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Opportunity or menace?

Come 2005, and the Multi-Fibre Arrangement (MFA) -- the framework for bilateral agreements establishing import quotas to limit textiles a...

Written by Nilanjan Banik |
April 5, 1999

Come 2005, and the Multi-Fibre Arrangement (MFA) — the framework for bilateral agreements establishing import quotas to limit textiles and garment imports — is to be phased out. The MFA, since its inception in 1961, dealt almost exclusively with developing country exports. In 2005, these quotas will go and exporting countries will compete freely. India, for which textiles form a major component of exports, stands to gain, right?Debatable. India’s competitors in textiles exports await this opportunity too. Only the most efficient exporters will survive as importing countries no longer discriminate between exporters. True, the MFA has restricted developing countries’ exports and shifted inputs to inefficient lines of production. But it has also assured them of some niche markets. Under MFA, export quotas are assigned irrespective of how competitive an exporting nation is. MFA also helps the exporting country make profits in the form of quota rent. The quotas allocated to a country are always in highdemand.

Considerable amounts of rent are generated in allocating them to particular firms. But, of course, quota allocation raises the prices of these exporters’ products, for the rent they pay is factored into their prices. For less competitive countries, the MFA phase-out will bring more losses than gain. Unfortunately, India seems to be one of them. The problem with our textiles originates from its dependence on the unorganised sector, with its creaky infrastructure, low capitalisation, dated technologies, poor market research and poor R&D.

Most trade takes place through retailers who are not well versed in changing fashions in the developed world. India is way down on the investment ladder as well. Average machine investment here is $2,790 compared with $2.5 million in Hong Kong and nearly $1 million in mainland China. Indian firms are smaller, with an average machine number of 119 against 698 in Hong Kong and 605 in China. It also reflects lower investment per machine, at $250 here, versus $3,510 inHong Kong and $1,500 in China.

India has a much higher proportion of manually operated machines, and its power machines are less sophisticated. In South Korea, Taiwan, Hong Kong and China, the average number of processing machines in an apparel export firm is 31, 13, 28 and 35 respectively, against five in India. Obstinate industrial policy precludes large investments in the garments unless half of the output is exported. Fibres and yarn face high export taxes to cater to the handloom sector. Higher customs rates for synthetic fibres raise their costs, whereas world demand for synthetic garments is rising faster than for cotton.

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Nor does cheap labour cover these shortcomings. According to a cost comparison by New York-based Weiner International Inc, in 1993 the wage cost per hour in China was 40 cents to India’s 60 cents.

Indian labour productivity has fallen after liberalisation in this industry. In textiles, cotton garments and clothing, cotton textiles handlooms, khadi, and cotton textiles powerloomssaw a productivity fall of 0.67, 1.88, 3.87 and 0.01 per cent respectively. China has rapidly developed capacity in mad-made fibres in line with world tastes. In India, cotton continues to get preferential treatment. China also has diversified much more. It is the largest producer of cotton and cotton yarn, the second largest producer of wool and yet, by 2000, man-made fibres will make up 30 per cent of all fibres produced there. In a world of changing tastes, such variety is essential for any competitive edge.

With the MFA phase-out, major markets will emerge in the higher end segments, where China is competitive. Its garment exports have significantly increased their share in the US market.

The author is research officer, Rajiv Gandhi Institute for Contemporary Studies

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