PM Mitra, PLI and FTAs: Saviour for Ailing Indian Textile Industry?

Yuvaraj Mandal

Note: Although textiles and apparels are conceptually different, as textiles are the intermediate products used in the making of final goods (apparel/clothing), due to the purpose of simplicity, this article will mostly use ‘textile industry’ terminology to indicate the ‘textile and apparel industry’ of India.

Introduction

As of 2023, the Indian textile and apparel industry makes significant contributions to various aspects of the economy. It contributes 4% to global trade in textiles and apparel, making it a crucial player in the international market. In terms of GDP, it accounts for approximately 2%, which amounts to around $70 billion. Additionally, the industry’s output represents 7% of the total industry value.

One of the notable aspects of the Indian textile industry is its ability to generate a substantial number of employment opportunities. It offers jobs to both skilled and unskilled workers, with over 45 million direct employment opportunities and an additional 100 million jobs in allied sectors. This makes it one of the primary sources of employment, particularly for women, especially in rural areas of India.

In fact, women comprise the largest segment of the industry’s workforce, making up approximately 60 to 70% of the total manpower. In India alone, the textile industry provides income opportunities for more than 27 million women. Among them, about 50% are associated with unorganized sectors such as handlooms, handicrafts, and sericulture (2022 estimates).

To further support and develop the industry, the government has set a target of achieving $100 billion in textile product exports by the year 2030. This ambitious goal reflects the government’s commitment to fostering growth and expansion in the textile sector, which plays a vital role in the country’s economy.

Problems of the Indian textile industry

Just before the Pandemic, this was India’s position in the world in terms of exports.

We took before-pandemic data as it highlights India’s condition in the normal economic state of the world.

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xB6EPCh5RDJDOZfi2Z7Lqlv0MLoOt1Yp 6YB2vxQRp6diceJEZ mxcXdHHSSz7uGt8IPP7oibsFIJ96V4wB UQRnop CmhZzJNj2NNtMr68JnXVjay8L NqjRj9rZ TcV6QfDIcmrN8jj5jOR5Mfgmg

Source: WTO 2020 (Created by Author)

An interesting observation is that while India exports a lot of textiles, the exports of clothing products are lagging behind. In fact, merely 36% of India’s total textile exports are ready-made garments (RPG). Even Bangladesh has outperformed India when it comes to exports of clothing in recent years.

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Source: Mint

How can Bangladesh outperform India?

According to the Economic Survey of 2019-20, Bangladesh’s ready-made garment exporters have a significant advantage in terms of economies of scale. Over 80% of the market value of Bangladesh’s exports comes from large enterprises, while in India, 80% of the market value comes from small enterprises.

Furthermore, the following graph highlights the cost-effectiveness Bangladesh has in terms of wage structure:

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Source: Still Un(Der) Paid by Clean Clothes Campaign | Graph created by Author

The second advantage is the preferential duty treatment given to garments from Bangladesh as a Least Developed Country (LDC) by the European Union and other developed countries. This preferential treatment helps improve the economy of LDCs under the World Trade Organization (WTO) agreement. However, in 2026, Bangladesh will graduate to the UN’s developing country bracket, which means trade concessions from the US, Europe, and other countries will gradually come to an end, requiring Bangladesh to explore new options.

Bangladesh has also been enjoying duty-free trade benefits to Indian markets since 2011 under the South Asian Free Trade Area (SAFTA) on the export of all goods including apparel products, except 25 alcoholic and beverage items. Due to the duty-free trade benefit, Bangladeshi garments accounted for 34% of the total imported garments despite having 12.50% countervailing and provincial duty (2019-20 pre-pandemic estimates). 

The curious case of man-made fibres

According to Textile Magazine, India’s exports are primarily focused on cotton, while a significant portion (60%-70%) of the global textile trade consists of man-made fibre-based products, especially apparel. Despite being the second-largest producer of man-made fibres in the world, India’s share in MMF garments is only 2%, with China dominating at 34%, followed by Vietnam and Bangladesh. Vietnam has recently overtaken Bangladesh in ready-made garments exports. 

