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FTAs/PLI scheme to aid India in garnering larger pie of global textile trade

ICICIdirect Research 02 Jan 2023 DISCLAIMER

What's Buzzing 

After the strong performance of the Indian textile and apparel exports in FY22 to all-time high exports, the Indian textile and apparel (T&A) export momentum has been muted in H1FY23. However, recent policy initiatives by the Government of India (FTA with many trading partners, PLI Scheme) and easing cotton prices are expected to provide an opportunity for sustained long term growth. 

Context 

Reduced dependency on China (China+1) by global retailers has enabled India’s textile exports to report an all-time high T&A exports of US$ 42.9 billion in FY22 (26%, 16% growth in FY20, FY19, respectively). The value growth in T&A exports has been largely led by significantly higher yarn realisations. However, H1FY23 has been a turbulent period for the Indian textile value chain owing to spiralling domestic cotton prices and global retailers being saddled with excess inventory. 

Our Perspective 

We believe that higher inventory levels of global retailers compared to earlier quarters is likely to make the order book momentum subdued for Indian exporters during the holiday season (Q3FY23) and spring summer 2023 (Q4FY23, Q1FY24). Expectation of higher cotton production in the next cotton season (CS23) have led domestic cotton prices on a declining trend (down ~35% from peak). Reduction in premium of Indian cotton prices vs international cotton prices (from peak of 40% to 12-15%) is enabling India’s competitive strength to inch up. FTA with Australia, UAE and potential FTA with UK/Europe would act as export volume enhancers. The government is targeting exports of T&A to Australia to increase from US$392 million to US$1.1 billion in the next three years. EU/UK contributes ~40% to the total apparel global trade (US$200+ billion) with India’s share being at a nascent stage (<4%). We believe there are robust opportunities for Indian apparel exporters to enhance their market share in the region. For home textiles, the export opportunity size in EU is close to US$30 billion and India’s share is ~6-10% providing ample scope for growth. Also, GoI has approved 61 applicants under Production Linked Incentive (PLI) Scheme with proposed investment of Rs 19,077 crore and is evaluating launching PLI 2.0 to improve India’s global competitiveness. The PLI scheme is expected to increase investments in MMF and help India garner a larger pie of global trade in the segment.

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