Weaving a US$500 billion Dream - Indian Textile & Apparel Sector

Why you should be investing in the promising Indian Textile & Apparel Sector

India, the world’s largest democracy, is also one of the fastest growing economies in the world, and thereby an active hub for investors from all around the world. As per projections by the International Monetary Fund, India will soon overtake Germany as the world’s fourth largest economy. India’s private consumption is also expected to grow at a CAGR of 7 per cent from US$ 1.6 trillion in 2018 to a whopping US$ 2 trillion by 2022.

In recent times, India has attracted significant FDI and indigenous investments in 25 major sectors in line with the government’s “Make in India” initiative. As per the FDI report 2018 by FDI Intelligence, India was ranked second highest in terms of FDI by capital investment and first for job creation, with 161,445 jobs announced in 2017. India has also improved its World Bank Ease of Doing Business (EODB) ranking from 142 in 2015 to 77 in 2018, securing a place among the top hundred countries.

The textile and apparel (T&A) sector is one of the leading segments of the booming Indian economy. The sector accounted for about 12 per cent of the total exports earnings of the country in the year 2017-18 and provides direct employment to 52 million people and indirect employment to an additional 69 million people. It has the double advantage of being export-competitive as well as having a large & growing domestic market. The T&A market in India is estimated to be at US$ 137 billion in 2018. The domestic consumption of textiles and apparel is around US$ 100 billion, constituting approximately 70 per cent of the total market size while exports make up the rest 30 per cent with US$ 37 billion.

Over the decades, a major part of textile and apparel manufacturing has moved from developed countries like the USA, EU and Japan to destinations like China, South Asia and South East Asia. Today’s textile and apparel sector is again at the cusp of major structural changes. China, a dominant player in this segment, is now seeing its share in global trade on a downward trend due to rapidly increasing domestic consumption and rising wages. This is, in turn, creating trade opportunities for competing nations like India, Bangladesh, Vietnam and Ethiopia. India, the largest and most resourceful country out of all those listed above, has the potential to gain the maximum benefit.

Organized retail in India currently stands at around 10 per cent of the overall retail market of US$ 815 billion and within this, apparel has a share of approximately 35 per cent. With changing consumer dynamics: a growth in disposable income, favourable demographics, changing lifestyles and a high potential for penetrating non-urban metro markets; the share of organized retail in India is expected to reach 14 per cent by 2030.

Looking at the macro-economic factors and emerging trends, we believe that the real growth phase of Indian textile and apparel industry is yet to start. India is poised to be the powerhouse for textile and apparel manufacturing, exports and consumption in near future, and the following factors prove this to be true.

India has a stable and supportive government, which has been instrumental in developing business friendly policies. As a result, foreign direct investment (FDI) inflows in India in 2017-18 were recorded to be US$ 61.96 billion. There has been a cumulative infusion of US$ 546 billion in India since the start of twenty-first century and India has emerged as one of the most attractive destinations for investment and business in recent years. Prudent macroeconomic policies have resulted in a consistent economic growth over the past years. GDP growth rate has gone from 5.5 per cent in 2012 to 6.7 per cent in 2018, amounting to a massive USD 2690 billion, as compared to world GDP growth rate of 2.6 per cent in 2012 to a meagre 3.14 per cent in 2018.

Also, India’s infrastructure sector has witnessed a remarkable development in the last few years, with facilities coming up in various parts of the country. The Indian Government has an ambitious target of pumping US$ 375 billion into developing infrastructure by 2020, including US$ 120 billion for building 27 industrial clusters and an additional US$ 75 billion for road, railway and port connectivity projects.

Add to that, the competitive cost of manufacturing that India offers, and you have the perfect mix of ingredients in this recipe for success. The wage cost in India is higher than in Bangladesh but lower than that in China and Vietnam. In terms of power cost, India is comparable to low cost destinations like Bangladesh, Vietnam, Myanmar, and Kenya etc. but higher than that in China. The lending rates in India are on a higher side as compared to China and Vietnam but with the special government support available for this sector, the effective cost of capital becomes comparable, as is evident from Table 1 below.

Manufacturing in India, for India, is the way to go currently. In the last decade, the Indian domestic market has performed better than the largest consumption regions like US, EU and Japan. The domestic consumption of textile and apparel is already at US$ 100 billion as of 2018, and it is estimated that the market size will touch US$ 380 billion by 2030. Also, studies show that countries after achieving a per capita GDP of more than US$ 2,500 experience a spur of economic growth led by consumer spending, which the Indian economy is expected to reach by 2021 as illustrated in Figure 1. This will help in exponential growth of textile and apparel consumption in the country.