However, Indian weavers and spinners are increasingly turning to Man-Made Fibres (MMFs )as an alternative to cotton. These fibres, such as viscose and polyester, contribute to almost 100% of non-cotton fabrics and blended fabrics. It provides a reliable option for weavers and spinners during low production periods of natural fibres, especially during the cotton shortage in 2022. Hence, the promotion of MMFs is imperative to improve India’s apparel exports as well as sustain the livelihoods of Indian textile workers.

Unfortunately, India suffers from internal problems when it comes to the production of MMF fabric and garments. Currently, the MMF value chain in the textile industry experiences an inverted duty structure where taxes on the final product are lower than taxes on the inputs. This leads to an accumulation of input tax credit that is typically refunded by the government. In this process, the flow of crucial working capital for MSME businesses is hampered. 

Under the Goods and Services Tax (GST) system, cotton attracts a uniform tax rate of 5% across the entire textiles value chain. In contrast, MMFs and textiles are subjected to different GST rates. The GST rate on MMF is 18%, while filament yarn and spun yarn have a GST rate of 12%. For fabrics, the GST rate is 5%. This depicts the differential treatment between cotton and manmade fibres throughout the textiles value chain, which India needs to urgently address.

There are other reasons which made the Indian man-made textile industry uncompetitive. 

The Finance Ministry implemented an anti-dumping duty on Viscose Staple fibre (VSF) of $0.512 per kilogram in August 2016, which remained in effect for a duration of five years. VSF is a biodegradable MMF that is gaining popularity globally and replacing cotton. This increased the price of the fibres and made the end-product garments unaffordable for Indian consumers and international markets.

Recently, the anti-dumping duty on VSF was removed, and the Confederation of Indian Textile Industry (CITI) hailed it as a “historic decision”. After the expiration of the duty in August 2021, imports from China remained at a low level. However, data indicated a significant increase in imports from Indonesia during the same period. In July 2022, the imports from Indonesia reached their highest point in the past four years when compared on a monthly basis. Although the increasing import of VSF can benefit the garments industry, its impact on the intermediate industry should be closely monitored. 

PLI Scheme

To address these concerns, the Indian government introduced the Production-Linked Incentive (PLI) Scheme with a budget allocation of Rs 10,683 crore to boost the production of MMF apparel, MMF fabrics, and Technical Textile products in the country. In April 2022, the Union Government approved 61 applications with an investment potential of over Rs 19,000 crore under the PLI scheme for textiles. Afterwards, three more companies were added in May 2022. 

Due to the underutilization of the allocated corpus of Rs 10,683 crore for the first phase of the PLI scheme, the government decided to introduce a second edition which is yet to be announced. It is estimated that just over Rs 6,000 crore will be utilized from the allocated budget. Thus, the second edition of the PLI scheme, known as PLI 2.0, is expected to have a budget allocation of Rs 4,307 crore. It will cover the manufacturing of garments, made-ups, and textile accessories using both natural and man-made materials. This information was mentioned in a Cabinet note which was finalized by the Textiles Ministry.

Furthermore, the Textiles Ministry stated that 74 research proposals with a total value of Rs 232 crore have been approved under the National Technical Textile Mission (NTTM) for speciality fibre and technical textiles.

Free Trade agreements 

According to India Ratings and Research (Ind-Ra), the recently implemented Free Trade Agreement (FTA) between India and Australia, effective from December 29, 2022, is expected to benefit Indian garment and home textile exporters. The data shows that China held a significant share of textile imports into Australia, accounting for nearly 60% (approximately $12 billion) in 2020, while India’s share stood at 5%-6%. Ind-Ra predicts that with the FTA in place, the volume of Indian textile exports to Australia will gradually increase in 2023 and beyond, based on the capacities of the producers.

