US and European markets dominate global textile trade, accounting for 64% of clothing and 39% of the textile market. With the dismantling of quotas, global textile trade is expected to grow (as per McKinsey estimates) to US$ 650 bn by 2010 (5-year CAGR of 10%). However, as against expectations, in the post-quota regime, the resurgence in exports to the now unregulated markets took off rather slowly.

Budget Measures Provision for Integrated Textiles Parks (launched in October 2005 with the intention of creating 25 textile parks) to increase from Rs 1.9 bn to Rs 4.3 bn. Technology Upgradation Fund (TUF) scheme to continue during the 11th plan (2007- 2012) with provision of Rs 9.1 bn for FY08. Reduction in duty on polyester fibres and yarns from 10% to 7.5% and on raw materials such as DMT, PTA and MEG from 10% to 7.5%. Increase in dividend distribution tax from 12.5% to 15%. 1% higher education cess to charged.  Budget Impact Reduction in duties on polyester fibres and on raw materials is likely to boost the sector prospects, as produces get cheaper and competitive in the export markets. Extension of the scheme upto 2012 and higher allocation to the TUF is a step in the right direction. This would encourage existing textile mills to avail loans on favorable terms (interest subsidy is offered to borrowers through the TUF route). Allocations of funds to the Scheme for Integrated Textiles Parks will facilitate setting up of dedicated textile hubs.  Company Impact The extension of the TUF scheme and the incremental allocation therein will prove beneficial for readymade garmenting companies like Arvind Garments and home textile companies like Welspun India and Alok Industries that are currently in the capex phase.  Sector Outlook Identification of the textile sector as a priority one for 'job creation' by the government certainly augurs well for the long-term. This is particularly a positive for players in the garmenting side, the same being very labour intensive. Tax sops by way of lower excise and import duties on yarn are likely to reduce the raw material cost. Given the latent opportunities present in the global scenario, the measures are likely to help the textile companies become more competent and attract sizeable orders from the US and European markets. More importantly, it would enable textile companies to increase capacities and gain scale, which is critical element while bidding for global orders.  Industry Wish List Confederation of Indian Textile Industry Customs duty on export of man-made fibres should be abolished. Customs duty on furnace oil should be withdrawn, the same being an affordable fuel for the industry. Customs duty on all textile machinery should be reduced from the current levels to 5% and that on machinery for cloth processing should be abolished. The duration for the TUF scheme (due to expire in 2007) must be extended for another five years upto 2012.  Budget over the years Budget 2004-05 Budget 2005-06 Budget 2006-07 Cenvat duty on handloom and powerlooms withdrawn. Instead, a new tax regime for the textile sector introduced Mandatory Cenvat chain abolished No mandatory excise duty on pure cotton, wool and silk, be it fibre, yarn, fabric or garment Blended textiles and pure non-cotton items like polyester, viscose, acrylic and nylon to have a different tax regime Mandatory excise duty on man-made staple fiber at 16% imposed 2% education cess on all taxes Duty on textile machinery reduced from 20% to 10% Duties on polyester and nylon chips, textile fibres, yarns and intermediates, fabrics, and garments reduced from 20% to 15% Excise duty on Polyester Filament Yarn reduced to 16% Allocation of Rs 4.4 bn for Technological Upgradation Fund (TUF) and a 10% capital subsidy scheme introduced for the textile-processing sector 30 products related to hosiery and knitting exempt from the reserved category. Allocation to the Technology Upgradation Fund (TUF) enhanced from Rs 4.4 bn to Rs 5.4 bn. Provision for the interest subsidy on term loans to the handloom sector to be increased from Rs 2.0 bn to Rs 2.4 bn. Rs 1.9 bn to be provided for the Scheme for Integrated Textiles Parks (launched in October 2005 with the intention of creating 25 textile parks). Excise duty on all man-made fibre yarn and filament yarn to be reduced from 16% to 8%. Import duty on all man-made fibres and yarns to be reduced from 15% to 10%.
Key Positives TUF aiding growth: An additional 10% capital subsidy was allowed for processing machines under the Technology Upgradation Fund Scheme (TUFS). The additional subsidy shall encourage more processors to opt for the scheme. This will help in upgradation of machinery and will be beneficial for the processing sector in the long term. Vision 2010: The Union textiles ministry has unveiled a white paper - Vision 2010 - for the apparel sector, which has set the target of US$ 50 bn exports by 2010. Consolidation is the key: Every manufacturer is ramping up capacities to meet the challenges of the quota free regime. Also, large textile firms within India are buying small-scale garment manufacturers to shore up their production facilities		Key Negatives Technology constraints: The rush for garment exports in the quota-free regime has not yet materialised in the Indian textiles sector. Lack of state-of-the-art technology poses the most serious challenge to India's attempt to increase its exports. The total number of shuttleless looms as a percentage to total looms in India in 2003 was 9.5% as against 94.8% in USA and 95.2% in Austria (Source: Ministry of Textiles). India's number of shuttleless looms as a percentage of total looms is the lowest, next only to Pakistan with 7.6%. Unfavorable labour laws: Labour laws in India have been traditionally less favourable to the industry. In the absence of concrete labour policies, the industry has often got paralysed due to labour strikes, thereby compromising on efficiencies of scale of operations. Logistical pains: India also has logistic disadvantage due to its geographical location, which is distant from major markets as compared to its global competitors like Mexico, Turkey and China, which are relatively located in close vicinity to global markets like the US, Europe and Japan. As a result, the cost of shipments is higher. Archaic regulatory regime: Although quota restrictions have been dismantled, domestic textile players continue to be caught in archaic Indian government regulations like the 'Handloom Reservation Order' and the 'Hank Yarn Obligation Order'.

Equitymaster.com is one of India's premier finance portals. The web site offers a user-friendly portfolio tracker, a weekly buy/sell recommendation service and research reports on India's top companies.