The window of opportunity for the Indian Textiles Industry is narrow! Lack of on-time policy decisions would hamper the profit making situation that elimination of quotas have presented. In this context it becomes imperative to study the current areas of growth that have fuelled the Chinese economy. A comparative analysis of Indian and Chinese textile markets at this juncture would clear the picture how China has overhauled India when it comes to manufacturing.
Nevertheless, it can be stated India can counter the Chinese dominance by emphasising more on the Man Made Fibre Industry. Currently 60 per cent of the global trade is in MMF segment where polyester is the Key fibre. However India's fibre mix in exports is 15 per cent MMF and 85 per cent Cotton.
Since millions of acreage of land under cotton cultivation has only led to 4 million and 8 million tons of cotton production in India and China respectively, the contrast is apparent when it’s compared to MMF production in China. Chinese exports have witnessed more than one and half times growth between 2002 and 2004, apparently also the period of rapid growth in the production of MMF, which stood at 14 million ton for 2004 an increase of 6 million tons over 2002.
On the contrary, the Indian governments’ emphasis on cotton has not resulted into economies of scale. If the decision is based on humanitarian grounds then it is obviously not paying dividends.
India should take a leaf from the Chinese brethren in increasing Indian exports of Man Made Fibers, especially polyester, to help build on some of the basic advantages that already exist like availability of adequate raw materials, the world scale and world class production facilities, competitive conversion costs and favourable drivers of demand.
The Indian textiles industry is today on the cusp of a historic opportunity, with an investment requirement of US$ 30 billion, an additional employment generation of almost 15 million and a potential export volume of US$ 100 billion in 10 years.
These are astounding numbers but well within the reach of the textiles industry provided a few key issues are addressed.
Correct fibre mix:
The starting point has to be a focus on the Man-made fibre (MMF) industry, because 60% of global trade is actually in synthetics. Within the MMF sector, it is polyester that is the key fibre. India, needs to make a huge, concerted effort at increasing the MMF share of its export basket from its current 15% if it has to reach anywhere near its potential.
As a point of reference, one only needs to look at the huge investments and growth in Chinese MMF production, exports, global market share to realize how they have consistently outperformed India in the world textiles trade.
Broad policy road-map for textiles:
In the run-up to the Union Budget for '05-'06, the Government's basic approach embodied two broad principles:
1. There should be a progressive customs duty structure graduating from raw materials to finished goods, while simultaneously moving towards lower peak rates.
2. There should be progressive convergence between the excise duty regime for competing fibres
Missing links in Budget '05 - '06:
The Government's initiative in reducing peak rate of customs duty by 5% across the board from 20% to 15% is a welcome step, however, some structural anomalies exist.
If one were to consider competing man-made fibres polyester and acrylic, the difference becomes immediately apparent.
Raw materials of polyester and acrylic:
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It is particularly interesting to note that the customs duty on Acrylonitrile has been reduced twice in the past six months - from 15 to 10% in September 2004 and now further to 5% in this Budget.
In the case of polyester, however, it is the raw material producers (PTA & MEG), who have been afforded a 10% duty differential - not the fibre manufacturers. If Government's widely appreciated intent to remove such arbitrary duty distortions within individual value chains and across competing fibres, is applied the case for reducing the customs duty on PTA/MEG to 5% becomes apparent.
This will ensure equivalent treatment for acrylic and polyester fibre manufacturers within the man-made sector. Also India has a surplus capacity in PTA and that imports into the country have been negligible in the past few years. Duty reduction will therefore impose no revenue losses to the Government. On the other hand it will transparently afford equity between competing fibres, while promoting growth in the most important MMF sector and it's down stream converters.
Pressure on the polyester industry:
It must additionally be pointed out that the polyester industry has been reeling under acute pressure from galloping raw material prices for PTA / MEG over the past couple of years as is seen in the chart below.
This has resulted in a tremendous squeeze on the margins of polyester producers. On the other hand, acrylonitrile prices are actually showing a downward trend worldwide over the past couple of years.
National Calamity Contingency Duty (NCCD) 1%:
Even when the polyester is not a luxury item 1 per cent contingency duty still continues bracketing it with items like Air conditioners and Automobiles. This contingency duty should be removed to give it a level playing field.
Excise Duties - Discrimination across fibres:
The excise duty reduction on polyester Filament Yarn is a welcome step. However, the duty discrimination between cotton and polyester is still large enough to be a deterrent for large-scale down-stream investment and growth.
The duty concession to the cotton sector has had the immediate effect of completely turning around the scenario to a 8% growth situation in '04. This is very good for textiles but, unfortunately, not sufficient in light of the growth targets that we have taken up for ourselves. By contrast, the discrimination tariffs have meant slow down in growth for polyester to a moderate level of 4% in '04.
Duty differentiation for the same product:
Draw textured yarn (DTY) is produced both by independent texturisers and by composite units, who make both POY & DTY. In the budget proposal however, unlike independent processors, composite texturising units producing their own POY, will have an additional burden of 8 % duty on the textured yarn since they have to pay duty @ 16 % on their finished textured yarn.
This might be a hurdle to integrate and achieve economies of scale. when the industry requires immediate and massive consolidation. The unintended consequence will be that integrated POY/DTY manufacturers like Indorama, Welspun, Nova, Modern, Century Enka, JBF, Sanghi etc, may actually be forced to forego the benefits of integration and go in for demerger. Hence it’s only probable to expect that the excise duty regime for texturising units is made uniform for all players.
Conclusion:
In the post-MFA scenario, Indian textiles have a huge role to play in promoting investment, employment and exports. This promise can only be fulfilled with concerted policy initiatives aimed at making man-made fibres globally competitive.
As a vital constituent of this sector, the man made fibre industry, looks up for concerted policy remediation to secure long-term competitiveness for Indian Textiles and consequently prepare the foundation for enormous investments, employment and exports for our country 
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