exports from 1994 onwards. A good example is that China a leading exporter of T&C, exported the textiles in the proportion of
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33:67 during 1997-2004. In 2006 its export of clothing was US$ 95.39 bn as against only US$ 48.68 bn export of textiles. Similarly the Indian exports of readymade garments have increased at greater rate in comparison to cotton textiles. As per the report of ministry of textiles the exports of clothing increased from $US 7986.38 million in 2005-06 to $US 10242 million in 2008-09 i.e. by 28.25% whereas the exports of textiles have increased from $US 4600.78 million in 2005-06 to $US 4741.60 million in 2008-09 i.e. by 3.06%. Impact of MFA phase out on the Indian Textiles and Clothing Exports India's Position in Global Textiles and Clothing Industry India's position in the World Textiles Economy Second largest producer of raw cotton. Second largest producer of cotton yarn. Second largest producer of cellulosic fibre/yarn. Second largest producer of silk. Fourth largest producer of synthetic fibre/yarn. Largest producer of jute. In order to study the impact of MFA phase out on the Indian Textiles exports, four factors are taken into consideration. They are as follows: 1. Total Textiles exports in the country; 2. Production of Cotton; 3. FDI in Indian Textiles industry; and 4. The operating profits of the textiles exporters in the country. First each factor is studied individually in detail and then their impact is measured on each other. Indian Textiles & Clothing Exports The Indian textiles industry contributes substantially to Indias exports earnings i.e. 15% of total exports. Indias textile products, including handlooms and handicrafts, are exported to more than a hundred countries. However, the USA and the EU, account for about two-third of Indias textiles exports. The other major export destinations are Canada, U.A.E., Japan, Saudi Arabia, Republic of Korea, Bangladesh, Turkey, etc. In the post-quota period, India has emerged as a major sourcing destination for new buyers. As a measure of growing interest in the Indian textile and clothing sector a number of buyers have opened their sourcing/ liaison office in India. Commercially, the buoyant retailers across the world are looking for options of increasing their sourcing from the Indian markets. Indian manufacturers are also pro-actively working towards enhancing their capacities to fulfill this increased demand. Indias textiles & clothing (T&C) export registered robust growth of 25% in 2005-06, recording a growth of US$ 3.5 billion in value terms thereby reaching a level of US$ 17.52 billion and the growth continued in 2006-07 as T&C exports were US$19.15 billion recording an increase of 9.28% over previous year. Though Indias T&C exports in 2007-08 at US$ 22.13 billion were badly affected by strong appreciation of the Indian rupee against the US

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dollar, it still managed to record a healthy growth of 15.59% in US dollar terms (in rupee terms, the growth was about 2.76%).4 Textiles & clothing exports during April-December 2008 amounted to US$ 15.27 billion as against US$ 15.25 billion in the corresponding period in the preceding financial year, recording a minuscule growth of 0.12%. A sector-wise analysis of textiles exports is given below:Table 2: Sector-wise Analysis of the Indian Textiles Exports
Items 1 2 3 4 5 6

(Rs. In crores )

2001-02 (Rs) 22027.52 14697.99 5191.24 1378.75 2083.88 45379.38

2002-03 (Rs) 23003.1 14701.8 6153.4 1214.7 1995.0 47068.0

2003-04 (Rs) 22772.8 14302.9 7521.2 1513.3 2222.4 48332.7

2004-05 (Rs) 22772.8 14302.9 7521.2 1513.3 2222.4 48332.7

2005-06 (Rs) 35358.49 20369.27 9029.91 2018.52 3069.39 69845.55

2006-07 (Rs) 37506.17 25197.20 10863.39 1919.36 3196.89 78683.01

2007- 08 (Rs.) 36497.79 27585.98 12785.02 1783.13 2646.75 81298.67 %V (Rs) -2.69 9.48 17.69 -7.10 -17.21 3.32

2008-09 (Rs.) 47110.00 21808.20 15088.11 2199.50 3106.98 89312.06 %V (Rs.) 29.08 -20.98 18.01 23.35 17.39 9.84

Source: Foreign Trade Statistics of India( Principal Commodities & Countries), DGCI&S for export figures in Rupee and Department of Commerce(Intranet) -Exchange rate In the table above the Item No. 1= Readymade Garments, 2=Cotton Textiles, 3= Man Made Textiles, 4= Woolen Textiles, 5= Silk and 6= Exports of total textiles. V* = Variation in Exports *Data for the year 2003-04 are taken same as that of 2002-03 due to unavailability of data for that year.

