The end of country quotas on textile exports marks one of the most major events of the world economy - one that can cause tectonic shifts in the global business landscape.
Indian textile firms made big initial gains in the quota-less world
The Multi-Fibre Agreement (MFA), under which these quotas were organised, was put in place in 1974 to protect the textile industries in the US and Europe.
The MFA expired in 1994, but the quotas were continued and managed by the World Trade Organisation with the understanding that they would be terminated at the start of 2005.
That has happened now and the winds of change are palpable.
The US is expected to lose a large number of jobs in this sector, which has anyway dwindled over the past decades.
In 1974 there were 2.4m workers in the textile sector in the US. By 2000, 40% of these jobs were gone.
What is more worrying is that there are many poor countries that could lose out.
Anticipating the end of quotas, exports from El Salvador collapsed by 30% last November. It is expected that the apparel sector of the Dominican Republic will lose up to 40% of its jobs.
Big gains for India
Currently, global textile and apparel exports are just short of $500bn a year.
Shifts in shares of the textile industry can lift entire nations out of poverty and, equally, plunge regions into joblessness
To put this in perspective, India's national income is just over $500bn; Bangladesh's and China's close to $50bn and $1,300bn respectively.
With the quotas gone, total global exports are expected to cross $1,200bn by 2010.
Shifts in shares of this huge industry can lift entire nations out of poverty and, equally, plunge regions into joblessness.
While the gains for China are certain and enormous, India is also expected to reap substantial benefits.
In the first six weeks of the quota-less world, India has made big gains.
Sears and Marks & Spencer are setting up operations in India and Gap Inc is expected to expand its sourcing from India.
It seems likely that in the first quarter of this year garment exports will get a spurt of 50%.
What happens over the next few years will depend critically on government policy.
Currently India exports $14bn worth of textile products. Even without doing much it should reach an export of $40bn by 2010.
Bangladesh should also benefit from the new regulations
But, with a proper blend of policies, it is possible to reach the figure of $80bn. This, apart from the benefit of bringing in foreign exchange and boosting growth, could make a visible dent on unemployment.
For Bangladesh and Pakistan, which rely on textiles for about 70% of their export earnings, it will be harder struggle but they - especially Bangladesh - could also benefit from a quota-less world.
All these countries have cheap labour; the additional advantages that India has are those of size and large foreign-exchange reserves that can (and, I believe, should) be used to boost infrastructure.
Last month I met Sudhir Dhingra, chairman of Orient Craft, one of the largest Indian exporters, and toured one of his factories in Gurgaon, outside Delhi.
The unit had 3,800 workers, sitting in modern, assembly-line arrangements in a clean, well-lit factory.
They were producing little dresses and skirts that would be sold by Orient Craft at $4 a piece and would be retailed in the US for $45.
With margins like this it is not surprising that the global garment manufacture is expected to move entirely to developing countries over the next few years.
Orient Craft had a turnover of $118m last year and this year is expected to cross $160m.
While the Gurgaon factory I visited is one of India's largest, to take full advantage of scale factories need to be several times its size.
To achieve this, government has to play an important coordinating role.
The end of quotas could lead to greater Chinese exports
It has to remove its small-scale industry size restrictions, modernise the ports and have more flexible labour markets.
For a product to travel from factory in India to retail outlet in New York takes around 30 days. Most East Asian countries take half that time.
This is where the ports come in.
Indian ports are small and riddled with bureaucratic delays. Large liners do not come here.
Most exports have to go out on "feeder vessels" to be transferred to a "mother vessel" in some other port.
Moreover, goods are required to be delivered at the port seven days prior to shipment. In most East Asian ports the cut-off is one day.
The modernisation of ports and transport infrastructure will need money.
One possibility is to use a small fraction of India's foreign exchange reserves, say $10bn for this and other infrastructural investment.
This would help not just the textile sector but all traded goods.
The initial investment could be recovered in a few years in terms of not just money but jobs; and it could also help the global trade of other South Asian countries.
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Here is a selection of readers' views on this column.
This is bad news also for developing countries in SOUTHERN AFRICA, which are unable to compete with China and India in their exporting markets in Europe and USA, as well as in their domestic markets. A lot of textile industries are struggling or closing in Southern Africa, and many countries are becoming IMPORTERS of finished goods that were previously made in their own countries.
Ramesh J PATEL, ZAMBIA
As always, Prof. Basu writes an optimistic, eloquent, thought provoking piece. The world is about to take off on the back of the garment industry and countries all around the world stand to benefit from it. With any industry picking up so rapidly, the positive effects will be felt all over. Wonderful.
I feel that India should take this advantage and we should not forget china increased its investment in textiles technology by some billions of dollars.
So watch out elephant, dragon is crawling faster?
Irony abounds. Puts a different perspective on the scenes in movie Gandhi where Indians are burning their British-made suits.
Lou Tanner, USA
I would say Indian garment manufacturers should brand their merchandise and sell across the world. I think many Indian companies like Raymond, Arvind mills would be better off to market their brand globally or tie-up big supermarket stores to sell their brands. This would mean better margins and revenue for India. Let us just not be cotton producer and garment maker, i think time has come for India to sell its brands worldwide.