Furthermore, the zero import duty access granted by Australia to India (previously 5%) is expected to create a level playing field for Indian exports compared to those from China, Vietnam, and Bangladesh, as indicated by Ind-Ra.

In addition, India and the United Arab Emirates (UAE) have recently signed a FTA which is likely to provide a boost to Indian textile and apparel exports. India is also actively engaged in negotiations for free trade agreements with the European Union, the United Kingdom (UK), Canada, Israel, and other countries. 

PM Mitra

The Government of India (GOI) has announced the locations for the establishment of 7 Pradhan Mantri Mega Integrated Textile Regions and Apparel (PM MITRA) Parks across various states including Tamil Nadu, Telangana, Gujarat, Karnataka, Madhya Pradesh, Uttar Pradesh, and Maharashtra. These parks are a significant step towards realizing the government’s vision of making India a global hub for textile manufacturing and exports, aligning with the 5F vision of the Prime Minister: Farm to Fibre to Factory to Fashion to Foreign.

Out of 18 proposals received from 13 states, the selection of these 7 sites was based on a challenge method that considered factors such as connectivity, existing ecosystem, textile/industry policy, infrastructure, utility services, and validation using PM Gati Shakti – National Master Plan for Multi-modal Connectivity. These parks are expected to attract investments worth Rs. 70,000 crores and generate employment opportunities for around 20 lakh people.

The Ministry of Textiles will oversee the implementation of these projects, with each park having a Special Purpose Vehicle (SPV) owned by the central and state governments to manage the execution. The Ministry will provide financial support through Development Capital Support of up to Rs. 500 crores per park and Competitive Incentive Support of up to Rs. 300 crores per park to encourage quicker implementation. Other GOI) schemes will also be utilised to provide additional incentives to the Master Developer and investor units.

State governments will play a pivotal role in establishing MITRA Parks by providing contiguous and encumbrance-free land parcels of at least 1000 acres and ensuring reliable power supply, water availability, wastewater disposal systems, and an effective single window clearance. The establishment of such parks will provide a platform to build an integrated textiles value chain—from spinning, weaving, processing, and printing to garment manufacturing and accessories production, all in one location. This consolidation will significantly reduce logistics and transaction costs, helping India to be internationally competitive in apparel exports. 

Furthermore, these parks will provide plug-and-play facilities as well as training and research facilities to support the textile industry. As per the Hindu BusinessLine, the plug-and-play concept means “ready facilities in terms of building, power-water-sewage connectivity, road connectivity, besides other basic things including clearances in hand required to start the industry”. 

The total outlay for the project is Rs. 4,445 crore, with an initial allocation of Rs. 200 crore in the 2023-24 Budget. 

Conclusion

In conclusion, the textile industry stands as a significant contributor to global trade, economic growth, and employment opportunities. With its substantial share in the global market, the industry continues to play a crucial role in the economies of countries like India and Bangladesh. Particularly noteworthy is the employment it provides to millions of women, particularly in rural areas, promoting gender empowerment and inclusive development.

To enhance competitiveness and foster growth, various measures are being taken. The implementation of free trade agreements, such as the recent one between India and Australia, presents favourable opportunities for textile exporters. Additionally, initiatives like the PM MITRA Parks in India aim to establish integrated textile value chains, reducing logistics costs and providing a supportive environment for textile manufacturing.

However, the industry faces challenges that necessitate continuous adaptation, investment in research and innovation, and the adoption of sustainable practices. By leveraging emerging technologies, promoting skill development, and strengthening partnerships, India can be a global hub for apparel manufacturing and exports.

References

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About the author:

Yuvaraj Mandal is a research intern at IMPRI. He is studying economics and finance at Ashoka University.

Read more articles by IMPRI: https://www.impriindia.com/insights/%e2%82%b92000-notes-another-costly-mistake/

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