Performance comparison and study the impact of marketing expenses, wages & salary and age on the firm performance in Indian Cotton Textile Industry
Term Paper 2007 26 Pages
India is the world’s third largest producer of cotton and second largest producer of cotton yarns and textiles. The Industry was de-licensed in 1991-92 and it lead to various structural changes in this industry. This study aims to compare the performance (in terms of return on capital employed) of firms incorporated before liberalization and firms incorporated after liberalization in Indian cotton textile industry. This study also intended to study the impact of marketing expenses, wages & salary and Age on explaining the variances in the firm performance (in terms of net sales of the firms) across various groups of the firms.
Introduction: Overview of the Indian Cotton Textile Industry
The textile industry holds an exceptional place in Indian economy because of its contribution to the GDP, employment generation and forex earning. One of the earliest to come into existence, Indian textile industry is one of the economy’s largest industrial sector. In 2000 - 01, the textile and garment industries accounted for about 4 percent of GDP, 14 percent of industrial output, 18 percent of industrial employment, and 27 percent of export earnings. India’s textile industry is also significant in a global context, ranking second to China in the production of both cotton yarn and fabric and fifth in the production of synthetic fibers and yarns. It offers direct employment to about 35 million people and to another 50 million people in related area. It can be inferred that one out of every six Indians are directly or indirectly associated with this industry. This industry offers one of the most basic needs of the people i.e. clothing and helps in improving the quality and standard of life. From the production of raw input to the delivery of the finished products with substantial value addition at each and every stage of processing, that is why it has distinctive position as a self – reliant industry. Its vast potential for creation of employment opportunities in the agricultural, industrial, organized and decentralized sectors & rural and urban areas, particularly for women and the disadvantaged is noteworthy.
Indian textile industry and Governmental Policy
Although the development of textile sector was earlier taking place in terms of general policies, in recognition of the importance of this sector, for the first time a separate Policy Statement was made in 1985 in regard to development of textile sector. The Industry was de-licensed in 1991-92 and from then the per capita cloth availability increased from 22.87 Sq. Meters (1990) to 33.51 Sq. Meters (2005). The textile policy of 2000 aims at achieving the target of textile and apparel exports of US $ 50 billion by 2010 of which the share of garments will be US $ 25 billion. The main markets for Indian textiles and apparels are USA, UAE, UK, Germany, France, Italy, Russia, Canada, Bangladesh and Japan. The main objective of the textile policy 2000 is to provide cloth of acceptable quality at reasonable prices for the vast majority of the population of the country, to increasingly contribute to the provision of sustainable employment and the economic growth of the nation; and to compete with confidence for an increasing share of the global market.
The projected value of Indian textile industry is estimated to grow from US$ 47 billion in the year 2005-2006 to US$ 115 billion by the year 2012, comprising domestic market of US$ 60 billion and exports of US$ 55 billion. Thus the projected growth rate is 16% per annum during these years. The Government of India has taken initiatives and included new schemes in the Annual Plan for 2007-08 to provide a boost to the textile sector. These include schemes for Foreign Investment Promotion to attract foreign direct investment in textiles, clothing and machinery; Brand Promotion on Public-Private Partnership (PPP)) approach to develop global acceptability of Indian apparel brands; Trade Facilitation Centers for Indian image branding; Fashion Hubs for creation of permanent market place for the benefit of Indian fashion industry; Common Compliance Code to encourage acceptability among apparel buyers and Training Centers for Human Resource Development on Public Private Partnership (PPP) mode. The major sectors forming part of the textile industry include the organized Cotton/ Man Made Fibre Textile Mill Industry, Man made fibre/ filament yarn industry, the decentralized power loom sector, woolen textile industry, silk industry, handloom industry, handicraft industry, jute industry and textile exports.
