Once again, Indian stock markets are showing the familiar signs of irrational exuberance. While the Sensex has risen since the beginning of 2003 by over 50 per cent, there is one sector where the rise has been even more spectacular: the textile sector.
For the overall Indian economy, several favourable factors have been cited that include a good monsoon, declining interest rates and better focus on productivity, even though the collective impact of these factors is likely to be far lower than that reflected in the current rise in market capitalisation of the stock market.
For the textile sector, the boom in the stock prices is perhaps based on a single factor: the phasing out of quotas at the end of December 2004, implying that Indian companies will be free to export any textile product to any market in the world without being subjected to Quantitative Restrictions on account of quotas.
Theoretically, this is true. However, the fallacy in this argument is very obvious as well: to be able to export, the Indian companies must have exportable products (in terms of quality as well as price competitiveness) and the capability to ramp up production volumes to meet the export opportunity.
The date of phasing out of quotas has been known for almost 10 years now and hence it is not something that has happened only in the last few months. Unfortunately, the state of the art for most of the Indian textile industry remains shamefully obsolete barring a few notable exceptions.
The Indian textile ministry merrily keeps setting humungous targets that are nothing more than pies in the skies. The figure most frequently touted is $50 billion in exports by the year 2010, up from about $14 billion in 2003.
To put this in perspective, the entire current output of the Indian textile industry (for domestic and export consumption) is about $35 billion.
Yet, the government believes that it can double this output in the next six years just to meet the projected export target! And the so called analysts and experts in the Indian stock markets believe that Indian companies can each raise the hundreds of crores of rupees that each one needs to modernise, add more capacity for value adding products, and create marketing expertise to convert the post MFA (i.e. post 31 December 2004) opportunity into real business.
As per various estimates, even if the Indian textile industry were to set the export target of $30 billion, and a domestic market consumption of $25 billion (up from the current $15 billion) by 2010, the total investment needs are in excess of $20 billion (about Rs 90,000 crore).
For an industry beset with non performing assets, and most of the existing listed companies continuing to show poor operating profitability, it is practically impossible for this industry to raise this kind of capital in the next five to six years.
What can be the way forward? As a start, the Government must now come out with a bold plan to create an equity fund for investment into carefully planned projects covering the entire textile -- clothing value chain.
The organised textile industry is woefully short of funds to invest in equity and hence the government may actually be well advised to hold part equity in select projects with a clear divestment schedule once the projects take off. A corpus of Rs 15,000 crore (Rs 150 billion) would be the bare minimum to start with which can then be leveraged through a combination of private promoter equity and debt to raise another Rs 30,000-45,000 crore (Rs 300-450 billion).
Foreign direct investment in the textile and clothing sector must be assiduously wooed and for this, the leading Indian entrepreneurs and government must make a serious effort to reach out to major textile and clothing companies across the world and invite them to invest in India.
Opening up FDI to retail is an absolute must as a third step. It is only by having the likes of The Gap, Wal-Mart, H&M, Carrefour, etc. in India that our textile and apparel (and other consumer products) manufacturing will get a major fillip (like in the case of the automobile sector where the entry of global majors has created a thriving auto component manufacturing industry).
The government has been extraordinarily myopic on this issue for too long now and needs to take a broader view of the entire subject of FDI in retail.
There are, of course, many other steps that the Indian textile industry needs to take before it can come anywhere close to becoming a world class one, capable of competing on cost effectiveness and volume with say China.
Till these are taken, it is fundamentally risky to take such an optimistic view on the prospects of the Indian textile sector as the Indian stock market investors are currently taking!
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