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Graph 1: Sector-wise Analysis of the Indian Textiles Exports

90000 80000 70000 60000 50000 40000 30000 20000 10000 0 2002 2003 2004 2005 2006 2007 2008 2009 1

2
3 4

5
6

Source: Self on the basis of table 2. * (X axis represents items as marked in table 2. & Y axis shows the amount in US $ in millions) *Item No. 1= Readymade Garments, 2=Cotton Textiles, 3= Man Made Textiles, 4= Woolen Textiles, 5= Silk, 6 = Total Textiles Exports. Readymade Garments: Readymade Garments account for approximately 41% of the countrys total textiles exports. After the MFA phase out the textiles exports grew from US$ 7986.38 million in 2005-06 to US$ 8282.27 in 2006-07. During 2007-08 the Readymade Garments exports have amounted to US$ 9065.36 million, recording an increase of 9.46 % over the exports during 2006-2007. During the period of 2008-09, the Readymade Garments exports have amounted to US$ 10242.08 million, recording an increase of 12.93% over the exports during the corresponding period of 2007.5. Cotton Textiles including Handlooms: Cotton Textiles i.e. yarn, fabrics and made-ups (Mill made/ Powerloom/ Handloom) constitute more than 2/3rd of our exports of all fibres/ yarns/made-ups. After the MFA phase out the textiles exports grew from US$ 4600.78 million in 2005-06 to US$ 5564.15 in 2006-07. During 2007-08 the Cotton Textiles exports have amounted to US$ 6851 million, recording a healthy increase of 23.14% over the exports during previous year. During the period of 2008-09, the Cotton Textiles including Handlooms exports have amounted to US$ 4741.60 million, recording a decline of 30.87%% over the exports during the corresponding period of 2007. In 2007-08 the textiles exports of India suffered badly due to sharp appreciation in Rupee vis--vis the US$. Although the rupee has depreciated sharply vis-8

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vis the US dollar since April, 2008, the exports prospects of the Indian textiles sector continues to be adversely affected. Some of the reasons attributed to this decline are the financial sector melt down and economic slowdown in international markets, increased cost of production because of increasing raw material costs, high power and other input costs which have affected the profitability of textiles and garments units in India and their exports. The liquidity crunch is another factor that is affecting the industry. In such a situation the positive impact of rupee depreciation had been washed away. During the current financial year, various export promotion councils and trade bodies represented to the Government that the textiles exports had adversely been affected by recent global recession. For exports, the major markets have been USA, EU & Japan and all the three markets have went into recession during the current year. As a result, during this year exports quantities were reduced or put on hold or the orders were cancelled or buyers opted for cheaper prices elsewhere. 6 Man-made Textiles: After the MFA phase out the textiles exports grew from US$ 2039.57 million in 2005-06 to US$ 2398.90 in 2006-07. During 2007-08 the Man-made Textiles exports have amounted to US$ 3176.56 million, recording an increase of 32.38% over 2006-07. During the period of 2008-09 the Man-made Textiles exports have amounted to US$ 3280.50 million, recording a growth of about 3.25% over the exports during the corresponding period of 2007. 7 The increase was comparatively very low owing to the same reasons mentioned above. Silk Textiles: After the MFA phase out the textiles exports grew from US$693.28 million in 2005-06 to US$705.95 in 2006-07. During 2007-08 the silk exports have amounted to US$ 657.40 million, recording a decline of 6.88% over the exports during the previous year. During the period of 2008-09 the Silk Textiles exports have amounted to US$ 675.53 million, recording a growth of 2.71% over the exports during the corresponding period of 2007. 8 Woolen Textiles: After the MFA phase out the textiles exports grew from US$ 455.92 million in 2005-06 to US$ 423.84 in 2006-07. During 2007-08 the woolen textiles exports have amounted to US$ 442.90 million, recording a growth of 4.5% over 2006-07. During the period of 2008-09 the woolen textiles exports have amounted to US$ 478.22 million, recording an increase of 7.92% over the exports during the corresponding period of 2007.9 Handicrafts including carpets: During 2007-08 the handicrafts exports have amounted to US$ 1.45 billion, recording a growth of 6.31% over the exports during 2006-07. During the period of April December 2008 the handicrafts including carpets exports have amounted to US$ 0.858 billion, recording a sharp decline of 24.67% over the exports during the corresponding period of 2007.10 Finally, it may be observed that on the whole the exports of total textiles products have gone up to US$ 20193.06 in the year 2007-08 from US$ 17375.11 in 2006-07 i.e. by 16.22%. The exports figures went down in the next year 2008-09 to US$ 19418.65, i.e. a decline by 3.90%. The reasons for this downfall are already discussed above in point (ii). Graph 1 clearly depicts the whole picture. We see here that the maximum growth is in the exports of readymade garments/ clothing sector out of all the sectors. Second to this is cotton