Current Scenario of the Industry
Indian textile industry with both textile and clothing capacity may be able to prosper in the new competitive environment after the textile quota regime of quantitative import restrictions under the multi-fibre arrangement (MFA) came to an end on 1st January, 2005 under the World Trade Organization (WTO) Agreement on Textiles and Clothing. As a result, the textile industry in developed countries will face intensified competition in both their export and domestic markets. However, the migration of textile capacity will be influenced by objective competitive factors and will be hampered by the presence of distorting domestic measures and weak domestic infrastructure in several developing and least developed countries.
The elimination of quota restriction will open the way for the most competitive developing countries to develop stronger clusters of textile expertise, enabling them to handle all stages of the production chain from growing natural fibers to producing finished clothing, it has been rightly said that 21st Century will belong to Asia. This is getting clearer and holds good even in case of Textile Sector. It is well known that with very high labor costs in U.S.A and Europe, entire activity from spinning to garmenting will shift to Asian countries like China, India, Bangladesh, Pakistan, and Sri Lanka etc. With the abolition of Quota Regime, each country would try to grab maximum share of world trade in textile and garment sector. Indian Textile Industry will have to face fierce competition particularly from China, Pakistan, Bangladesh and Sri Lanka. The OECD paper also says that low wages can still give developing countries a competitive edge in world markets, time factors now play a far more crucial role in determining international competitiveness.
Indian Cotton Textile Industry and Vision 2010
The mood in the Indian textile industry given the phase-out of the quota regime of the multi-fibre arrangement (MFA) is upbeat with new investment flowing in and increased orders for the industry as a result of which capacities are fully booked up to April 2005. As a result of various initiatives taken by the government, there has been new investment of Rs.50, 000 crore in the textile industry in the last five years. Nine textile majors invested Rs.2, 600 crore and plan to invest another Rs.6, 400 crore. Further, India's cotton production increased by 57% over the last five years; and 3 million additional spindles and 30,000 shuttles-less looms were installed. The industry expects investment of Rs.1, 40,000 crore in this sector in the post-MFA phase. The low wage structure in India also causes for the shift in production of textiles from developed countries to India (Bheda, Narag, Singla, 2003).
A Vision 2010 for textiles formulated by the government after intensive interaction with the industry and Export Promotion Councils to capitalize on the upbeat mood aims to increase India's share in world's textile trade from the current 4% to 8% by 2010 and to achieve export value of US $ 50 billion by 2010 Vision 2010 for textiles envisages growth in Indian textile economy from the current US $ 37 billion to $ 85 billion by 2010; creation of 12 million new jobs in the textile sector; and modernization and consolidation for creating a globally competitive textile industry.
Plus and Minus of the Indian Cotton Textile industry
Indian cotton textile industry relies upon high raw material base of cotton, man-made fibres, jute, silk etc. with huge production capacity (spinning - 21% of world capacity and weaving - 33% of world capacity). This industry has great advantage of availability of low cost enormous network of skilled human resource, flexibility in production processes and long experience with US and European Union.
Along with lots of strength, this industry is also suffering from some weaknesses. Fragmented nature of the industry throws a critical challenge to this industry. Same quality of cotton, high power cost (E.g. cost of power was Rs. 8 per garment in India whereas in China it was only Rs. 2 per garment.), infrastructural constraints are major disadvantages for the Indian cotton textile industry.
Importance / Need of the Study
Indian cotton textile industry is one of the most important sector that affect the economy of the country as major portion of Indian population is dependent on this sector for their bread and butter. Although this sector is very critical, there is very little study is done to study the effectiveness of this sector in post liberalization period as liberalization changed the whole economic scenario of the country. This study aims to compare the performance of firms incorporated before liberalization and firm incorporated after liberalization. Same time this study is also intended to study the effect of different variables on firm’s performance. In this study firm performance is measured in terms of weighted Return on capital employed and Net Sales. The study will strengthen the existing body of knowledge by providing some empirically tested insight for Indian cotton textile industry and other similar industry.