Indian Textile Industry October 2006

Contents Market Overview Government regulations & policy Business opportunities and Advantage India

Indian Textile industry - important from perspective of overall economy Total market size (2004-05): USD 38 bn Domestic market ~ USD 25 bn Exports ~ USD 13 bn Strong contribution to Indian Economy 14% contribution to industrial production 4% contribution to GDP 16% contribution to export earnings Direct employment to more than 35 million people Industry functions in the form of clusters (roughly 70 in number) across India, producing 80% of the country’s total textile Sector is diverse, with the hand-spun and hand woven sector at one end of the spectrum, and the capital intensive, sophisticated mill sector at the other Unless otherwise specified, all references to a year implies Financial year – April to March Indian Textile Industry has a pivotal role to play in the economic life of the country through its contribution to industry output and foreign exchange generation It is the second largest provider of employment after the agriculture sector and has a direct link with the rural economy in terms of performance of major fibre crops as well as livelihood of millions of farmers Some of the textile clusters in which productions happens are very huge and significant for the overall industry, for example Panipat produces 75% of all blankets produced in India Tirupur contributes 80% of the country’s cotton hosiery exports Ludhiana makes 95% of total woolen knitwear produced Source: Ministry of Textiles Annual Report, Industry Research

India has a strong base in raw materials Cotton dominates the industry Nearly 56% of yarn produced is made of cotton Country produces nearly 23 varieties of cotton India is the second largest player in the world cotton trade India’s position is strong vis-à-vis other countries in most raw materials Largest producer of jute Second largest producer of silk Third largest producer of cotton, accounting for nearly 16% of global production Third largest producer of cellulosic fibre/yarn Fifth largest producer of synthetic fibres/yarn Eleventh largest producer of wool Abundant availability of raw material is one of the key advantages of the Indian textile industry Cotton - Predominant fabric used in the industry With 4.13 million metric tonnes of production, country accounts for almost 16% of global production of cotton India also leads the world in cultivated area under cotton (roughly 8.82 million hectares in 2004-05) Jute - Occupies an important place in the Indian economy Has a strong contribution to direct employment as well livelihood in the tertiary sector and allied activities India leads globally in jute with its annual production of 7.5 million bales in 2004-05 Silk - Highly remunerative cash crop, with minimum investment and sustained attractive returns India accounts for 18% of world raw silk production (15.74 thousand tonnes production in 2003-04) India has the unique distinction of being endowed with all 4 varieties of silk - Mulberry, Eri, Tasar, Muga Wool - With its annual production of 50.7 thousand tonnes of raw wool fibre, India accounts of roughly 2% of global production Source: Ministry of Textiles Annual Report, Industry Research

Industry fragmented and dominated by small scale units Spinning Weaving Processing & manufacturing 100% = 2922 mills 100% = 5.83 million units Of the 2300 processors in India, only 200 units are integrated with spinning, weaving or knitting units Bulk of apparel and home textile manufacturing accounted for by 77,000 small scale units Composite mills 8% Organised sector 2% Small independent units 39% Large independent units 53% Powerloom 31% Handloom sector 67% The Indian textile industry comprises mostly small-scale, non-integrated spinning, weaving, finishing and apparel making units Spinning: Of the 2922 spinning units in 2004, 2699 units were independent in nature, with 1135 units in small-scale sector and 1564 units of larger scale; independent units account for 75% of total capacity and 92% of production Weaving: Of the 5.83 million weaving units in India, only 0.1 million units are in the organised sector; number of mills have declined in number since 2003, while powerlooms have grown Processing: Industry is dominated by hand processing and independent processing units Manufacturing of garments and made-ups: Industry is dominated by small-scale units, mostly sub-contractors, a result of SSI reservation of the industry till a few years ago; almost 90% of garment export units are in the small scale sector The textile industry across the value chain is largely decentralised Units mostly independent and small scale in nature, rather than composite units undertaking all activities together Large scope for entry of organised integrated textile manufacturers Source: Compendium of Textile Statistics, 2004

