The textiles and garments (T&G) industry is one of the oldest industries in

the world and India is one of the global pioneers in this industry. The
industry occupies a significant place in many economies across the globe,
including India, where over one-fifth of the working population is
dependent on the sector for employment. D&B’s Industry Report on
Indian Textiles and Garments analyses various facets of this industry and
presents an outlook on its future growth.

Some of the key issues and concerns analysed in the report are:

• Highly fragmented industry: High competition and low profit margins

• End of quota regime: Changing export dynamics and gains for India

• Low share in global exports, despite being the largest producer: Scale
disadvantage vis-à-vis competing countries

• High competency in cotton textiles: Strong cotton base

• Imbalanced product mix: Low competitiveness in man-made fibres

• Labour advantage: Gradually diminishing

• Rupee appreciation: Hurting exports

• Promising domestic market: Key growth drivers

• Growth opportunities: Increasing expansion activities

• Intensifying competition: Changing company strategies

• Government policies: Shift from regulatory to supportive

D&B’s Industry Report on Indian Textiles and Garments addresses these

critical issues in four broad sections. Section-I deals with Industry
dynamics, analysing the complex structure of India’s textiles and
garments industry and highlighting the role that government policies
played in shaping the current status of the industry. Historically,
government policies were highly restrictive to the growth of large-scale
businesses in this industry as special incentives were provided to small
firms; key segments like garments were reserved for the small-scale
industry. As such, the industry largely remains fragmented and
unorganised. Today, the regulatory scenario pertaining to the T&G
industry is progressive and forward–looking, following considerable
deregulation and liberalisation since 2000. For instance, customs duty on
synthetic fibre/yarn has been brought down from as high as 20% in FY02
to 7.5–10.0% in FY08, which has not only brought about greater parity
across different textile fibres but has also helped the growth in the
synthetic textiles industry.

The industry’s backward linkages are strong due to abundant raw material
production within the country. India is the largest producer of jute, the
second-largest producer of cotton and silk, and amongst the top five
countries producing synthetic fibre. In terms of labour supply, India has
an advantage over other countries due to abundant availability of low-
cost skilled and unskilled labour. However, there is a lack of a technically-
trained workforce, which could pose a serious problem for the industry in
future.

India is one of the few countries in the world to have a well-established,

complete value chain in the T&G industry. The industry is more
competitive in spinning and garmenting segments but intermediary
weaving and processing segments are weak, which is a serious concern.
While India produces high quality yarn, it depends on imported fabrics for
the manufacture of high-quality garments for exports. Hence, despite the
strong backward linkages, the Indian T&G industry is rendered
uncompetitive due to technological backwardness. A large number of T&G
players in India operate with low-end machinery. Moreover, about three-
fourths of the industry’s demand for textile machinery is met through
imports due to an underdeveloped domestic textile machinery industry.
Nevertheless, technological changes are gradually sweeping across the
industry as many firms across segments have started upgrading
machinery to increase production capabilities and efficiency.

Technological changes in the industry have been led by the urge to

become competitive and reap the benefits of growing demand,
internationally as well as domestically. The domestic demand for textiles
and garments is on a rise due to the growing incomes of households
thanks to a buoyant economy. The main drivers of demand for textile
products in the domestic market are going to be the youth and the
earning class, especially working women. With the proliferation of IT and
BPO units in India, the youth have become financially independent, which
awards them high discretionary power to spend their incomes on lifestyle
enhancements, including the purchase of branded garments. Garment
manufacturers want to tap the large, growing domestic market for
branded apparel and home textiles, and as such, most of them have
opened exclusive retail outlets for their respective brands in major Indian
cities.

Section-II highlights the Global perspective of the T&G industry. Globally,

this industry is highly inter-linked; different processes in the entire textile
value chain can be located in different countries based on the maximum
value offered at the lowest cost by those countries. India is an important
link in the global supply chain of this industry. The country is highly
competitive in supplying fashionable garments in foreign markets with a
skilled workforce and flexible operations. However, India’s share in global
T&G exports is a mere 3.4%, primarily due to the long-time existence of
quotas.

Since the quota regime ended in 2005, the global trade dynamics of the
industry witnessed a major change. Textile imports from developed
countries have declined considerably, as the T&G industry in most of
these countries is on a downturn. On the other hand, imports of finished
textiles — that is, made-ups and garments — have been increasing.
Countries with a competitive edge in terms of cost, quality, and delivery
schedules have been able to enhance their shares in global exports. China
is the largest beneficiary in the new regime, witnessing high export
growth across all T&G segments since 2005. China’s advantage lies in
low-cost manufacturing aided by high labour productivity and large-scale
mechanisation.

