Institute of Chartered Financial Analysts of India (ICFAI) University 2006 Certification Finance Security Analysis-II - Question Paper

Asian textile industry post-quota era

On December 31, 2004, quotas were eliminated under the Agreement of Textiles and Clothing (ATC) and trade in textiles and clothing was thus reintegrated into the world trade system. When the ATC was conceived in 1994, the gains from quota elimination were expected to go to low wage and populous Asian countries such as India, Indonesia, Pakistan, the Philippines and Thailand. The losers were predicted to be small and marginal exporters, former large quota holders in East Asia, and firms in the EU and the USA. Indian textile industry offers end-to-end capabilities for manufacturing and processing yarn and has the ability to satisfy customer requirement across multiple product grades as well as small and large lot sizes. But the outlook for Asian suppliers other than China has been changed by China’s entry to the World Trade Organization (WTO) in late 2001 and its growing dominance of Western markets. Asian suppliers will also be impacted by Preferential Trade Agreements (PTAs) giving non- Asian partners duty-free access to the EU and the USA. The proliferation of PTAs has cast doubt on whether Asian suppliers other than China will achieve the gains they were promised.

The USA, the EU and a few other WTO members have used safeguard quotas to protect their markets in the post-quota era. In the 1st few months of 2005 China made strong inroads into EU and US markets—at the expense of preferential suppliers and former large quota holders in East Asia. In contrast, Asian suppliers such as India, Indonesia, Bangladesh, Pakistan and Sri Lanka maintained or slightly improved their positions in the US market. a few are moving into higher quality products as they adjust to low cost competition from China. Meanwhile, in the post-quota era, efficient Asian production networks continue on to be undermined by EU and US preferential trade deals, enforced by restrictive rules of origin. Such a situation could be avoided if negotiators at the WTO Doha Round were to prove successful in reducing EU and US textile and clothing import tariffs.

Textile industry in India

India is the world’s 2nd largest producer of textiles and garments after China. It is the world’s 3rd largest producer of cotton—after China and the USA—and the 2nd largest cotton consumer after China. The textile and garment industry in India is 1 of the oldest manufacturing sectors in the country and is currently it’s largest. The textile and garment industry fulfils a pivotal role in the Indian economy. The per capita consumption of textile in India is 2.8 units compared to world avg. of 6.8 units. It is a major foreign exchange earner and, after agriculture, it is the largest employer with a total workforce of 35 mn. In 2005 textiles and garments accounted for about 14% of industrial production and 16% of export earnings. India has a setback in technological front where specialized integrated textile mills are to set up. The industry covers a wide range of activities. These include the production of natural raw materials such as cotton, jute, silk and wool, as well as synthetic filament and spun yarn. In addition an extensive range of finished products are made. The Indian textile industry accounts for about 23% of the world’s spindle capacity, making it the 2nd highest after China, and around 6% of global rotor capacity. Also, it has the highest loom capacity—including hand looms—with a 61% share. India accounts for about 12% of the world’s production of textile fibres and yarns. This includes jute, of which it is the largest producer. The country is the 2nd largest producer of silk and cellulose fibre and yarn, and the 5th largest producer of synthetic fibre and yarn.

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