Growth and Changing Directions of Indian Textile Exports in the aftermath of the WTO

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1 Growth and Changing Directions of Indian Textile Exports in the aftermath of the WTO Abstract A.M.Sheela Associate Professor D.Raja Jebasingh Asst. Professor PG & Research Department of Commerce, St.Josephs' College of Commerce, Bangalore. India The Indian textile industry an age old industry employing more than thousand of workers changed it face of operation in the post liberalization period after In the year 1995, WTO had removed its MFA and adopted Agreement on Textiles and Clothing (ATC) which stated that all quotas on textiles and clothing to be removed among the WTO member countries by This policy benefitted some countries and with some it did not. The main objective of the study is to analyse the changes in the Indian textile industry in the post liberalization period. To study this phenomenon this study was carried out. Two periods were considered, on the pre-liberalization period and the post WTO period and the growth and changing directions were studied using a Markov chain model. The study revealed that while the momentum of cotton yarn exports have shown signs of declining, the exports of readymade garment are on the increase. Key words Textile Industry, Cotton Textile, Yarn, Exports, Imports. Introduction The Indian textiles and garments industry is one of the largest and most prominent sectors of Indian economy, in terms of output, foreign exchange earnings and employment generation. Though a predominantly unorganized industry prior to liberalization, when India liberalized its economy. The Indian textiles industry witnessed a phenomenal growth through Industrial Policy The process of globalization and Indian textile industry development was the effect of rapid acceptance of 'open market' policy by the developing countries, much in the lines of the developed countries of the world. In the year 1995, WTO had removed its MFA and adopted Agreement on Textiles and Clothing (ATC) which stated that all quotas on textiles and clothing to be removed among the WTO member countries by The MFA was purportedly designed to provide developing countries with guaranteed and growing access to markets of developed countries. Countries like China, Korea, India remained at disadvantageous position and witnessed a negative pinch as their production and exporting capacity remained in excess to the quotas-asiya In the post-quota period, India has emerged as a major sourcing destination for new buyers. The total exports of all goods from India during was of the order of 2,54,402.1 million dollars of which cotton yarn exports constituted $ 5431 million and Readymade garments for $ million, together accounting for a share of 6.5 % of the total exports which has dropped from 8.5% in the previous few years. The main objective of this study is to analyse the changes in the structure of Indian textile exports in the aftermath of the WTO and the consequent phasing out of the Multi Fiber Agreement (MFA). Methodology > RJSSM: Volume: 02, Number: 10, February-2013 Page 208

2 The data on value of textile exports from India during the period 1996 to 2011 in dollars was collected from the Reserve Bank of India website ( Growth rates were calculated for each of the exports to the major countries. The data was divided into two periods, one spanning the period and the second from These periods constituted the pre- WTO and the post- WTO periods, respectively. A Markov chain process was fitted to the data separately for each period to understand the dynamics of the change in India s cotton yarn and readymade garment exports. We model the movement of Indian exports between countries of the world by a discrete-time and space Markov process. We assume that the value of exports at any period t is described by a stochastic process {Et} that takes values in a finite discrete state space Si from 1 to 11. A Markov chain is a sequence of random values whose probabilities at a time interval depend upon the value of the state at the previous time (Papoulis, 1984). We use this idea that if an individual knows the current state, it is only this current state that influences the probabilities of the future state. At each time, the Markov chain restarts anew using the current state as the new initial state. We assume that this Markov chain has eleven states indicating that exports takes place to those eleven countries. The vector containing the long-term probabilities, denoted by, is called the steady-state vector of the Markov chain. If this model is closely applicable with real data this indicates that the Markov assumption is valid in describing reality. A transition probability is the commanding factor in a Markov chain. It is a conditional probability that the system will move to state j from i the next time period, given that it is currently in state i. The Markov chain obtains the much desired efficient estimates when the transition probabilities are properly determined. The transition probabilities of exports from one country to the other or to the same state depend only on the current state. P jj is the probability that exports to a particular country in the current period, would tend to stay in that country itself in the next period, while P ij is the probability that exports will shift from country I to country j in the next period. The transition probability matrix is estimated in the Linear Programming framework using a Minimization of Absolute Deviation (MAD) estimator. The rows of the transition matrix indicate the losses from a particular market and the columns indicate the gains to a particular market. The model is specified as follows to obtain estimates of the transition probabilities. The problem may be specified as follows: Minimizes z= Y-XP E Subject to Y = XP + u; RP = e; P >0; Where E is a unit vector of order (r t x1). Y is the vector of export shares of period t and X is a matrix of export shares in the period t-1 which should satisfy the following conditions a) 1 P ij 0 and b) P ij = 1. Export concentration The concentration of exports has been studied by computing the Theils s entrophy Index. The index is calculated as follows: I = P i ln (P i ) where Pi is the share of the exports to the i th country. In order to bind the index within a range of 0 to 1, the index I is divided by Ln (n) where n is the number of groups or countries in this case. H = I / ln (n). > RJSSM: Volume: 02, Number: 10, February-2013 Page 209

