Textile: Pre-Budget Sectoral Analysis

After the Multi Fibre Arrangement (MFA) is phased out, the textile industry of developing economies like India will have a reason to be optimistic about the long-term growth opportunity. The textile manufacturers will have a chance to increase the share of exports to the European Union (EU) and US markets.

Industry Wish List

	The CENVAT chain should be further strengthened and proper compliance of excise duty regulations should be enforced on all players in the industry. Excise cover should not be expanded, as it would help only the large operators in the textile market.
	In order to attract more investments, all textile segments should have a uniform basic excise duty of 8%. For texturised yarn segment, the excise duty should be gradually reduced from current level of 24% to 8%.

Budget over the years

Budget 2001-02	Budget 2002-03	Budget 2003-04

The allocation for textiles enhanced by more than 50 per cent from Rs 4.5 billion in 2000-01 to Rs 6.5 billion in 2001-02. New schemes of setting up integrated apparel parks.	The excise duty rates on yarns fixed at 8%, which was not there earlier. Excise duty rates on ready to wear garments at 12%. Excise duty exemption on handloom fabrics to continue and automatic shuttleless looms provided exemption from excise duty. The customs duty on automatic shuttle less machinery reduced from 25% to 10%.	Reduction of excise duty on polyester filament yarn from 32% to 24%. Excise duty on all knitted cotton fabrics and garments reduced from 12% to 8%. Basic customs duty on paraxylene reduced from 10% to 5%. Excise duty on garments reduced from 12% to 10%.

Key Positives

	Post 2005, Multi Fiber Arrangement (MFA) will be phased out. This will enable Indian companies to export their products in any quantity to any country as against a specific quota provided for export.
	Due to cheaper labor available in India as compared to European countries, the big brands have started outsourcing garments from Indian companies. Thus the growth potential expands post 2005.
	In order to restructure the sector, the government set up a textile reconstruction fund that will help in reducing the effective interest burden on viable textile companies. This fund targets reduction in interest rate for all borrowers in range of 8%-9%.
	The government has set an ambitious textile export target of US$50 billion by 2010 as compared to US$11 billion currently. Considering the huge potential in the European and the US markets, it seems possible.

Key Negatives

	Impractical labour laws also restrict large players to lay off redundant workers to improve competitiveness. Though promise of labour reforms have been made n the past, there has been a lag in terms of implementation.
	One of the biggest drawbacks of the India textile sector is that it is highly fragmented at lower levels. Access to finance and technology has been hard to come by, thus affecting growth prospects of smaller manufacturers.
	Since raw material cost as percentage of expenses is significant, the textile majors have suffered.

Equitymaster.com is one of India's premier finance portals. The web site offers a user-friendly portfolio tracker, a weekly buy/sell recommendation service and research reports on India's top companies.