India’s textile and apparel sector story

The textile and apparel (T&A) sector remains central to India’s economy, contributing significantly to the Gross Domestic Product (2.3%), industrial production (13%), and exports (12%). It directly employs around 45 million people, providing livelihoods across rural and urban areas, and creates jobs for unskilled, semi-skilled, and female workers. However, despite this potential, India’s T&A sector accounted for only 4.8% of global exports in 2023. The country’s strength lies in its raw materials, particularly cotton, where it holds 14% of global exports. As it prepares for the future, India’s T&A industry will need to penetrate the growing Man-Made Fibre (MMF) segment, which now accounts for approximately half of global apparel trade and will continue to grow.
The global apparel industry is extremely competitive and characterised by low margins. Buyers frequently switch suppliers to secure better prices, creating a high-pressure environment for manufacturers. This dynamic is particularly challenging for Indian firms, most of which are relatively small compared to their counterparts in Bangladesh and Vietnam, where firms tend to be larger and more consolidated. India in general finds it difficult to compete on costs with these countries, which then drives a need to develop competitive advantages based on other factors, such as quality, innovation, or sustainability.
Market access further handicaps Indian exporters. Bangladesh, for instance, enjoys preferential trade agreements like the European Union (EU)’s Everything But Arms (EBA) initiative, which provides duty-free access to the European market, allowing it to dominate in certain apparel categories. Similarly, Vietnam benefits from the EU-Vietnam Free Trade Agreement (EVFTA). In contrast, Indian exports to the EU face import tariffs of 9.6%, creating a significant price disadvantage in the world’s largest apparel market.
As a result, market shares for Bangladesh and Vietnam market in global apparel exports stand at 10% and 7%, respectively, versus only 3.5% for India, as of 2022. (Contrary to some perceptions, Bangladesh will remain a rising power in apparel production: its current problems are temporary.)
India’s historical reliance on cotton production has further limited its ability to adapt to changing global trends. Cotton-based products remain India’s core strength, but global apparel demand is shifting increasingly towards MMF, driven by markets like the United States, where items such as MMF-based jerseys and pullovers are in high demand. Athletic wear is also moving increasingly towards MMF.
Indian companies have been slow to pivot to MMF-based apparel production. Many companies are hesitant to enter the MMF segment, which is more competitive and requires significant investments in new technology and infrastructure. Another reason is that domestic taxes favour cotton over MMF and create an artificial price wedge: MMF yarn and fibres, fabric and apparel attract Goods and Services Tax (GST) in the range of 12-18%, while the same range of cotton products see a duty of 5%. This discourages investment in MMF production, exacerbating India’s challenges in aligning its production with global demand.
Given that Indian firms are generally smaller and less competitive than those in Bangladesh and Vietnam, the country needs to find ways to compete on parameters other than price. This could include improving supply chain efficiency, enhancing quality control, or focusing on ethical production and sustainability, which are becoming more important in the global market.
India can also build on its strength in cotton by developing higher-value segments within the cotton apparel market, such as organic cotton or luxury cotton-based garments, which command higher prices and are less susceptible to the cutthroat price competition of the fast-fashion industry. Additionally, India’s large domestic market and growing middle-class offer opportunities for producers to innovate and move up to higher quality segments, which could eventually help firms compete better internationally.
India’s domestic supply chain in the manmade space is currently inadequate to meet the needs of its exporters. Apparel exporters need to rely on imports, but relatively high tariffs on MMF inputs like manmade fibres, yarn and fabric make it harder for exporters to compete. For instance, Vietnam carries an Most Favoured Nation (MFN) tariff of 2% on polyester fibre compared to India’s 5%. While reducing tariffs on MMF inputs, policymakers should also ensure that tariffs along the entire supply chain be rationalised. For example, Purified Terephthalic Acid (PTA), an important raw material for manufacturing polyester yarn, has a tariff of 5%; if the yarn tariff, currently at 5%, is reduced, the PTA tariff must be similarly reduced, or else the yarn sector might see “negative effective protection.” Moreover, the polyester fabric duty of 20% is too high, given the sharp global competition in the MMF sector. It should carry a duty no more than that on key MMF inputs like yarn.
India’s textile and apparel sector holds significant potential to create more and better employment, especially from the labour-intensive apparel segment. However, the sector faces important challenges in adapting to global market demands. It requires both the government and private sector to play their part. The government could help by rationalising domestic taxation and reducing import tariffs along the entire supply chain. This can help increase demand, reduce import costs of MMF inputs and incentivise domestic production. Securing preferential access to the European market would be very helpful. The private sector could step out of its cotton comfort zone and aggressively push into the MMF segment, import suitable MMF technology from world leaders such as Korea, China, and Japan, and innovate more in the cotton segment. The potential gains in (higher quality) employment would be immense.
This article is authored by Sanjay Kathuria, visiting senior fellow, Prerna Prabhakar, associate fellow, and TG Srinivasan, visiting senior fellow, Centre for Social and Economic Progress (CSEP), New Delhi.