Cut excise on manmade fibres as also reduce customs duty on its raw materials                                  

Current Industry Status:

From growing its own raw material - cotton, jute, silk and wool - to providing high value added products to the consumers - fabrics and garments, the textile industry covers a wide range of economic activities and has a significant role in the economy of the country.

At present, textile industry contributes about 17% to the country's industrial production and 8% to the Gross Domestic Product (GDP).

The contribution of this industry to the gross export earnings of the country is about 30% while it adds only 7% to 8% to the gross import bill of the country.

After agriculture it is the largest employer and provides indirect employment to about 35 million persons. The industry is highly fragmented, with over 2000 players.

The Indian textile industry is growing at the rate of 5%. Presently, the per capita consumption of textile fibre in India is one of the lowest (2.5 kg) in the world. It has a highly complicated structure and encompasses many segments.

Broadly, it can be classified into the natural fiber segment comprising cotton textiles, woolen textiles, etc., and the synthetic fiber segment comprising polyester filament yarn, blended yarns, etc.

The industry predominantly uses cotton and converts staple fiber into finished textile products through the various manufacturing stages such as ginning, reeling, spinning, weaving, processing and garment manufacturing.

Global trade in textile and clothing is growing at the rate of 5-7%. However the textile industry manufacturing base continues to shift to developing countries, especially in the Asian region. China, Pakistan and India are the three main beneficiary countries from the global relocation of textile industry and would be the hub of world textile industry in the coming years.

The global fibre consumption is projected to grow at the rate of 2% per annum during the next five years. The per capita consumption which currently is around 7.7 kg is projected at 8.5 kg by 2005. The United State of America (USA) and European Union (EU) will remain the major consumers of textile products.

Despite lack of and obsolescence of infrastructure, the Indian textile industry has shown remarkable resilience to various vicissitudes and has grown considerably in terms of installed spindleage, yarn production and output of fabric and garments.

The textile mills can be classified according to the nature of work, like only spinning activity or composite mill, which undertakes spinning, weaving and processing all under one roof. However it is dominated by the decentralised sector i.e. Powerlooms & Handlooms, and the composite mill sector is required to compete with this dominant sector on unequal terms. Consequently, the composite mill industry is largely decimated and only few mills are capable of facing intense competitive pressures on a continuing basis.

The textile industry has faced the most difficult time during the past few years. The cost of production has been going up and the price realisation, both in the domestic and export markets, has been declining.

There is global excess capacity in the industry which has reduced profitability to an extremely low level. Also lack of modernisation, high cost of inputs, competition from neighbouring countries have forced many textile mills in the country to close down and still more landing at the Board for Industrial and Financial Reconstruction (BIFR).

The number of closed textile mills have more than doubled to 464 units at the end of Dec. 2002, compared with the closure of 220 units in 1997-98. What is still worse is that of the 646 mills referred to the BIFR till April 2002, 164 have been recommended for winding up and 83 declared non-maintainable, while 249 are still under inquiry.

The year FY 2001-02 in retrospect was a tough one for the Indian industries in general and especially for the textile sector. Unfortunately, a number of events had a dampening effect on the business sentiments of the industry, starting from 11th September, 2001 followed by an attack on Indian parliament on 13th December, 2001 and the disturbances in the State of Gujarat. The export as well as domestic business of the textile division suffered on this account.

The total fabric production was higher by only 2.6% to 41337.91 Mln.sq.mtrs. as compared to 4.4% growth recorded in FY 2000-01 to 40290.13 Mln.sq.mtrs. In addition to natural fibres namely cotton, silk, wool & jute, the industry uses a wide range of synthetic and man made fibres such as filament and spun yarns from polyester, viscose, nylon and acrylic.

In line with the industry trend the production of Viscose Staple Fibre (VSF) fell by 21.6% to 185280 tonnes as compared to growth of 16.9% to 236173 tonnes recored in FY 2000-01. However the total production of Polyester Filament Yarn (PFY) increased by 5.7% to 866059 tonnes as compared to growth of 2.3% to 819731 tonnes recorded during FY 2000-01.

Also the exports of textiles (excluding Ready Made Garments (RMG)), fell by 9.7% to US$ 5134.9 million as compared to growth of 13.4% recorded during 2000-01 to US$ 5688.7 million. Of this, the exports of cotton yarn fabrics madeups dropped 12.3% to US$ 3041.3 crore as compared to increase of 12.1% to 3466.3 crore during FY 2000-01. Exports of RMG dipped by 10.3% to US$ 5004.3 million as compared to growth of 16.9% to US$ 5578 million during FY 2000-01.

However, the Central Government seems to be conscious of the need to revive the industry and exploit its export potential and it has taken several steps including reduction of excise duty in the Budget for the year 2002-03, which has some positive impact on the industry. The year 2002-03 has seen the demand for textile products picking up with the global economy pulling out of recession and improving domestic market. Almost all sectors of industry has shown remarkable achievement during the first seven months of the year from Apr. 2002 - Oct. 2002.