Being an all-in-one manufacturing package also works in India’s favour. India is one of the few textile manufacturing countries in the world where all levels of textile value chain i.e. from fiber/filament to garment/made-ups manufacturing are present. In contrast, countries like Bangladesh, Vietnam, Sri Lanka, Myanmar, Ethiopia and Cambodia have fragmented value chains; most are focused on end-products and are dependent on other countries for fabric and yarn. India’s huge capacities across the textile value chain offer raw material security and hence reduced costs for production. This also provides flexibility to stakeholders to diversify into any segment of the value chain, depending on the market demand and profitability.

There is an abundant availability of ready-made infrastructure for the textile and apparel industry, including the Scheme for Integrated Textile Parks (SITP) which was launched in 2005. Under the scheme, the government assists the park developers by providing 40 per cent of the project cost up to US$ 6.2 million. Till 2016, 74 such parks have been approved under the scheme.

Not only that, but India’s manufacturing capabilities are also strongly backed by Government support through various schemes and incentives to make India globally competitive. In 2016, the Government of India announced a US$ 1 billion per annum special package for 3 years for garment and made-ups manufacturers. Various State Governments have also announced their textile and apparel policies aimed at attracting investments in their states.

One such lucrative policy that was announced by the state government of Gujarat in October 2017 is Gujarat’s Garment and Apparel Policy (GGAP). The policy aims to create 100,000 new jobs, thereby generating additional exports and attracting investment in apparel sector over the next five years. Any enterprise with at least 150 new machines (Cutting & Sewing) with a minimum of 300 employees can avail incentives up to 125-130 per cent of the total capital investment over a period of 5 years.

India also has an abundance of one of the more important resources: the human resource, in the form of skilled and English-speaking manpower. It is estimated that nearly 250 million people may enter the Indian work force by 2030, which means more people earning and having a disposable incomes. With an increasing emphasis on quality, the demand for skilled labour will rise in the coming time. Realizing this, the Government of India has implemented several initiatives to develop the pool of skilled manpower in India like Samarth (Scheme for Capacity Building in Textile Sector) that targets to train 1 million people over a period of 3 years (2017-20) with a budget outlay of approximately US$ 185 million. English is the second most important language that is understood and is used commonly as a medium of spoken and written communication. This is another key advantage for global companies to set up their operations in India, whether sourcing or manufacturing.

Indian textile industry is marked by the presence of large scale manufacturers across the value chain i.e. from yarn to finished goods. Many of these companies are already in partnerships or JVs with global companies. These diversified textile conglomerates have huge manufacturing capacities, compliant set-ups for high quality goods manufacturing and are well-recognized by world-wide buyers. In FY18, 49 listed Indian textile and apparel companies recorded annual turnover of more than US$ 100 million. There are many more opportunities in the Indian textile value chain which can be explored and that investors can reap benefit from, in different forms of partnerships.

The Indian domestic textile and apparel market is a gold mine, currently estimated at US$ 100 billion. In recent years, the domestic market has performed better than some of the largest consumption regions like US, EU and Japan. The domestic apparel consumption of India has grown at a robust CAGR of 10 per cent since 2005 and is expected to grow at an even faster pace of 12 per cent CAGR to reach US$ 380 billion in 2030. This market growth would not only increase demand of conventional products, but changing demographics and lifestyle would spur growth of several product categories which would involve categories like technical textiles, synthetic fabrics, intimate wear, women’s western wear and sportswear.

The Government of India is taking proactive actions to make the business environment in India conducive for local and foreign investors.

Any foreign investor who is interested to invest in the textile sector in India can enter into the country by setting up a corporate entity like a local Indian subsidiary company or a Limited Liability Partnership (LLP), forming joint ventures with Indian partners, or setting up a non-corporate entity like a liaison office.

The key factors that will determine the success rate for any investment in the Indian textile sector include a mix of selecting the right opportunity, the right location, and a thorough understanding of your consumer and your operations. Evaluating a right opportunity also entails assessing internal and external competition, business scale-up possibility, entry barriers, expected returns and future sustainability of the business. As the famous adage goes, ‘Consumer is king’, therefore failure to define and fully understand one’s target customer can render other efforts futile, and hence understanding the consumer becomes a mandate for a successful business.

With decades of experience in the textile and apparel sector of the country, Wazir is one such catalyst that helps clients invest in India successfully by assisting them in strategy formulation and implementation, forming alliances and joint ventures, investments, market understanding, sector analysis and due diligence, thereby providing end-to-end solutions spanning the complete business cycle in textile value chain.

All in all, the above trends indicate that the Indian economy, especially in the Textiles & Apparel sector is booming, and how! The country’s macroeconomic stability, resilience to deal with external shocks and a stable political environment provide strong assurance for its spot as one of the most attractive global destinations for investments, and promise abundant growth at a healthy pace for all its stakeholders in the future as well.