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Budget brings cheers for textiles

July 08, 2004 19:24 IST
Last Updated: July 08, 2004 19:26 IST

After Multi Fiber Arrangement is phased out, the textile industry of developing economies like India will have a reason to be optimistic about the long-term growth opportunity. The textile manufacturers will have a chance to increase the share of exports to the European Union and US markets.

 Budget Measures
  • Cenvat duty on handloom and powerlooms has been withdrawn
  • Instead a new tax regime for the textile sector has been introduced
    • Mandatory Cenvat chain stands abolished.
    • No mandatory excise duty on pure cotton, wool and silk, be it fibre, yarn, fabric or garment.
    • Blended textiles and pure non-cotton items like polyester, viscose, acrylic and nylon will have a different tax regime.
    • Mandatory excise duty on man-made staple fiber at 16% imposed.
  • 2% education cess on all taxes.

     Budget Impact
  • The removal of duty will make the handloom and powerloom products competitive post 2005 when international markets open up for Indian players. However, to some extent, this will have a negative impact on the established branded garment players.

  • With the removal of excise duty on pure cotton, wool and silk products, the Indian companies will be much more competitive to face international low cost producers from China, Sri Lanka, Pakistan etc.

     Sector Outlook
  • MFA is an agreement through which a particular country is restricted to export its textile products beyond a certain level to European and US markets. After Multi Fiber Arrangement (MFA) is phased out, the India textile industry will get access to European and US markets. The textile majors are planning to add capacities in order to capitalize on the situation. The government has taken some measures to make the textile players more competitive by providing excise cuts for some of the categories. Our long term outlook on the sector remains positive.

     Industry Wish List
  • The CENVAT chain should be further strengthened and proper compliance of excise duty regulations should be enforced on all players in the industry. Excise cover should not be expanded, as it would help only the large operators in the textile market.

  • In order to attract more investments, all textile segments should have a uniform basic excise duty of 8%. For texturised yarn segment, the excise duty should be gradually reduced from current level of 24% to 8%.

     Budget over the years
    Budget 2001-02Budget 2002-03Budget 2003-04
    The allocation for textiles enhanced by more than 50 per cent from Rs 4.5 bn in 2000-01 to Rs 6.5 bn in 2001-02.

    New schemes of setting up integrated apparel parks.

    The excise duty rates on yarns fixed at 8%, which was not there earlier. Excise duty rates on ready to wear garments at 12%.

    Excise duty exemption on handloom fabrics to continue and automatic shuttleless looms provided exemption from excise duty.

    The customs duty on automatic shuttle less machinery reduced from 25% to 10%.

    Reduction of excise duty on polyester filament yarn from 32% to 24%.

    Excise duty on all knitted cotton fabrics and garments reduced from 12% to 8%.

    Basic customs duty on paraxylene reduced from 10% to 5%.

    Excise duty on garments reduced from 12% to 10%.


    Key Positives
  • Post 2005, Multi Fiber Arrangement (MFA) will be phased out. This will enable Indian companies to export their products in any quantity to any country as against a specific quota provided for export.

  • Due to cheaper labor available in India as compared to European countries, the big brands have started outsourcing garments from Indian companies. Thus the growth potential expands post 2005.

  • In order to restructure the sector, the government set up a textile reconstruction fund that will help in reducing the effective interest burden on viable textile companies. This fund targets reduction in interest rate for all borrowers in range of 8%-9%.

  • The government has set an ambitious textile export target of US$ 50 bn by 2010 as compared to US$ 11 bn currently. Considering the huge potential in the European and the US markets, it seems possible.

    Key Negatives
  • Impractical labour laws also restrict large players to lay off redundant workers to improve competitiveness. Though promise of labour reforms have been made n the past, there has been a lag in terms of implementation.

  • One of the biggest drawbacks of the India textile sector is that it is highly fragmented at lower levels. Access to finance and technology has been hard to come by, thus affecting growth prospects of smaller manufacturers.

  • Since raw material cost as percentage of expenses is significant, the textile majors have suffered.

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