Indian T&G companies witnessed a substantial jump in exports in the first

year after the abolition of quotas. However, growth in exports slowed
down in subsequent years as revenues have been hit by the steady
appreciation of the rupee against the dollar. The impact of rupee
appreciation has been quite severe on Indian T&G exporters, as they are
highly dependent on the US market and thus have a great exposure to
dollar fluctuations. Besides lower export revenues, the industry has also
witnessed job losses as many firms laid off employees due to loss of
orders.

An important trend observed in India’s T&G trade post quota phase-out is

the shift in composition of exports — garment exports have outpaced
textile exports and now account for over 51% of total T&G exports. This is
a reflection of emerging opportunities in global markets. If India wishes to
increase its share in global exports, focus would have to shift more
towards value-added products.

Section-III reviews the Industry performance of Indian textiles and

garments. The financial condition of the Indian T&G industry improved
considerably during the last 3 years. Prior to 2004, the financial health of
the Indian T&G industry was weak, primarily due to slow growth in sales.
However, with an improvement in demand conditions from 2004 onwards,
the industry’s financial performance has changed for the better,
witnessing sales growth of 10.4% and RoCE of 10.9% in FY06 (as against
6.8% sales growth and 9.2% RoCE in FY04). Operating margins of the
industry improved for almost all segments of the industry. Cotton and
blended yarn segments have seen operating margins rise to 13.4% in
FY06 from 11.2% in FY04.

Section-IV, the last section of the report, provides Strategic insights on

the Indian T&G industry. Competition amongst players in the Indian
industry is intense, reflected in extremely low margins (average 4%) in
the business. Better demand prospects in recent times have further
intensified competition. Big players with established brands stand to gain
from the growing opportunities but even they face tough competition from
the unbranded players, who are catering to the masses. Changing
competition has forced Indian T&G companies to alter business strategies
as well. In order to be highly cost-efficient, many players have started
investing in better technology, IT solutions, and captive power
generation. Vertical integration activities are also on a rise to enable
companies to control their input, logistics, and marketing costs.

Over the next few years, branding initiatives are expected to accelerate
and many garment companies are expected to join the brand bandwagon
as competition in the market is expected to further heat up. Exports of
textiles and garments have suffered in the recent past due to the sharp
appreciation in the rupee value vis-à-vis the US dollar. With export
realisations coming under pressure, several exporters are expected to
expand their domestic retail base as a long-term strategy to penetrate the
growing domestic market.

Mega investments are likely to materialise in garment retailing, especially

by large companies in this segment, as organised apparel retail is likely to
fuel high demand for garments in India. Expansion activities and the
induction of higher-end technologies are likely to continue until the
lifetime of the government’s TUFS initiative — that is, until 2012. Besides
investments in the production of textiles and garments, investments are
also likely to increase in textile machinery production as several foreign
textile machinery players have shown an interest in establishing
manufacturing bases in India.

The industry could see greater consolidation in the next few years, not
only amongst large players but also amongst small and mid-sized players
in the industry as M&A activity has turned out to be a fast track mode for
expanding and benefiting from growing number of opportunities.

The growth outlook for the industry is positive on the domestic and
exports front, backed by strong economic growth in the domestic market
and increased market opportunities internationally post the dismantling of
textile quotas. D&B Industry Research Service forecasts the market for
Indian textiles and garments to touch US$ 67.7 billion in 2007, with a
potential to reach US$ 88.8–93.0 billion by 2010. Of this, the domestic
market is expected to be worth US$ 60.4–65.5 billion and exports worth
US$ 27.5–30.8 billion by 2010.

The Indian T&G industry has high growth potential but certain elements of
risk could disrupt growth and performance. The industry faces high risk
on the exchange rate front, as steady appreciation in the rupee could lead
to revenue as well as employment losses. The industry faces moderate
business risk in terms of machinery supplies as it is largely dependent on
imported machinery. Since many textile and garment companies are
implementing major expansion plans, any hurdle in machinery supplies
from abroad could pose great financial risks. The other risk element in
India’s textiles and garments business is the imbalanced product mix,
highly favouring cotton, contrary to the popular global trend, which
favours synthetics over cotton. Some element of business risk may also
emanate from the shortage of technically-trained manpower, which is
extremely crucial to retain India’s competitive edge in the global textiles
market.
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