Though the production of natural fabric has seen stable increase of 2% during the first seven months of the year from Apr.- Oct. at 224409.62 Mln.sq.mtrs, the production of PFY increased by 13.5% to 567270 tonnes as compared to rise of 4.7% to 499964 tonnes recorded in the corresponding previous period. Also the production of VSF increased by 35.1% to 126417 tonnes as against a fall of 30.7% to 93551 tonnes in the corresponding previous period.

Moreover textile exports (excluding RMG) during the above period, also witnessed a rise of 7.3% to US$ 3363.2 million as against fall of 7% to US$ 3135.7 million recorded in the corresponding previous period.

Exports of cotton yarn fabrics/made-ups increased by 3.9% to US$ 1938.3 million as compared to decrease of 8.9% to US$ 1865.9 million during the corresponding previous period. However the exports from man-made yarn fabrics madeups rose higher by 20.6% to US$ 761.7 million compared to fall of 0.4% to 631.8 million in corresponding previous period. Exports of RMG rose by 9.2% to US$ 3151.1 million as compared to drop of 12.1% to US$ 2887 million during corresponding previous period.

Currently man-made fibres (MMF) constitute 42% of Indian textile industry, while cotton accounts for the balance 58%. Also cotton constitutes a major share of India's exports. This is skewed, as against a strong non-cotton textile export trend world-wide. However the demand for cotton is facing increasing competition from man-made fibres due to its durability, versatility, easier processes and cost competitiveness, also the acreage for cotton production is limited.

The Government has identified textile sectors as capable of providing huge forex inflows and targets to achieve US$ 50 billion by 2010 from present US$ 15 billion. Moreover the abolition of Multi Fibre Agreement (MFA) by Jan. 2005 and China's entry in the WTO has prompted Government to come out with a competitive strategies for the sector.

Prevailing Tax Rates & Provisions:

The Union Budget 2002-2003 proposed to correct some of the inherent anomalies and provide incentives for investment in modernisation, given the poor health of the textile industry due to severe competition in both the international and domestic markets. It accorded a special status to the textile industry.

In the budget 2002-03, excise duty on various textile fabrics and ready made garments was reduced for a period of 3 years from 16% to 12%.

Excise duty on Polyester Filament Yarn (PFY) is 32% (16% Excise + 16% Special Excise Duty (SED)). In the budget it was proposed to remove SED totally in a phased manner in 2 years.

It also contained exemption of excise duty and reduction of customs duty (from 25% to 10%) on automatic shuttleless looms, processing machinery, specified silk reeling twisting and weaving machinery.

Excise exemption continued on handloom products subject to certification by Handloom Export promotion council.

Expectations:

Certain policy anomalies such as on excise continue to retard the potential growth of this industry. There is a prevailing incidence of steep excise of 36.8% on polyester filament yarn and 18.4% on blended yarn as compared to 9.2% on cotton. Similarly, there is a continuing disparity and absence of a graded differential between the customs duty on Purified Terephthalic Acid(PTA)/Mono Ethylene Glycol(MEG) (raw materials), and polyester fibre and yarn - each attracting a 20% duty. Also presently the garment sector is attracting sales tax where as the processed fabric used by the garment sector as input is levied Additional Excise Duty (AED) at the processing stage. This AED is in lieu of sales tax but no credit is available leading to cascading effect.

Some of the major expectations are as follows:

• Uniform excise duty on cotton and synthetic yarns at 8%.
• Reduction in excise duty on Polyester Filament Yarn (PFY) & Partially Oriented Yarn (POY) from current levels of 36.8% to 16%.
• Reduction in excise duty on garments from current levels of 12% to 8%.
• Reduction in import duty on textile machinery to 5% from current levels of 10%
• Reduction in import duty on raw materials (PTA/MEG/DMT) from current 20% to 10%.
• Removal of the 15% surcharge on excise duty.
• Further export incentives and sops to textiles and garments exports
• Labour reforms / Exit policy
• SSI reservation for knitting sector should be completely withdrawn.
• Setting up of a Textiles Industry Reconstruction Fund with a corpus of around Rs 3000 - 4000 crore to provide assistance to viable sick units.

Best Pre-budget Buys/Sells:

Top picks Indo Rama Synthetics, Arvind Mills, Century Textile & Indian Rayon.

Summary:

Key reasons for non-competitiveness of textile industry are distortion in current fiscal regime, lack of labour reforms, inadequate infrastructure and lack of bilateral agreements.

However with WTO agreement coming into place, domestic companies and small-scale players will have to face competition from global players.

The Indian textile companies, which are in competitive advantage in terms of raw material and labour cost, have to rework their capabilities with phasing out of the Multi Fibre Agreement (MFA) which used to give them fixed export quota for exporting to developed countries. This will now give way to free international competition.

The industry will have to modernise fast and consolidate and globalise to face the emerging competitive scenario.

Phasing out of MFA gives tremendous opportunities to efficient players, provided government rationalises the fiscal levies and supports modernisation.

Run-up to the Budget 2003

Powered by