What explains India’s poor performance in garment exports

India has been losing its share of the world garment trade over time – it went down from 6% in 2013 to 3.5% in 2016. This article examines the Indian garment industry based on a survey of garment manufacturers in India. It discusses the constraints and nature of competition faced by the industry, and suggests a number of policy changes in order to boost exports.

The garment industry was central to the industrialisation process of many developed countries like Japan, and other newly industrialising countries like South Korea. The benefits of this sector include generation of employment, income, foreign exchange, and export diversification. However, India has been losing its share of the world garment trade over time – it went down from 6% in 2013 to 3.5% in 2016.

In recent research (Ray 2019), we examine the Indian garment industry based on a survey of garment manufacturers in India, conducted during September-October 2010. The objective of this study is to examine the effect of clusters of garment manufacturers on the sales of this industry and to understand the nature of competition Indian manufacturers face from products manufactured in other South Asian countries. The five clusters chosen for the survey were Bangalore, Delhi-NCR (National Capital Region), Kolkata, Ludhiana, and Tirupur. The clusters chosen for the primary survey are the leading centres for apparel production in the country. While the Kolkata cluster specialises in kids’ garments and men’s innerwear and shirts, the Delhi cluster manufactures products mainly for women. Both Bangalore and Tirupur are largely export-oriented while the Kolkata cluster caters largely to the domestic market. The Ludhiana cluster specialises in winter-wear. We interviewed 127 firms with approximately 25 respondents in each cluster. Majority of the firms were small. In this article, we discuss some highlights of the survey.

The Indian garment industry

The process of manufacturing a garment comprises several steps: cutting, stitching, embroidery, fixing of accessories, dyeing, and so on. The maximum value addition to textiles is done by the garment sector, which is the last stage of the textile value chain). Eighty per cent of the national production of garments is concentrated in 10 clusters: Kolkata, Mumbai, Tirupur, Ludhiana, Indore, Bellary, Jaipur, Bangalore, Chennai, and Okhla (Apparel Export Promotion Council, 2009). The clusters are categorised in terms of two aspects: (a) type of garments (that is, knitted or woven) and, (b) category of products (for men, women, or kids). The domestic market is served with products of a lower quality than those that are exported. The domestic segment can be subdivided into items that are branded (and sold through organised retail) and those that are not branded. India’s garment exports (comprising 24% of total domestic production of garments) include ‘t-shirts, singlets, vests, etc.’, and ‘women’s or girls’ suits, ensembles, jackets, blazers, etc.’ in 2015-16.

Technology is the key to facing the challenge of greater competition from imports. Turning to the role of imported machinery we note that, eight of the 38 domestic-segment firms use imported machinery, while the corresponding figure for the export-segment firms is 42 out of 50. Of the 39 firms that belong to both domestic and export segments, 37 use imported machinery. This is not surprising since products meant for exports are of better quality than domestic products and the value addition using imported machinery can be far greater. Sixty seven of the 105 smaller firms use imported machinery while 20 of the 21 larger firms use imported machinery. This is due to the fact that imported machines are far costlier than the corresponding domestic machines, and hence, are unaffordable for the smaller firms. Most of the imported machines were imported from Japan, Taiwan, China, Singapore, and EU for the processes of dyeing, knitting, cutting, and stitching. The firms usually take up small orders and deliver products with value additions such as embroidery, sequencing, printing, and so on. Most of the small-scale players work on the ‘kokha’ model, wherein the cutting of the fabric is done in-house in order to ensure standardisation of size and cuts while the stitching is outsourced, and finally the garments are finished in-house.