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textiles and then the man made sectors. Woolen and silk represents very limited or restricted growth within this period. Production of Cotton The textiles and clothing exports did not increase alone. The phase out of MFA impacted the demand and supply of cotton too. As the exports of textiles and clothing grew the requirement for cotton enhanced. To fulfill this demand the supply had to be increased. Strategically focusing the enhanced productivity of cotton, the government of the country contributed to enlarge the crop size. The efforts were fruitful as we can see that the crop size increased dramatically from 27.85% in the year 2003-04 to 73.57% in 2004-05, 100% in 2006-07, 125% in 2007-08 and 290% in 2008-09 in comparison to base year which is taken as 2000-01. This can be seen in table 3. Since launch of "Technology Mission on Cotton" by Government of India in February 2000 significant achievements have been made in increasing yield and production through development of high yielding varieties, appropriate transfer of technology, better farm management practices, increased area under cultivation of Bt cotton hybrids etc. All these developments have resulted into a turn around in cotton production in the country since last 2/3 years. The fundamental changes that taking place in the realm of cotton cultivation in the country, are having the potential to take the current productivity level near to the world average cotton production per hectare in the near future. Apart from meeting the increased cotton consumption by domestic textile industry, country may have sufficient surplus cotton to meet the cotton requirements of importing countries. 11 Table 3: Supply and Demand of Cotton12 (Quantity in lakh bales of 170 kgs each) Items Supply Opening Stock Crop Size V% Imports V% Total Availability Demand Mill Consumption V% Small Mill consumption V% Non-mill 00-01 40.50 01-02 29.00 02-03 40.00 03-04 24.00 04-05 21.00 05-06 72.00 06-07 52.00 07-08 47.50 08-09 43.00

140.00 158.00 136.00 179.00 243.00 244.00 280.00 315.00 290.00 12.85 27.85 73.57 74.28 100 125 107 2.85% 22.13 25.26 17.67 7.21 12.00 4.00 5.53 6.50 7.00 14.14 -20.15 -67.41 -45.77 -81.92 -75.01 -70.62 -68.36 202.63 212.26 193.67 210.21 276.00 320.00 337.53 369.00 340.00

149.36 147.00 142.42 150.39 163.98 182.00 194.89 203.00 195.00 -1.58 10.97 12.70 11.70 6.65 13.06 -4.64 11.63 6.63 14.78 .68 13.00 18.50 13.71
10

9.78 16.57 51.04 14.48

21.85 20.00 82.31 15.00

30.48 21.26

35.91 23.00

30.55 20.00 82.31 15.00

93.80 109.66 15.88 15.00

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consumption V% 2.83 16.37 7.95 14.01 18.11 25.03 18.11 18.11 Total 173.03 171.76 168.83 177.10 195.03 217.00 232.03 241.00 230.00 Consumption Exports 0.60 0.50 Source: Cotton Advisory Board 0.84 12.11 9.14 47.00 58.00 85.00 50.00

*Cotton Year: October to September *to calculate variation the year 2000-01 is taken as base. Graph 2: Crop Size and Total Consumption

350

300

250 Crop Size Imports 150 Total Consumption Exports 100

200

50

0 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: Self on the basis of table 3. * X axis represents the time period and Y axis represents the Quantity in lakh bales of 170 kgs each Substantial improvements in the crop production lead to reduction in the textiles imports as home production fulfilled the local demand to a large extent. The imports came down by 45.77% in 2004-05, further by 81.92% in 2005-06, by 75.01 % in 2006-07, by 70.62% in 2007-08 and by 68.36% in 2008-09 in comparison to the imports of cotton in 2000-01as base.