3 RMG & Yarn Exports m $ If the value of H is zero the markets are said to be concentrated, whereas if the value of H tends to 1, the markets are said to be less concentrated or atomistic. Results and Discussion The study first looks at the trends in exports of cotton yarn and readymade garments from India, then examines the dynamics of the changes in terms of the shifts and changing directions and finally computes concentration ratios to see if concentration or otherwise of textile exports has taken place in the aftermath of the WTO agreements. Figure 1 depicts the trends in textile exports from India. Scrutiny of the table reveals that while the total exports from India has been growing exponentially (16.91%) during the period, the exports of readymade garments (8.88%) are growing linearly, albeit at a faster rate than the growth of yarn exports (3.39%) Fig 1: Trends in Indian Textile Exports & Total Exports Yarn Ready Made Total Exports 0 0 Table 1: Growth of Exports of Cotton yarn, fabrics, made-up, from India (million US $) Overall ( Country Average Average Period 1 ( ) Period 2 (2004- U.S.A % 2.41% 6.32% Bangladesh % 15.05% 5.39% Korea, Republic of % 4.59% 5.48% Italy % -5.34% 3.02% Germany % 2.79% 0.85% U.K % -6.46% -4.98% U.A.E % -3.09% 0.65% Japan % -6.24% -3.34% Kong % -3.40% % Mauritius % % -7.76% Others % 6.80% 5.08% Total % 4.38% 3.39% > RJSSM: Volume: 02, Number: 10, February-2013 Page 210

4 Cotton Yarn From table 1 it is apparent that the growth of cotton yarn exports from India had decreased from 4.38% to 3.39 percent after the WTO agreement. It is noteworthy that exports of cotton yarn had decreased to all the destinations notably to Bangladesh, where the growth had declined from 15.05% to 5.39%. This shows a healthy trend towards the production of value added products. Turning to the dynamics of the change in cotton yarn exports for the pre WTO period presented in table 2, it can be seen that of the individual countries considered, Germany had the highest loyalty, followed by Bangladesh, Kong and UK with evidenced by the diagonal elements of , , and respectively. Table 2: Changing directions of Cotton Yarn Exports from India ( ) Pre WTO B desh Germany Kong Italy Japan Korea Mauritius U.A.E. U.K. U.S.A Others Bangladesh Germany Kong Italy Japan Korea, Republic of Mauritius U.A.E U.K U.S.A Others In stark contrast to this during the post WTO period the exports dynamics of cotton yarn had changed dramatically (Table 3). All the diagonal elements reduced to zero with the exception of the UK and the US which had reduced from their earlier period. This is perhaps due to the lack of consistent exports to these destinations from India. Table 3: Changing directions of Cotton Yarn Exports from India (2004- Post WTO B desh Germany Kong Italy Japan Korea Mauritius U.A.E. U.K. U.S.A Others Bangladesh Germany Kong Italy Japan Korea Mauritius U.A.E U.K U.S.A Others > RJSSM: Volume: 02, Number: 10, February-2013 Page 211