Competition from South Asia

We start by asking the firms about the effect of competition from the South Asian countries on the Indian firms. Most of the firms said that they face no competition from the South Asian countries. This is important since India is losing ground in the garment exports. If not to the South Asian countries, who is it losing ground to? To answer this question, a distinction needs to be made between large and small firms as well as the market they cater to. None of the large firms are catering exclusively to the domestic segment – they are either exporting, or serving both the domestic and export market. Firms that are exporting report that they face very little competition from the South Asian countries. This is mainly due to the fact that Indian products involve a higher value addition such as embroidery etc. vis-à-vis products of other South Asian countries, and lie somewhere in between the products manufactured by Turkey (higher quality) and other South Asian countries in terms of quality. They thus cater to different segments of the export market. Each South Asian country specialises in different categories of garments; hence, these countries do not pose a threat to one another. While Bangladesh manufactures simple garments such as t-shirts, shirts, and the like in bulk; Sri Lanka is engaged in production of swimwear and women's undergarments. Pakistan is primarily a supplier of fabrics, especially denims, and manufactures bed linen and other household garments. India, on the other hand, manufactures superior-quality, woven, and knitted products.

As far as the domestic market is concerned, the competition is not coming from South Asia, but mainly from other countries such as China, Cambodia, and Vietnam. The smaller firms have reported that some of them do face competition from the South Asian countries, especially in some products like swimwear from Sri Lanka. One of the interviewees pointed out that to meet the changing demands of the Indian buyer, large retail stores like Shoppers Stop and Pantaloon replace their old stock every 15-20 days with new designs and cuts. This gives an edge to the domestic manufacturers who can meet this requirement of value-added garments more easily and quickly as compared to South Asian manufacturers.

Constraints faced by firms

Garment chains are buyer-driven chains where production is organised in globally dispersed production networks, coordinated by lead firms. Activities that add value to the product (such as, design and branding) are often coordinated by lead firms. Indian firms are not part of the global garment value chain. The reasons for the low integration of India’s garment industry can be found in the costs associated with production logistics, and time involved in exporting/importing.

The other possible reasons for the low integration are the large size of the domestic market and the fact that the ease of supplying to the domestic market is greater. Owing to high export standards and strict delivery schedules, certain firms prefer to cater to the domestic market.

The main constraints faced by the firms include the rising cost of energy, which remains a constraint as the use of oil and electricity in production is high, and commercial electricity charge is very high in all states. The narrow fibre base in the country is another major constraint since only cotton and viscose are used in production. This limits the manufacturer’s capacity to produce and supply all year round. Hence, most of the Indian manufacturers are producing for a very small part of the year.

One of the firms pointed out that competition has not just been increasing at the suppliers-end but also at the buyers-end. There is a huge competition that the buyer faces back home, especially in Europe, which comprises some of the most fashionable countries. The effective shelf life of the range at the buyers-end has come down to as short as one week. Therefore, if the range which has been planned for a particular week does not reach the store on time, the buyer imposes a dual penalty on account of losing out on their projected sales revenue for that week and the consequent weeks in addition to the cost they have incurred on advertising, marketing, and store expenses. Thus, in the case of delays, the incidence falls completely on the supplier who is denied payment for that particular batch in addition to a heavy penalty. The logistics time cost is therefore huge.

The recent withdrawal of the Generalised System of Preferences (GSP)¹ could be another factor which will impact the garment firms’ prospect of exporting to the US.

What needs to be done to boost exports?

The firm interviews suggest a number of policy changes in order to boost exports. Firstly, improvement of the road, rail, and air networks such that companies can streamline their input-procurement process, and supply to buyers and retailers; secondly, lowering of interest rates, and easier availability of bank loans for investment in company expansion or new machinery procurement; thirdly, streamlining of transportation policies that will help in release of products by customs and clearance agencies quicker. Finally, import of fabrics should be made simpler and a single-window affair.

To conclude, the survey points to several factors impeding India’s garment exports. In an industry where the margins are thin, being competitive is key to exporting well.

Notes:

Generalised System of Preferences (GSP) is a trade preference programme of the US. Articles that qualify under the GSP are eligible for concessions and can be from any beneficiary developing country. Most garment articles fall in this category.