Manufacturing units present at all levels of value chain Raw materials Cotton, wool, silk, jute Garments Fibres and yarn Grey fabric Knitting Weaving Processed fabric Dyeing Finishing Man-made fibre/ filament yarn* Petrochemicals Home textiles The textile industry in India covers the entire supply chain from fibre production through spinning, weaving, knitting, dyeing and finishing, to production of finished goods (apparel and home textiles) Spinning: India, with its 39 million spindles in the organised sector as well as small-scale sector, accounts for 22% of world’s installed capacity. A notable feature of the industry is the installation of of large number of open end rotors in the 1990s 100% export oriented units in the spinning sector have grown in the past and the country today contributes about 25% of world trade of cotton yarn Weaving: India has the highest loomage in the world, (1.87 million looms, accounting for 61% of the world loomage) Hand processing units, independent power processing units, units attached to mills Weaving/ knitting units - handlooms, powerlooms, hosiery units Garments & home textile producers Production unit Spinning mills Composite Mills *Includes viscose staple fibre, polyester staple fibre, acrylic staple fibre, viscose filament yarn, nylon filament yarn, polyester filament yarn Source: Industry Research

Industry experiencing high growth Yarn production million tonnes Cloth production billion sq. mtrs CAGR CAGR 3.6% 3.4 45.0 4.1% 3.1 10% 6.0% 38.6 8.9% 8% 41% 2.4 17% 3.8% 31.5 100% non cotton yarn 20% 100% non cotton cloth 36% 8% 27% Blended yarn 17% 15% 13% 4.6% Blended cloth 13% Cotton yarn 75% 72% 73% 3.2% Cotton cloth 60% 49% 46% 0.9% 1996 2000 2006 1996 2000 2005 Production of yarn has a witnessed healthy CAGR of 3.6% between 1996 and 2006, with production in 2006 being 3.4 million tonnes Most of this growth has been driven by 100% non-cotton yarn, which grew at a CAGR of 6% to 349 million kilogrammes in 2006 Production of fabric saw an impressive CAGR of 4.1% between 1996 and 2005, with production in 2005 at 45 billion square metres While production of cotton cloth remained more or less stagnant, 100% non cotton cloth and blended cloth drove the growth in the industry, with a CAGR of 8.9% and 4.6% respectively Production of 100% non cotton cloth was 18.4 billion square metres, while that of blended cloth was 6 billion square metres in 2005 Increased output of yarn and fabric - CAGR of 3.6% and 4.1% respectively; global market has grown at a CAGR of 2-2.5% in this period Highest growth seen in 100% non cotton yarn and fabric, followed by blended yarn and fabric Cotton cloth continues to dominate the industry Source: Compendium of Textile Statistics

Exports are dominated by readymade garments Textile exports 100% = INR 654 bn 7% 13% 100% = INR 390 bn 55% 5% 25% 9% 52% Year 2005-06 Readymade garments 34% 100% = INR 199 bn Cotton yarn, fabric & made-ups 4% 10% Year 1999-00 Manmade staple fibres, yarn, fabric & made-ups Silk & woolen textiles, cotton raw, incl waste 51% 35% Textile exports have grown to INR 654 bn in 2006, having witnessed a healthy CAGR of 11.8% between 1995 and 2006 Manmade textiles witnessed the highest CAGR during this period at 14.5%, followed by RMG at 12.4% and cotton textiles at 8.4% Exports are made mainly to US and Europe and together account for more than 80% of textile exports Export basket comprises a wide range of items - cotton textiles, man-made textiles, woolen and silk textiles, made-ups and ready made garments (RMG) RMG exports contribute more than 50% to textile exports and have seen their share in textile export basket growing International retailers are increasing sourcing from India through their buying houses; retailers like Gap, Wal-Mart, H&M, Target, JC Penny and Tommy Hilfiger crossed USD 100 million each in sourcing from India Year 1994-95 Readymade garments dominate textile exports Share of manmade textiles in overall textile export basket has risen, whereas that of cotton textiles has fallen Source: Ministry of Textiles