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Analyzing the demand aspect, the mill consumption was on a downfall till 2002-03 but the demand in this sector started gradually increasing in 2003-04 and soon picked gears since then. This was due the increasing demand for the textiles for the local markets as well as the exports. The mill consumption increased from 20.85% in 2005-06 to 30.55% in 2008-09 in comparison to the mill consumption in 2000-01 as base. On the other hand the consumption in the small mill and non mill sector has also improved along with the total consumption. Though demand from the non mill sector did not increase to any large extent. It was just 18.11% increase from 2000-01 to2008-09, whereas the demand in the small mill sector grew by 109.66 in 2007-08 & 82.31% in 2008-09 from the year 2000-01. We find that demand as well as supply has reached to its maximum in 2007-08 but data 2008-09 exhibit a downfall. The reason for this decrease was a sharp appreciation of Rupee vis--vis US dollar. Various other factors like global recession and financial crises around the world too contributed to the fall in cotton exports. FDI in textiles industry FDI is becoming one of the most discussed topics in the drive for economic globalization. On one hand, multi-national companies consider FDI as an important means to reorganize their production facilities globally while on the other it is regarded as an important vehicle for economic development particularly for developing economies. Due to Indias recent liberalization of its foreign investment regulations, the country has become one of the fastest growing destinations for FDI inflows. India offers many advantages for foreign investors like strong economic growth leading to increased buying power by the middle class, low wages, and an educated work force. Extending its liberalization policies to other industries, India also raised the level of foreign equity ownership permitted in civil aviation, refineries, some mineral mining, construction, industrial parks and commodity exchanges in January 2008. In the textile and apparel sector, 100% FDI is allowed under the automatic route. FDI in sectors to the extent permitted under automatic route does not require any prior approval either by the Government of India or Reserve Bank of India (RBI). The investors are only required to notify the Regional Office concerned of RBI within 30 days of receipt of inward remittance. Ministry of Textiles has set up FDI Cell to attract FDI in the textile sector in the country. 13 FDI inflows for this sector account for about more than 1% of the total FDI inflows to the country. However, given the advantages that India offers as an FDI destination, specific to textile and apparel sector, it is a matter of time that major Textile and Apparel Transnational Corporations (TNCs) recognize the real potential of India in this sector and significant investment follows. 14 There has been a constant increase in the inflow of the FDI in the textiles industry. The table below shows the Financial Year-Wise Break-Up of inflow of Foreign Direct Investment (FDI) in India from August 1991 To April 2010. The data clearly shows that the FDI in textiles industry increased gradually since 2000. It increased from Rs. 0.24 bn in 2001- 02 to Rs. 02.58 bn in 2002- 03. But the FDI increased at higher rates as soon as the MFA phased out
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i.e. in the year 2005, depicting the confidence of the foreign investor in the Indian textiles industry. The investment shot up from Rs. 1.97 bn in 2004-05 to Rs. 4.15 bn in 2005-06 i.e. by 110.65%. It kept on increasing subsequently in the following years, reaching at Rs. 7.56 bn. in 2008-09. On comparison between the decades, it is found that the FDI in 1991 to 2000 was Rs.8.29 bn. which increased to Rs.45.54 bn in 2001 to 2010. There was a substantial increase of 449.34% in a decade. Table4: Financial Year-Wise Break-Up of Inflow of Foreign Direct Investment (FDI) In India from August 1991 to April 2010 (Amount in billion) IN FLOW OF FDI IN INDIA Total (All Sectors) Textiles (Including % age of FDI Financial Year in Rs 606.05 in US$ 16.70 Dyed, Printed) in Rs in US$ 8.29 0.24 in Textiles in US$ 1.45

August 1991 to

March 2000 126.45 2.91 0.09 0.002 0.07 2000-01 2001-02 193.61 4.22 0.24 0.005 0.13 2002 -03 149.32 3.13 2.58 0.054 1.73 2003 -04 121.17 2.63 0.43 0.009 0.35 2004 -05 171.38 3.76 1.97 0.04 1.15 2005 -06 246.13 5.55 4.15 0.09 1.70 2006 -07 706.30 15.73 5.61 0.13 0.80 2007 -08 986.64 24.58 7.48 0.19 0.76 2008 -09 1230.25 27.33 7.56 0.16 0.58 2009 -10 1233.78 25.89 6.68 0.14 0.54 2010- 11(April) 98.54 2.21 0.47 0.01 0.48 Grand Total 5,869.62 134.64 45.54 1 .07 0.79 Source: Department of Industrial Policy & Promotion, Ministry of Commerce and Industry, Govt. of India

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Graph 3: FDI in Textiles Sector in India

