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FDI in retail hiked China's textile exports 700%: study

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FDI in retail hiked China's textile exports 700%: study
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FDI in retail hiked China's textile exports 700%: study - January 18th, 2006

Phasing out of the Agreement on Textiles and Clothing (ATC) has resulted in 700% increase in China's exports, whereas India has seen a drop of 46%, according to a study undertaken by the Associated Chambers of Commerce and Industry of India (ASSOCHAM). It reveals that China's market share in the world textile market, which was around 9% in 2001 went up to 72.3% in 2005. At the same time, India's share of textile exports, which was around 2.8% in 2001 declined to 1.6% in 2005.

Releasing the study, ASSOCHAM President, Anil K. Agarwal says that the major reason for this massive rise for Chinese textile exports is not only its competitive advantage over rivals, but its liberal offer for opening up the retail sector to MNCs also contributed largely to the sale of its apparels abroad. In case of India, it lost its exports edge because it failed to create a supply chain for its textile products and take advantage of the economies of scale by continuing to block the entry of retail MNCs' into the country.

Of the 70 leading retailers world wide, 40 well known companies have been operating in various provinces of China without adversely impacting that country's domestic retailers. The global MNCs have taken Chinese products, particularly apparels, to almost all corners that one can identify in the world, adds Agarwal.

The ASSOCHAM analysis also seeks that a US$0.5bn investment in India's textile sector would result in an increase of US$1bn in Indian textile exports. By 2010, India will be able to achieve its US$50bn export target with a US$25bn investment. It will be able to generate 12mn new jobs of which at least 70% will be in rural India, says the ASSOCHAM study.

Investments made in the textile sector in the last 2-3 years will give fabulous returns in 2006-07 because of a lagged effect, with exports touching US$20bn during this period, the study shows. The industry chamber is of the view that investments, particularly FDI, has been termed as the most significant variable for India's textile exports in the global competitiveness.

ASSOCHAM has pointed out that India is the only major economy which still does not permit FDI in retail. In China, 40 of the world's top 70 retailers have already entered and set up business. They have helped boost exports. Wal-Mart alone exported in 2002 about US$12bn worth of goods. These retailers source their goods from inside. Thus FDI has been playing a significant role in China's building capacity to become the world's largest producer and exporter of textiles.

Last year, China received FDI of nearly US$60bn. Of this, the share of textiles was around 10%. As China steadfastly pursues the goal of cornering a third to half of the world trade in textiles and clothing, it is likely to strike strategic alliances with manufacturers in developing countries, particularly in South and South East Asia.

India needs significant regional partners to show improvement in productivity, raw material base, quality, and cost of inputs, design skills and economies of scale in order to benefit from a highly competitive environment. In the tax reforms State VAT has a limited scope; it applies only to sales tax, whereas there are other domestic indirect taxes, which the duty drawback or the DEPB is meant to compensate.

Within this limited State VAT, there are also differences in rates across VAT implementing states and variation between VAT and non-VAT states. Neither has it improved the efficiency of the exporters nor facilitated them by way of composite and uniform VAT rates. There are still many steps required to rationalise our tax system to create a common market for accelerated economic growth and international competitiveness, says the study.

Infrastructure and power sector reforms should be undertaken at a high speed to facilitate the smooth functioning of the industry, the study adds. India has high energy and capital costs, multiple taxation, and low productivity, all of which add to production costs. There is a need to make the present Technology Upgradation Fund Scheme (TUFS) more attractive and encourage firms to utilize larger funds available under TUFS.

Various factors associated with this scheme such as the hidden cost involved in processing of loan, prepayment penalty, and higher lending rates of financial institutions make the cost of capital high. Among all input prices, the price of materials has contributed the most to the unit cost growth in the textile sector in India. Raw material in India costs 15% more than in China. Energy price is still needs to be corrected, as the power cost in India compares unfavorably with that in many competing countries. On the index of 100 for India, cost of power in Bangladesh is 39, Indonesia 41, China 68, etc.

Although the textile industry fared well in the first half of 2005-06 as the weighted production index went up by 10.3%, compared to a 6.5% rise in the same period of the previous year. Investments as of October 2005, scaled up by a hefty 109.3% to Rs141.86bn, in the first nine months of the quota-free regime, India's textile exports dipped by 10.1% to US$4.7bn, while exports of readymade garments fell by 1.8% to US$5bn. Exports of textiles and readymade garments to the EU, accounting for 35.3% of India's textile exports, went up by a meager 3.7% to US$3.4bn during January-September 2005.

However, India holds promise! India was the second fastest growing textile exporter to the US in January-June 2005, led only by China. During January-June 2005, India's textiles and apparel exports to the USA increased by about 24.2%, which is higher than other competitors such as Mexico, Indonesia, Thailand, Korea and the Philippines. India has emerged as the second largest global textile-sourcing destination after China. Right from fibre to fashion, everything is available within the country. While China is good at low-price, high-volume products, Indians are excellent in high-quality value-added fashion garments.
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