Dismantling of quotas has resulted in higher growth in large markets In the first nine months of CY2005, US imports grew by 7% to USD 8.9 bn and EU imports grew by 3.7% to Euro 54.5 billion India has been one biggest beneficiaries in post quota regime in these two markets, while countries like Mexico, South Korea and Turkey have lost share Share in US textile and clothing market Share in EU textile and clothing market 2004 1st 9 months of 2005 2008* 2004 1st 9 months of 2005 2008* India has been one of the the biggest beneficiary of the end of quotas In the US market, India’s exports grew by 27% to USD 4.6 bn and market share increased from 4.4% pre-quota abolition to 5.2% in the 1st nine months of CY2005 In the EU market, India’s exports grew by 16% and market share increased from 6.0% pre-quota abolition to 7.3% in the 1st nine months of CY2005 *Forecasts Source: WTO study on gainers and losers post quota abolishment

Going forward, exports as well as domestic market to drive growth Drivers of exports Rising outsourcing budgets of retail giants Indian companies evolving from mere converters to vendor partners of global buyers Large outsourcing orders helping Indian companies build capacities, lower their per unit cost and become more competitive Imposition of caps on certain import segments from China by EU and US given the surge in Chinese exports has opened up opportunities for India Drivers of domestic market Growing young population Rising household income levels Growth of organised retail Market size estimates USD bn 65 30 37 Exports 12 India is expected to be one of the biggest beneficiaries in the export market, post quota removal Global retailers, accounting for the bulk of imports into their countries, used to source from all over the world because of quota restrictions, are now reducing the number of countries they source their products from, with key considerations being costs and manufacturing lead times Domestic market would be driven by India’s two-third population which is below 35 years of age and spending more on lifestyle products Rising household incomes (National Council of Applied Economic Research estimates that by 2009-10, households with annual income of USD 980 or above will constitute 80% of population) Growth of new retail formats and brands, targeted at quality conscious consumers Domestic market 25 35 2005 2010* *Forecasts Source: Research commissioned by Confederation of Indian Textile Industry

Contents Market Overview Government regulations & policy Business opportunities and Advantage India

Industry has witnessed a change in regulations Emphasis on increasing scale Post 1985 Emphasis on small scale sector Many segments (especially readymade garments, knitwear and hosiery) deserved from reservation for SSI Schemes for technology upgradation and modernisation introduced Multifibre approach adopted; emphasis on man made and synthetic fibres, in addition to cotton Taxation structure made simpler Pre 1985 Importance given to cotton textiles Favourable fiscal treatment given to powerlooms (mainly tiny and small-scale units) as compared to composite mills Most segments reserved for small-scale industry (SSI)* Restrictions on installation of automatic looms Historically the textile industry in India has been reserved for the small scale sector, which has been exempted from taxes, thus discouraging investments in increasing scale The government, through its various Budget announcements has sought to rationalise taxes Budget 2002-03: Textiles brought under the ambit of Cenvat (credit for duties paid on inputs or capital goods) and introduced on all yarns Budget 2003-04: Cenvat extended across the entire textile chain to include fabrics, made-ups and apparel; excise duty exemptions on many sectors and processes, specially SSI removed; excise duty rates reduced Budget 2004-05: Cenvat made optional - every manufacturer allowed to choose between a complete exemption from payment of excise duty or adopt the Cenvat route; excise duties lowered to 4% on cotton textiles and 8% on non cotton textiles (except man made fibres, polyester filament yarn, nylon filament yarn) for those claiming Cenvat credit Measures aimed at improving competitiveness of industry to face a post quota regime *Latest definition: Investment in plant & machinery of INR 10 million for most industries, INR 50 million for specified industries like hosiery, hand tools, drugs & pharmaceuticals, sports goods and stationery items

