In November 2020, the Cabinet approved the Production Linked Incentive (PLI) scheme for 10 sectors, including textiles. Manufacturers producing man-made fibres and technical textiles (industrial application) shall be given an incentive by the Centre from a corpus of Rs 10,683 crore over a five-year period. But the decision to exclude cotton textiles from this incentive was surprising.
By doing this, the Centre ignored an industry that employs five crore workers and supports 60 lakh farmers. However, the industry is in decline—India’s cotton exports contracted 18% last year to Rs 800 billion. India’s share in global textile and cloth exports shrunk to a meagre 4.5% even though it produces 20% of the world’s cotton. Surprisingly, India became a net importer of raw cotton worth Rs 20 billion, even as domestic production surged to a six-year high of 360 lakh bales. Overall, ICRA estimates that the cotton spinning firms recorded a 2% decline in revenues and a 230 basis points contraction in profitability.
The decline in cotton textiles on the one hand and the Centre’s constant emphasis on the industry as a whole on the other indicates that the cotton segment is not a priority. Take, for instance, two statements from the textile ministry’s deposition to the Parliamentary Standing Committee on Labour as evidence. About exports to Bangladesh, the Secretary replied, “… we will have an agreement with Bangladesh to supply fabric and yarn to them and they will make the apparel and export it.” About man-made fibre segment, the ministry said, “Share of MMF in world textiles has been increasing but India’s domestic market has been dominated by cotton.”
Read together, these statements explain the dominance of low-value cotton fibre and yarn in exports and reveal the ministry’s intention behind excluding cotton textiles from the PLI scheme. While it is important for India to move with the global trend towards man-made fibres, doing so at the cost of a large cotton foundation will be perilous. The ministry should aim to compete with Bangladesh’s exports of finished goods like apparel rather than supplying it with intermediate goods like cotton fibre and yarn.
The decline caused by the ministry’s ignorance has been compounded by Covid—cotton textiles exports to the US, a key market, declined 19% YOY between January and May 2020 whereas exports from the rest of the world increased by 60%. ICRA forecasts that this year, apparel exporters will record a double-digit contraction, with small enterprises being worst affected. The Index for Industrial Production (IIP) of textiles and apparel shows that output had contracted 40% YOY till September 2020, far worse than the 20% contraction in the general index.
Yet, the Centre has not announced a special relief package for the industry. MSMEs have had to rely on the credit measures under the Atmanirbhar package, which are inadequate for an industry that is 85% unorganised. The bottom line is that the cotton textiles industry is experiencing unprecedented distress. The Centre should use this as an opportunity to institute reforms that drive short-term rejuvenation and long-term expansion.
The principles of this reform must be securely grounded in export promotion. Exports are an engine of economic growth that drive investment and job creation by tapping into global demand. Bangladesh and Vietnam have done well to recognise this and contribute to 12% of global textile exports despite producing less than 1% of the world’s cotton. A 2020 ICRIER Working Paper by Das and Kukreja calculated that $1 million of cotton textiles exports support 403 jobs. Extrapolating from this, last year’s contraction in exports of $2 billion may have resulted in eight lakh job losses.
If India is to arrest this decline, two policies must be implemented. One, extending the PLI scheme to cotton apparels and two, notifying a higher rate for cotton apparels under the upcoming Remission of Duties or Taxes on Export Products (RoDTEP) scheme.
The double punch of the PLI scheme and RoDTEP for finished cotton goods has three primary benefits. First, it will direct intermediate cotton goods away from exports and towards value-added products. Second, it will increase cost competitiveness of Indian exports. Third, it will allow for higher utilisation of surplus domestic cotton stocks that are at a five-year high because the incentives will be transmitted across the value chain.
While cost competitiveness may be a viable export promotion strategy in the short term, only productivity gains can sustain competitiveness in the long run. The PLI scheme and RoDTEP are not designed to deliver these productivity gains. Currently, as much as 85% of the units in the cotton textile value chain are unorganised and non-integrated. They trail their peers from China and Bangladesh in productivity because they are characterised by low technology machinery and poorly skilled workers. These units require policy support to upgrade machinery and labour skills.
The Centre needs to revamp two existing policy initiatives in this regard. Regarding machinery, the Amended Technology Upgradation Fund scheme was launched in 2016 to mobilise investments worth Rs 950 billion and create 35 lakh jobs by 2022. Four years since its inception, the scheme has met only 40% of its target and less than 10% of its job creation target. The Samarth scheme was announced to train 10 lakh persons between 2017-2020 with an outlay of Rs 13 billion but till September 2020 had achieved only 15% of fund utilisation with no clarity over actual target completion.
With upgraded technology and workers, firms shall be in a better position to develop backward and forward linkages. Economic research provides evidence that these integrations increase domestic use of cotton produce while maximising value addition. The Centre must look to textile clusters to foster these integrations. A 2020 ICRIER Working Paper by Ray found that India, unlike Bangladesh, performs poorly in garments because of the lack of proper clusters. A cluster promotion policy that supports brownfield clusters like Bengaluru (apparel) and Tirupur (knitted garments), and establishes greenfield clusters in high cotton production states like Andhra Pradesh is needed.
The challenge presented by Covid is also an opportunity to lay the foundation for the next era of growth in cotton textile manufacturing. The Centre needs to bring out a combination of measures—PLI and RoDTEP for cotton apparels for the short run, and technology and skill upgradation along with cluster promotion for the long run. These will allow India to leverage its vast cotton produce and expand its share in global cotton textile trade. In doing so, it will secure the future of the six crore Indians who depend on the industry and generate lakhs of non-farm jobs in rural and semi-urban areas.
Lavu Sri Krishna Devarayalu
YSRCP MP from Narasaraopet, Andhra Pradesh
(Assisted by Raghav Katyal, LAMP Fellow)
(krishna.lavu@yahoo.in)