Kaushik Basu: The textile opportunity

The policy prescription for textiles will benefit other sectors of the economy, too

The end of the multi-fibre agreement (MFA) on December 31, 2004, which set quotas on the maximum amount of textile products that each country was allowed to export to the US and Europe, creates enormous opportunities for developing countries, and India, in particular.

Unfortunately, though we had nearly a decade-long notice of this, our government did precious little to prepare for it. Yet all is not lost. Through a concerted effort, starting with the upcoming Union Budget, the country can reap enormous benefits from this sector.

Currently, India exports textile products worth $14 billion. With the boost that comes with the end of the MFA, the Indian government has set itself a target of $50 billion of exports by 2010.

I believe we should have a much more ambitious target than this. Aiming for $80 billion is not unrealistic at all if the government puts its energies to it.

This, apart from the benefit of bringing in foreign exchange and boosting growth, can create a large number of jobs, and take much of the pressure away from state-sponsored public works programmes.

The current aggregate global trade in garments is approximately of the value of $350 billion. This is expected to rise to $850 billion by 2010.

Hence, even though $80 billion of exports from India may, in itself, look large, it will be less than 10 per cent of the global exports. And with India's natural advantages, it is not unrealistic at all to aim for this.

China currently has a 25 per cent share of the global export market.

India has three natural advantages. It has cheap and abundant labour, it has its own cotton, and the "India look" happens to be a fashion label in the west.

But to capitalise on these will require some "systemic reforms". Before getting to these, let me briefly review the state of the textile sector and what ails it.

To get a better understanding of this, I spent a couple of days last month visiting some textile-manufacturing units in Gurgaon and talking to buying agents and supply-chain managers.

Orient Crafts is one of the largest manufacturers of textile products in India. It has 19 production facilities, employing over 20,000 workers.

I visited a unit employing 3,800 workers. It had rows of "tailors", sitting in modern, assembly-line arrangements in a clean well-lit factory.

The end of the assembly line spews out pretty little dresses and skirts, which will be sold by Orient Crafts at $4 a piece and will be retailed in the US for $45 in fancy boutiques and department stores.

With margins like this, it is not surprising that global garment manufacture is expected to move entirely to Third World countries over the next few years, now that there are no quotas to prevent this.

While the Gurgaon factory is one of the largest in India, it is sobering to learn that in China there are factories several times the size of this.

Even in Bangladesh there are facilities that are many times larger. These advantages of scale translate into a cost advantage that India cannot currently match.

India's other handicap is speed. The country's relative strength is in fashion clothes and in these products styles come into vogue and vanish within weeks. Much depends on how quickly an exporter is able to respond to these transitory demands in New York or San Francisco.

There are several factors that make the Indian response slower than its competitors. First, its assembly line moves slower. That is, Indian workers are less efficient than their counterparts in China or East Asia.

Secondly, for a product to go from the factory gate in India to a New York retail outlet takes 30""35 days. Most East Asian countries take half that time. An analysis of what causes this delay opens up a hornet's nest.

First, there is the problem of ports. Indian ports are small and riddled with bureaucratic delays. Hence, large liners do not come here. Most of our exports have to go out on "feeder vessels", to be transferred to some larger "mother vessel" in some other port.

Moreover, thanks to the slower bureaucracy, in India goods are required to be delivered at the port seven days prior to shipment. In most East Asian ports, the shipment "cut off", as this is called, is one day.

This is what makes the resolution of the textile problem a turnkey affair. It is not enough to do one thing like modernising the machinery or removing small-scale industry size restrictions, as some economists seem to believe.

What is needed is a simultaneous push on several fronts.

To begin with, we need to modernise our ports and transport system in general. For this, the government needs to spend money and invite multinational investment in these sectors.

Second, India needs to have more contract-friendly labour laws. Firms need to be able to hire large numbers of workers and also shed employment when needed.

There are, first of all, the unpredictable fluctuations in demand caused by fashion swings. Then there is seasonality, with high demand in spring and summer and slack demand over winter.

Most Indian firms, aware that trying to shed workers will get them into trouble vis-à-vis the Industrial Disputes Act, 1947, employ the number of workers they will need during the slack season.

As I have argued elsewhere, India's labour laws, in the name of helping workers, have actually hurt them by keeping employment and wages low. Moreover, these laws have kept worker productivity low.

It will be a digression to go into the details of labour market problems here, but it is worth noting that the law creates problems that go beyond its direct application. It has spawned a culture of slackness that has handicapped Indian industry and kept our workers poor.

Third, we have to remove the small-scale industry restrictions that compel certain products to be manufactured in small and scale-inefficient units. This may have been a reasonable policy of sacrificing some efficiency for greater equity in a closed economy.

But, in today's globalised world, to have this restriction is to handicap Indian manufacturers vis-à-vis their international competitors and to risk closure of Indian firms and ultimately achieve neither efficiency not equity.

Some of these, especially the modernisation of ports and transport infrastructure, will need money. Where will this come from? One possibility is to use a small fraction of India's foreign exchange reserves, say, $10 billion, for this and other infrastructural investment and modernisation.

Analysts have wondered why foreign direct investment is not coming into the Indian textile sector. The main reason is that, thanks to the above problems, there was no scope for the sector to grow substantially and for factories to be larger and therefore scale-efficient.

If, however, the package of policy changes advocated here is implemented, the sector will begin to grow and FDI in large measure could come in; and the initial investment of $10 billion can be recovered within a few years.

The above recommendation may seem like too many policy changes to give a push to one sector. But most of these changes""modern ports and more flexible labour laws, for instance""will have effects beyond the textile sector.

Hence, even though the policy may be focused on the textile sector, it can have a widespread beneficial effect for Indian industry and the services, in general.

(The author is Professor of Economics and C Marks Professor of International Studies and the Director of the Program on Comparative Economic Development at Cornell University)