30 25 20 15 10 5 0 A

A B

Source: Self on the basis of table 4. * X axis represents the time period and Y axis represents FDI amount in US $ *A= FDI in all sectors in India, B= FDI in Textiles Sector The textiles industry in India is experiencing an increase in the collaboration between national and international companies. International apparel companies like Hugo Boss, Liz Claiborne, Diesel, Ahlstorm, Kanz, Baird McNutt, etc have already started their operations in India and these companies are trying to increase it to a considerable level. 15 National and the international companies that are involved in collaborations include Rajasthan Spinning & Weaving Mills, Armani, Raymond, Levi Strauss, De Witte Lietaer, Barbara, Jockey, Vardhman Group, Gokaldas, Vincenzo Zucchi, Arvind brands, Benetton, Esprit, Marzotto, Welspun, etc. 16 After China, India is the second most attractive destination for FDI in textile and apparel sector, other than South Asian countries of Bangladesh and Vietnam. These are the countries where the FDI and textile and apparel exports have seen a major growth. The primary reason for major investment in other countries has been duty free access to major markets, a parameter on which India ranks way behind. In order to achieve the projected growth of textile and apparel sector, it becomes still more important to make efforts to educate the international investing community about the merits of investment in India. Operating Profits Of Textiles & Clothing Exporters In India The MFA phase out had a very controversial impact on the operating profits of the firms. It cannot be generalized that the phase out had a favorable or unfavorable impact. There are mixed results. Some firms continuously earned profits whereas some ran into losses. In table 7 we can see few firms like Bombay Rayon Fashions Ltd, Vardhman Textiles Ltd, S.Kumars Nationwide Ltd, Alok
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Industries Ltd, Loyal Textiles Mills Ltd., etc. have been doing well and earning good profits. On the other hand the firms like JJ Exports, Adinath Textiles Ltd, Raymond Ltd, Hanil Era Textiles Ltd, Supertex Industries Ltd., etc. are going in to losses. At the same time the firms like VTX Industries Ltd., Winsome Textile Industries Ltd., Oswal Yarns Ltd, Ashnoor Textile Mills Ltd., Jaybharat Textiles & Real Estate Ltd, etc are fighting to sustain their profit levels.17 On survey it is found that this picture is because of the open market situation. With the abolition of the quota system the global textiles market is witnessing tough competition situation. Only the strong one is going to survive. The firms with large scale capacity and a sound capital base are able to fight the situation and sustain their profits. They are more responsive and adaptive to the required changes. The firms with medium or small capital base are finding it hard to fight and remain in the market. They cannot adapt the changes very quickly. There are either capital or technology constraints. They are finding it difficult to survive in the open market. Table 5: Operating Profit 18 (Rs. In Crore) Firms Name 1. 2. 3. 4. 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 VTX Industries Ltd JJ Exporters Winsome Textile Industries Ltd. Loyal Textiles Mills Ltd. Bombay Rayon Fashions Ltd Vardhman Textiles Ltd S.Kumars Nationwide Ltd Alok Industries Ltd Adinath Textiles Ltd Raymond Ltd DCM Ltd Oswal Yarns Ltd Bluechip Tex Industries Ltd Ashnoor Textile Mills Ltd Jaybharat Textiles & Real Estate Ltd Kakatiya Textiles Ltd Cheslind Textiles Ltd Supertex Industries Ltd Hanil Era Textiles Ltd Total Mar-10 Mar-09 Mar-08 Mar-07 Mar-06 23.39 3.21 31.00 67.54 391.63 785.55 769.85 1,251.66 1.81 265.51 74.38 0.13 N.A 4.26 56.92 4.05 16.39 1.51 N.A 3748.79 3.21 5.09 9.16 47.44 318.35 643.31 537.63 891.78 2.20 48.10 22.87 0.13 0.60 4.23 54.42 1.73 -13.87 7.80 -39.01 2545.1 7 133.96 29.64 4.46 21.70 59.67 251.47 414.85 401.36 704.46 9.43 304.47 13.33 0.17 0.56 3.98 56.55 2.04 7.03 1.23 -2.67 2283.7 3 120.2 26.86 16.46 24.56 56.36 98.93 406.52 245.12 497.12 6.06 390.06 21.91 0.16 0.27 3.30 51.19 1.52 13.30 1.28 16.41 1877.3 9 98.81 18.03 14.78 17.42 49.52 34.60 407.54 198.76 N.A 0.00 328.31 21.35 0.16 0.22 3.42 30.66 -0.39 19.28 0.05 23.08 1166.7 9 64.82 Mar05 11.25 8.19 N.A N.A N.A N.A N.A N.A N.A N.A N.A N.A 0.16 N.A N.A N.A N.A N.A 23.79 43.39 10.85

Arithmetic Mean 220.52 Source: Companies and Industries.htm

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Graph 4: Average Operating Profits of The Textiles and Clothing Exporters