Mukundan, Jharkhand, India
A good article with lots of future hope in Indian textile industry. As we know that Indian bureaucracy sometimes stand obstacles to export promptly, Indian companies should seek outside investment in textile sector, specially in Latin American countries like Bolivia, Peru, Colombia, and Ecuador. These countries have signed up a special free trade agreement with the United States therefore they need more investment in textile area. India should take advantage of this trade agreement.
Somnath Naha, Bolivia (Indian Citizen)
When will the ridiculous leftist parties in India learn? Even China has given up on state barriers to trade and commerce. Trade in a market economy with a reformed labour market is the only way forward.
In response to Radhika above: Sure, not all factories in India are like this one, but that is because most of those factories faced some sort of state intervention, or bureaucratic red-tapism (an Indian specialty).
Remove the barriers to trade, and all else will flow in due time.
A. Jain, USA
One thing that has a big & direct impact on prices is the labour laws prevalent in a country. If Indian government puts things in correct perspective (considering textiles is the second largest job provider in the country after agriculture), they need to IMMEDIATELY reform and redefine our labour laws for textile sector. Textile industry should be treated at par with any other seasonal business and hence flexibilities (read hire & fire) should be allowed along with increasing the minimum weekly working hours from 48 to, say 60. This shall immediately transform to price advantage of around 5-7%. The workers also stand to gain in a larger perspective.
Manish Sareen, Gurgaon, India.
India can and will be a superpower in the textile sector. The only constraint that India has is lack of professionalism, approach towards knowledge and morever using that knowledge. Textile being a competative trade we have to be more effecient which will reduce our overheads, increase turnovers and help the bottom line. Government will and should play a lead role with low interest investment strategies and providing basic infrastructure.
Gaurav Sabharwal, India
So when these developing countries profit from this shift,can we expect the life of the average person( the laborour) to change.This looks like a paradox because if the standard of living improves and the wages go up,they loose their competitive edge.Maybe the wealth will probably stay with a few at the top.
Haroon Syed, Canada
I think the protection to the cotton and textile industry and different legal nuances in this industry is responsible and to be blamed for the lack of the competitive edge in the textile industry...... while comparing with China we usually forget that she enjoys not only large economies of scale but also government support which have contributed in the mass production. But here in India the government is solely responsible for not letting emergencof big manufacture and thus keep them away from enjoying the fruit of economic of scale. Moreover this has stopped the industry in gaining any comparative advantage over other countries' industry.
OM P.S., india
This is a bad news for country like Bangladesh which is one of the poorest. Removing quota system may mean that people will jobs in textile industry much needed for poorer nation. India is already a fast developing nation but pooer nation around it are being swamped by Indian goods which is causing increasing poverty in these countries. The world ought to adopt a system which is fare on all and not just few.
Mr Basu points to India be able to gain about $40bb in exports without too much of sweat. The irony of course is $80bb possible with a bit of sweat. $40bb of income shared among 100mm odd textile workers amounts to about $400 per worker. This is close to double India's average income. Indeed, the political parties (Congress and Communists) who profess to look after the poor's interest seem to be their worst enemies!
Well thought out by Mr. Basu. But given the huge gap in the labour wage and profits derived from these exports, real benifits/development cannot be gained with solid labour reforms and laws and their stricter implementation. There is only one factory he saw, in one of the well accessed regions of the country.
One big challenge is going to be ongoing quality control from vendors in India/Pakistan/Bangladesh. Having worked in retail purchasing, I have to note the considerable effort the importers have to make to ensure that the manufacturer is maintaining quality and meeting specifications. I have sourced garments from China as compared to India in past even if they were more expensive purely because of consistency and quality as well as ease in resolving business disputes. It is a good time for countries like India, Pakistan and Bangladesh to promote better quality control practices.
Adam Taylor, Uk/US
I think that the most important thing India should do is to improve the quality of the garments. As Kaushik mentioned some brands have their unit in India but they also sell garments made in Singapore, Taiwan, Thailand, Vietnam and need not to mention that quality of Indian clothes is not very good than even small Asian countries. In this quota free world if India loses customer once it will be very difficult to get them back. India need to work a lot on quality not just quantity.
Most countries involved in textile production have been preparing for this change in their terms of trade for several years. But it is understandable that not all have fully prepared for the bonanza that is about to arrive. In the UK we're fortunate to have largely restructured our economy away from textile production. But what is not mentioned in Kaushik Basu's article is the bonanza that is about to arrive in the major textile consuming countries: we shall be able to buy much better value garments and that will both raise our textile consumption and free-up cash for other spending. With such advantages we should be willing to help those countries who are not able to benefit. More aid should be provided.
Andrew Dundas, UK
A nice article by Mr Basu. I believe the Indian governments (both past and present) have been caught napping. They knew very well that this MFA regime was coming to an end. The reforms in the ports should have started long back. The reduction in time and cost of transport and shipping means a lot to exporters. Labour reforms are also long overdue. It calls for some hard decisions by the political parties and the leftist parties will oppose them. But India has to push forward.
The main reason India comes after China is its need to take concrete steps to change its infrastructure and for strong political will.
Devinder Singh, Canada
Developing countries like India will benefit immensely through having a low cost-base, higher productivity, efficient infrastructure and better working conditions.If carefully nurtured, this could create thousands of jobs and lift people from poverty.