5 Ready Made Garments In so far as textile exports from India are concerned, the growth had sustained an increase from around 7.5 percent to 8.35 percent (Table 4). During the period under reference, the quantum of readymade garment exports had increased to $ 4900 million to $ 9515 million. Notable increases in exports were observed to Germany, UK, Netherlands and Japan. Exports to USA, France, Italy and Russia had witnessed a significant decline. Table 4: Growth of Exports of Readymade Garment from India (Million US $) Overall ( Country Average Average Period 1 ( ) Period 2 (2004- U.S.A % 3.12% 6.86% U.K % 10.82% 12.96% Germany % 15.30% 9.19% U.A.E % 16.29% 11.68% France % 5.28% 8.55% Italy % 4.06% 12.44% Netherland s % 11.44% 9.70% Canada % -1.53% 3.98% Japan % 6.45% 4.28% Russia % % % Others % 12.06% 11.11% Total % 8.35% 8.88% Total Exports % 18.74% 16.91% With regard to the dynamics of the dynamics of the change in readymade garment exports from India during the pre and post WTO period captured through the Markov Transitional probabilities and presented in tables 5 and 6, reveal a different picture. While the retention probabilities were close to zero in the pre-liberalization period in the post liberalization period the exports had become more stable. The retention probabilities for USA, UAE and Canada were 0.613, and respectively (Table 4) whereas the corresponding figures for the pre-wto period they were 0.27, and 0 (Table 5). The growth of exports to Germany growing at a staggering rate of 15.3% can be traced to the switch of exports from the Netherlands(0.912) and France (0.352). Similarly Netherlands growth during the post WTO period is on account of the shift from the UK, US and Germany and UK s growth could be attributed to shifts from France (0.518), Germany (0.368) and Italy (1.00). Table 5: Changing directions of Ready Made Garment Exports from India Pre WTO ( ) Canada France Germany Italy Japan Netherlands Russia U.A.E. U.K. U.S.A Others Canada France Germany Italy Japan Netherlands > RJSSM: Volume: 02, Number: 10, February-2013 Page 212

6 Theis's Index Russia U.A.E U.K U.S.A Others Table 6: Changing directions of Ready Made Garment Exports from India (2004- Post WTO Canada France Germany Italy Japan Netherlands Russia U.A.E. U.K. U.S.A Oth Canada France Germany Italy Japan Netherlands Russia U.A.E U.K U.S.A Others Export Concentration Having looked at the dynamics of change of exports from India of both cotton yarn and readymade garments during the pre-wto and post WTO periods, we next examine whether the changes has led to a concentration of exports to different geographical locations or not. The Theil s entropy measure has been calculated and presented in Figure 2. The exports are concentrated if the Theil s statistic tends to 0 and diversified if the value of the statistic tends to 1. From the results depicted in the figure it is evident that the while the exports of cotton yarn are tending towards concentration the exports of readymade garment have remained more or less the same level of diversification Fig. 2: Changes in concentration of Textile Exports Cotton Yarn Garments > RJSSM: Volume: 02, Number: 10, February-2013 Page 213

7 Summary Abolition of the Multi Fiber Agreement in the aftermath of the WTO has brought about sea changes in the rules governing the global trade in textiles. Being a large producer of textile, it has far reaching implication on Indian Textile exports from India. To study this phenomenon this study was carried out. Two periods were considered, on the pre-liberalization period and the post WTO period and the growth and changing directions were studied using a Markov chain model. The study revealed that while the momentum of cotton yarn exports have shown signs of declining, the exports of readymade garment are on the increase. The USA is the dominant importer of both cotton yarn and ready markets from India and continue to be the dominant importer for several years to come. Germany, Netherlands and Japan are sourcing more readymade garments from India, but there has been a serious slump of exports to Russia. While the stability of exports to various counties of cotton yarn has declined, the export stability of readymade garments has increased quite markedly in the post WTO period. References: 1. Papoulis, Athanasios, 1984, Probability, Random Variables, and Stochastic Processes, New York: McGraw-Hill. 2. Reserve Bank of India, 2011, Handbook of Statistics of the Indian Economy , retrieved from 3. Dr. Asiya Chaudhary 2011 : Changing Structure of Indian Textiles Industry after MFA (Multi Fiber Agreement) Phase out: A Global Perspective Far East Journal of Psychology and Business Vol. 2 No 2, February Table: Theil s Concentration Ratios for Indian s Textile Exports Year Cotton Yarn Garments > RJSSM: Volume: 02, Number: 10, February-2013 Page 214