Av. Profit
250 200 150 100 50 0 2005 2006 2007

Av. Profit

2008

2009

2010

Source: Self made on the basis of table 5. *X-axis represents years and the Y- axis represents the average profits of different firms in crore rupees. It is found that the years 2008 &2009 do not present a very rosy picture for textiles exporters. This can be seen in the above two tables. The operating profits as well as the sales turnover have dipped in these years. The reasons are various. Firstly, for the Indian textiles industry which depends almost exclusively on domestic sources the strong appreciation of Indian rupee vis--vis the US dollar in 2007-08 landed the textiles and clothing exports in a difficult situation. This was established by the fact that Indias share in global textiles and clothing exports in 2007 declined to 4% and 2.8%, respectively from 4.3% and 3.3% in 2006. Secondly in 2008-09, conditions prevailing worldwide have not at all been conducive for the textiles exports. The world is currently passing through a recessionary phase and the major markets like US, EU and Japan are facing financial crisis. In this environment, the textiles and auto sectors are the worst hit sectors, particularly as these are considered to flourish in good times. US, the single largest importer of textiles and clothing items, has observed a negative growth of 3.34% and 0.55% in its imports of textiles and clothing from the world and India, respectively during calendar year 2008. Even China which occupied about 33% market share in the US, managed to record a small growth of 0.97% during the same period. The other countries, which managed to register growth in the US markets, are Vietnam & Bangladesh. Almost all other countries have shown negative growth. The overall US markets of textiles and clothing has
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shown a decline of 14.19% in the first two months of current calendar year and India has also recorded a decline of 13.77% in the same period. In 2008 EUs overall imports of textiles and clothing recorded a growth of 7.32%, India managed to record a growth rate of 6.42%, while China, largest exporter with a share of 38.5% in EU, recorded a growth of 20.46%. In the current calendar year, Indias growth rate has slipped and recorded a decline of over 15% in January, 2009 over January, 2008 while EUs overall imports of T&C also recorded a decline of 9.96%. Third and last, some of the other reasons attributed to this decline are the financial sector meltdown and economic slowdown in international markets, increased cost of production due to increasing raw material costs, power and other input costs which have affected the profitability of textiles and garments units in India and their exports. The liquidity crunch is another factor that is affecting the industry. Analysis and Interpretation of the above data The above data is taken in to consideration to study the impact of MFA Phase out on Indian Textiles & Clothing Exports, its profits, FDI in the sector and cotton production. A period of nine years is taken for the study i.e. from 2001 to 2009. The period from 2001-2004 is the pre MFA phase out period and the period 2005-2009 is the post MFA period. The study focuses whether the impact of MFA phase out was negative or positive. These four factors are correlated to each other and we have to see the degree of association amongst them. To find the degree of correlation, we have to calculate the Multiple Correlation Coefficient for each factor. Multiple Correlation Coefficients is a measure of the strength of the association between the independent (explanatory) variables and the one dependent (prediction) variable. For this one factor is taken fixed as dependant factor and we see how the other three factors which are the independent have an impact on the dependant factors. After computing the Multiple Correlation Coefficient, taking all factors fixed one by one, we check the significant value, i.e. whether these are strategically significant to each other or not. For this purpose F-Test is used to test the significant value of observation of Multiple Correlation Coefficient. The test statistics is: F (K, N-K-1) =

Where N is the number of subjects (years), K is the number of predictor (Independent) variable and R2 is the squared Multiple Correlation Coefficient. The F is based on K and N-K-1 degree of freedom.

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In our case (data already present in above tables 2, 3, 4 $&5): Years Variable 1 Variable 2 Variable 3 Variable 4 2002 45379.38 158 0.24 0 2003 2004 2005 2006 47068 48332.7 48332.7 69845.55 136 179 243 244 2.58 0.43 1.97 4.15 0 10.85 64.82 98.81 2007 78683.01 280 5.61 120.2 2008 2009 81298.67 89312.06 315 290 7.48 7.56 133.96 220.52

Variable 1 = Total Exports of Textiles & Clothing Variable 2 = Production of Cotton (Crop size) Variable3 = FDI in Textiles Industry Variable 4 = Operating Profits of Textiles Exporters N = 9 and K = 3 On calculating the Multiple Correlation Coefficient on the above data, keeping one factor fixed at a time, we get the following results: R1.234 = 0.97313 (Keeping Variable 1 constant) R2.134 = 0.89750 (Keeping Variable 2 constant) R3.124 = 0.95629 (Keeping Variable 3 constant) R4.123 = 0.95357 (Keeping Variable 4 constant) In order to prove the first and the second hypothesis mentioned above, we first try to prove the following cases through the framed hypothesis: Case1: Ho = There is no impact of independent variables on dependant variable 1or there is zero correlation between the above variables. H1 = The independent variables jointly have an impact on the dependant variable 1 or there exists correlation among the variables. On calculating the value of F as per the formula given above we get 30.64. This is compared to the tabulated value given in F table at the 5%level of significance F(3,5), 0.05 = 5.41. Since the calculated value is much higher than the tabulated value, it can be conclude that exports of textiles & clothing is highly dependent upon the production of cotton, FDI in the industry and the operating profits of the textiles exporters. Thus rejecting the null hypothesis and accepting the alternative hypothesis. Case 2: Ho = There is no impact of independent variables on dependant variable 2. H1 = The independent variables jointly have an impact on the dependant variable 2 or there exists correlation among the variables. On calculating the value of F as per the formula given above we get 7.698. This is compared to the tabulated value given in F table at the 5%level of significance F(3,5), 0.05 = 5.41. Since the
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calculated value is higher than the tabulated value, it can be conclude that the production of cotton is highly dependent upon exports of textiles & clothing, FDI in the industry and the operating profits of the textiles exporters. Thus rejecting the null hypothesis and accepting the alternative hypothesis. Case 3: Ho = There is no impact of independent variables on dependant variable 3or there is zero correlation between the above variables. H1 = The independent variables jointly have an impact on the dependant variable 3 or there exists correlation among the variables. On calculating the value of F as per the formula given above we get 18.67. This is compared to the tabulated value given in F table at the 5%level of significance F(3,5), 0.05 = 5.41. Since the calculated value is much higher than the tabulated value, it can be conclude that FDI in the industry is highly dependent upon the exports of textiles & clothing production of cotton, and the operating profits of the textiles exporters. Thus rejecting the null hypothesis and accepting the alternate hypothesis. Case 4: Ho = There is no impact of independent variables on dependant variable 4 or there is zero correlation between the above variables. H1 = The independent variables jointly have an impact on the dependant variable 4 or there exists correlation among the variables. On calculating the value of F as per the formula given above we get 17.55. This is compared to the tabulated value given in F table at the 5%level of significance F(3,5), 0.05 = 5.41. Since the calculated value is much higher than the tabulated value, it can be conclude that operating profits of the textiles exporters is highly dependent upon the production of cotton, FDI in the industry and the exports of textiles & clothing. Thus rejecting the null hypothesis and accepting the alternative hypothesis. Final Result In all four cases, after keeping a variable fixed, one by one, it is found that jointly the independent variables have an impact on the dependant variables, rejecting the null hypothesis every time. Thus proving that the variables are correlated to each other and there is positive correlation between them i.e. the impact on all variables was positive on the MFA Phase out. So the first null hypothesis that there is no impact of MFA Phase out on the Indian Textiles & Clothing Exports is rejected and the alternative hypothesis is that there is a positive impact of MFA phase out on the Indian Textiles & Clothing Exports is accepted. With the same reasons and justifications explained in case 4, the second null hypothesis that there is no impact on the profit margins of the Indian textiles & Clothing exporters is rejected and the alternate hypothesis that there profit margins have improved after the MFA Phase out is accepted.