Several government initiatives targeted to attract investments Scheme launched in 1999 to provide firms access low interest loans for technology upgradation and setting up new units with state-of-art technology Scheme has disbursed INR 91.61 bn till 31st December 2005 Technology Upgradation Fund Scheme Upto 100% foreign direct investment allowed in textile and apparel manufacturing industry, with approval of the Foreign Investment Promotion Board (FIPB) ~ USD 1.02 bn of FDI in the sector approved between 1991 and 2004 Companies free to set up fully-owned sourcing (liaison) offices, as well as marketing operations Policy related to foreign investment Technology Upgradation Fund Scheme (TUFS) provides for any one of the following 5% reimbursement of interest charged by lending agency on rupee term loam 5% exchange fluctuation (interest and repayment) from the base rate on foreign currency loan Credit linked capital subsidy - 15% for SSI textile and jute sector and 20% for powerloom sector 5% interest reimbursement plus 10% capital subsidy for specified processing machinery SITP Scheme expects to put in place 25 textile parks by 2007,with government support in the form of grant/ equity upto 40% of project cost (ceiling of INR 400 million) “Scheme for Integrated Textile Parks” (SITP), based on public-private partnership model to build world class infrastructure facilities Product specific “Cluster Approach” targeting development of 100 additional clusters in textiles Technology Mission on Cotton (TMC), focusing on cotton R&D, dissemination of technology to farmers, improvement of market infrastructure and modernisation of ginning and pressing sector Upgrading infrastructure Source: Ministry of Textiles, Industry Research

Contents Market Overview Government regulations & policy Business opportunities and Advantage India

India has a cost advantage vis-à-vis competing countries Cost competitiveness Yarn: USD per kg of yarn Fabric: USD per yard of fabric South Korea China Brazil India Open-ended yarn & fabric Ring yarn & fabric Textured yarn & fabric Yarn Woven fabric India is more cost competitive vis-à-vis countries like Brazil, China and South Korea in manufacture of textiles Cost advantage arises mainly from the large pool of low cost but skilled manpower available in India In case of textured yarn and fabric, India is less competitive, which is a result of the higher tax burden (excise duty) on man made textiles in the country Knitted fabric India is cost competitive vis-à-vis competing countries in textile production, except in case of textured yarn and fabric

There are several other industry specific advantages arising out of the unique nature of the industry in India Large raw material base India has a rich raw material base, especially cotton which has seen improved productivity in the country under the Cotton Technology Mission Wide variety of cotton produced India, making India capable of catering to various segments of world trade Indian industry has ability to handle different materials - cotton, wool, silk and jute with equal skill Positive developments in the Textile Policy Reservation for small scale sector, especially key segments removed over last few years Fiscal anomalies in terms of excise duty structure removed Flexibility in production Capabilities across the entire value chain within the country reduces lead time for production and reduces intermediate shipping time Indian companies have flexibility and skilled manpower to handle small orders with complex designs Product development and design capabilities Several institutes in India for textile development, the major one being National Institute of Fashion Technology (NIFT) Several leading colleges also offer courses in Textile Engineering

Business opportunities exist for foreign players Invest in setting up vertically integrated large scale units Invest in setting up retail chains (single brand) Enter into marketing joint ventures with Indian companies Brand licensing to Indian players Investing in India Partner with Indian vendors to import from India, by nominating large Indian companies having credibility in terms of capacities and quality Readymade garments have maximum opportunity, given India’s cost competitiveness Sourcing from India Growth potential exists in several segments Yarn - Reducing availability of good quality yarn is India, as yarn manufacturers are forward integrating into weaving and processing Weaving & processing - Indian units are technologically weak and small in size; increased demand for fabric from garments and home textiles segment Large integrated textile producers: Most preferred format for large global retailers, with increasing margins in the garments segment Global buyers are increasingly collaborating directly with Indian suppliers to reduce costs, achieve faster turnaround and develop new products Many retailers communicate their buying programmes 8-9 months in advance of shipping dates to their vendors, so that the vendors can strategise and achieve scale based on the targets With Indian consumers increasingly getting exposure to international fashion trends, potential exists for export of lifestyle brands of garments and accessories to India Export to India