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On accepting the first and the second alternative hypothesis, we can conclude that since there is a positive impact of MFA phase out on Indian textiles exporters and their profits. Surely it is the right time for the textiles exporters to reorient their strategies towards profit maximization and capturing the maximum share in the global market. Responding to the given opportunity, the exporters need to improve not only their product quality and be cost competitive at global level but also adopt new technologies, diversify their marketing strategies, etc. Role of Government in the Growth of Textiles Industry The government of India has been making good efforts to promote and support the industry in the post MFA era. Various stimulus schemes have been announced in the previous years. Some of them are as general reduction of 4% in CENVAT rates, abolishment of the CENVAT on cotton and few other taxes being either reduced or deleted to promote the textiles exports. The Government introduced two packages of duty concessions, tax and interest rebates in December, 2008 and January, 2009 to provide stimulus to the economy in general to combat the recession. Scheme announced on 02.01.2009 are as follows: The DEPB Scheme extended till December 31, 2009 and restored the rates at those prevailing prior to 5th November 2008. Decided to remove the all- in- cost ceilings on External Commercial Borrowings. Duty Drawback revised rates/value caps with retrospective effect i.e. w.e.f. 1-9-2008. Increased Value cap for Cotton Yarn from Rs. 8/- per Kg to Rs. 12/ per kg for Grey Yarn and from Rs. 14 per kg to Rs. 16 per kg for Dyed yarn Increased rate of Drawback for Cotton Knitted Fabrics from 4.5% to 5% and value cap from Rs. 14 per kg to Rs.15.60 per kg. Interim Budget 2009-10 General rate of Central Excise Duty is reduced from 10% to 8%. As a result Central Excise Duty on Textile Machinery is reduced from 10% to 8%. Rate of Service Tax on taxable services is reduced from 12% to 10%. Stimulus Package Scheme announced on 24.02.2009 Customs Duty - The facility of exemption from Basis Customs Duty on imports of Naptha for generation of Electric energy is being extend beyond 31-03-2009. Excise Duty General Reduction in Excise Duty rates by 4% made w.e.f. 7-12-2008 is being extended beyond 31-03-2009 Further reduction in the rate of Excise Duty by 2%; i.e. from 10% to 8% Retaining the rate of Central Excise Duty on goods currently attracting Ad-Valorem rates of 8% and 4% respectively. Service Tax - The rate of Service Tax on taxable services has been reduced from 12% to 10%. Exemption from Income Tax for SEZ/s - Removed the anomaly in computation of export profits with reference to the total turnover of the assesses in SEZ/s.

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Major incentives introduced under Foreign Trade Policy (2009 - 2014) Incentive Schemes have been expanded by addition of new products and markets. 26 new markets have been added under the Focus Market Scheme. These include 16 new markets in Latin America and 10 in Asia- Oceania. The incentive available under Focus Market Scheme (FMS) has been raised from 2.5% to 3%. The incentive available under the Focus Product Scheme (FPS) has been raised from 1.25% to 2%. This covers a large number of products from various sectors have been included for benefits under the FPS. These include Jute and Sisal products, Technical Textiles and vegetable textiles. Market Linked Focus Product Scheme (MLFPS) has been greatly expanded by inclusion of products classified under as many as 153 ITC(HS) Codes at 4 digit level. This covers textiles made- ups, knitted and crocheted fabrics. MLFPS benefits also extended for export to additional new markets for certain products. These include apparels among others. Higher allocation for Market Development Assistance (MDA) and Market Access Initiative (MAI) scheme is being provided. To aid technological Upgradation of export sector, EPCG Scheme at Zero Duty has been introduced for apparels and textiles among others. To impart stability to the Policy regime, Duty Entitlement Passbook (DEPB) Scheme is extended beyond 31-12-2009 till 31.12.2010. To simplify claims under FPS, requirement of 'Handloom Mark' for availing benefits under FPS has been removed.

EXPORT PROMOTION COUNCILS Councils have been established to promote the textiles exports. They are as follows: Apparel Export Promotion Council (AEPC): The Apparel Export Promotion Council (AEPC) was sponsored on February 22, 1978 to promote exports of readymade garments from India. 1. The Cotton Textiles Export Promotion Council (Texprocil): The Cotton Textiles Export Promotion Council (TEXPROCIL), Mumbai was incorporated under the Indian Companies Act, VII of 1913 in October, 1954 with the pressing objectives of export promotion of cotton textiles. 2. The Synthetic & Rayon Textiles Export Promotion Council (SRTEPC) Export Promotion Activities of EPCs: During the year 2009-10, the EPCs continued export promotion activities of textiles exports. These included participation in overseas exhibitions/fairs, organization of Buyer-seller-Meets (BSMs) abroad and, sponsoring trade delegations for consolidating the existing markets and exploring new markets.

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CONCLUSION AND RECOMMENDATION It may be concluded that no doubt the country has benefitted from the MFA phase out, threats of the open market condition have also become vibrant. The removal of the quota system has brought the strong players in full swing. China and Korea are the biggest threats to India. In India the big firms are gaining from the phase out as they have the capacity to stand boldly and fight the fierce competition. On the other hand the medium and small firms are more vulnerable as they are finding it difficult in survive in the tough competition. Small scale exporters need further support from the government. Lack of capital and technology has always been a big hurdle in India. Our exporters are suffering badly from this limitation. Though FDI limits have been raised but the share of textiles sector is not that great. Yet more capital is required for the sector. We find lots of financial as well as technical support from the government but the bureaucratic system spoils everything. Exporters have to face long procedural steps before availing these benefits. How can they spare so much time here when they have to concentrate on the market situation. Very small scale firms find it most difficult to survive. They can enlarge their scale either by merging or amalgamating together. The Indian exporters need to be more responsive to the market requirements. There is slow adaptability to the new market situation. They have to be more vigilant and follow the market trends if they need to remain in the market for long period as strong players. References: 1. HBS Case N 9-383-164 Textiles and Multi-Fiber Arrangement. 2. Data has been taken from the Reports published by the Textiles Intelligence. Publication dates are: February 2008, March 2009 and October 2010. ISBN No.978-1-906196-55-4, Product Code: TXI00042. 3. Ibid. 4. NOTE ON INDIAN TEXTILES AND CLOTHING: Exports international Trade Section Updated On 11-05-09. 5. Annual report 2009-10, Ministry of Textiles, Government of India. 6. Ibid. 7. Ibid. 8. Ibid. 9. Ibid. 10. Ibid. 11. Cotton Advisory Board 12. Ibid 13. Foreign Direct Investment Policy in Textiles- Report Ministry of Textiles, govt. of India, updated on Feb.2010. 14. FDI: A Catalyst for Growth of the Textiles and Apparel Industry, by Prashant Agarwal, Luv Jasuja and Rohit Nasa, Technopak Perspective, Volume 02. 15. FDI Inflows to Textiles a report on Textiles.htm. 16. Ibid.
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17. www.raymondindia.com, CRISIL Research 18. www.companies&industries.htm 19. Ibid References Annual Reports of Ministry of Textiles from 2001 to 2010. www.wto.org Reports of Cotton Advisory boards. http://www.wto.org/english/res_e/statis_e/its2007_e/its07_merch_trade_product_e.htm http://www.wto.org/english/res_e/statis_e/its2010_e/its10_merch_trade_product_e.htm International Trade Section Updated on 11-05-09-NOTE ON INDIAN TEXTILES AND CLOTHING EXPORTS (Updated on 30th April, 2009).

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