Many foreign players have also entered India Illustrative, not exhaustive Top 10 buyers in India (Gap, Wal-Mart, Li & Fung, The Children’s Place, JC Penny, H&M, Federated, Fifth Avenue, Carrefour and Synergies India) account for 35% of total textiles sourced from India Other major companies include El Corte, Ecko, Kellwood, VF Corporation, Tesco, Next, Karstadt-Quelle Buying and liaison offices Brand licensing/ franchising Brand licensing - Hugo Boss, Tommy Hilfiger, Mango, Lovable, Nike, Lacoste Master franchisee - Marks & Spencer, Crocodile Indian Textile Industry has a pivotal role to play in the economic life of the country through its contribution to industry output and foreign exchange generation It is the second largest provider of employment after the agriculture sector, hence its development has a direct bearing on all aspects of the economy Some of the textile clusters in which productions happens are very huge and significant for the overall industry, for example Panipat produces 75% of all blankets produced in India Tirupur contributes 80% of the country’s cotton hosiery exports Ludhiana makes 95% of total woolen knitwear produced Manufacturing/ manufacturing cum retailing VF Arvind Brands - joint venture between Arvind Brands and VF Corporation to manufacture and sell latter’s brands in India Benetton Levi Strauss Reebok Carreman Michel Thierry Source: News articles

Illustrative, not exhaustive Key players in India Illustrative, not exhaustive Large industry conglomerate, with turnover of USD 279 million and presence in textiles, retail, engineering goods, personal care and prophylactics Textile products - worsted fabrics, wool and blended fabrics, specialty ring colour and stretch denim fabric, cotton and linen shirting fabric, readymade garments, woolen blankets and home furnishings One of the oldest textile companies in the country, having turnover of USD 231 million Produces suitings, shirtings, sarees, towels, bed linen and men’s apparel; significant exporter of polycotton blended fabrics and made ups One of the largest producers of denim in the world, having turnover of USD 338 million and exports to more than 70 countries Produces denim fabric, cotton and blended fabric, knitted fabric, voiles, apparel One of the largest textile business houses in India, having turnover of USD 400 million Significant presence in acrylic fibre, cotton, synthetic and blended spun yarns, grey and processed fabrics, cotton and synthetic sewing threads India’s largest exporter of readymade garments, having turnover of USD 180 million Supplies to more than 100 retailers and fashion brands across 39 countries Source: Capitaline, Company websites

Illustrative, not exhaustive Key players in India Illustrative, not exhaustive Leading producer of silk yarns and fabric (mainly for decorative and bridal use), with annual turnover of USD 32 million Other businesses include retailing of home furnishings in India and manufacture of bed linen products for domestic and export market Amongst the top 3 terry towel producers in the world, with annual turnover of USD 132 million Other products include cotton yarns, polyester filament yarn, bathrobes, buttons and saw pipes Belongs to one of the most diversified business groups in India (Aditya Birla Group) and has turnover of USD 577 million) Key products in textiles include viscose filament yarn and branded apparel; other interests include insurance, telecom, IT, carbon black Having turnover of USD 303 million, company is a major producer of polyester yarns, fabrics, garments and textiles Has the largest composite textile mill in India for producing cotton fabric Having a turnover of USD 95 million, its products include viscose filament yarn, viscose tyre/ industrial yarn, denim, cement and pulp and paper Source: Capitaline, Company websites

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