INDIA'S COTTON TEXTILE INDUSTRY: PROBLEMS AND PROSPECTS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700010052-2
• Release Decision: RIPPUB
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• Document Page Count: 17
• Document Creation Date: December 22, 2016
• Document Release Date: January 28, 2010
• Sequence Number: 52
• Publication Date: June 1, 1971
• Content Type: IM

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Cod idential
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DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
India's Cotton Textile Industry: Probiems And Prospects
Fu,,Aj T n
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FILE COPY
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Confidential
ER IM 71-100
June 1971
Copy No. ,
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WARNING
This document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
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En uJ,J frOM oarnmorir
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CONFIDENTIAL
CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
June 1971
INTELLIGENCE MEMORANDUM
INDIA'S COTTON TEXTILE INDUSTRY:
PROBLEMS AND PROSPECTS
Introduction
1. India's cotton textile industry is the nation's largest industry in
terms of en ployment and production and remains almost exclusively in
private hands. Its postwar development reflects the government's partly
conflicting economic policies. Import restrictions have protected the
industry from foreign competition, but, at the same time, licensing and
price and distribution controls have severely limited its expansion and
modernization. A unique feature of the industry's evolution has been a
trend toward small-scale, labor-intensive establishments. This trend - quite
the reverse of the trend worldwide - reflects New Delhi's deliberate efforts
to find jobs for its burgeoning labor force. This memorandum reviews briefly
the industry's progress since independence and examines the government
policies that have influenced this progress. It also analyzes the major
problems facing large-scale producers J and evaluates the short-term
prospects for the industry's growth.
Discussion
Background
2. At independence in 1947, India's well-developed cotton textile
industry was second in size only to that of the United States. About 80570
of total cloth production of 5 billion linear meters was produced, by large
mills, and the remainder was scattered among numerous small producers.
The large Mills were concentrated in the Bombay and Madras regions,
1. Including establishments with power equipment and more than SO
workers and those without power equipment and more than 100 workers.
All other cotton textile establishments are classified as "small scale. "
Note: This memorandum was prepared by the Office of Economic
Research and coordinated within the Directorate of Intelligence.
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identified at the time throughout the world with high-quality fabrics. Cloth
production: met not only domestic demand but allowed for considerable
exports. During 1948-50, export earnings from cotton cloth averaged $140
million annually, about 17% of total export earnings. India was the world's
second largest textile exporter, with about 11% of the market.
3. As the country's leading industry, cotton textiles accounted for
40% of industrial production, 40% of industrial employment, and 35% of
the nation's capital assets in 1948. The industry was owned and managed
largely by Indians, with only 10% foreign-owned, mainly British. Most
foreign capita! was concentrated in jute and tea.
4. The industry is still the nation's largest. Although there has been
some geographic dispersion, the industry is still concentrated around
Bombay, Ahmadabad, and Madras (see Figure 1). But its relative position
has dec fined substantially as heavy industry has grown more rapidly.
Moreover, India's share of the world cotton cloth market has declined
greatly and India's textile industry has not participated in the trend toward
capital-intensive operations or the spread of synthetic fibers that has
characterized other textile-exporting nations.
Production Trends and Government Policies
5. Over the past two decades, the growth of India's cotton textile
production has been erratic (see Figure 2). Cotton cloth production
increased by an average of better than 8% annually during 1951-55, but
slowed to 1% in the next five years, then averaged 3% during 1961-65.
Production declined sharply during the recession of 1966-67, recovered in
1968, and has since stagnated. In the entire period of the 1960s, production
failed to keep up with population growth.
6. Consumer demand does not appear to have been a decisive factor
in the industry's erratic performance, as both population and national
income have risen fairly steadily. Rather, ambivalent government policies
have at times encouraged and at other times inhibited the industry's
development. Although the industry is protected against foreign competition
by import prohibitions, the development of the large-scale sector and its
operations in the domestic market have been proscribed - at least since
the mid-1950s - by extensive controls. At the same time, the small-scale
sector has benefited from government subsidies and a rapidly growing share
of the domestic market.
7. The squeeze on large producers began in the mid-I 950s when
New Delhi placed emphasis on heavy industry, public sector investment,
and activities that would generate large employment. The textile industry,
as an already developed consumer goods industry, was given a low priority
for investment. These policies were enforced by regulations restricting
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GUN F1 UEN"I'IAL
JAMMU AND
KASHMIR
INDIA: TEXTILE INDUSTRY
P11AD[BH
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Installed capacity as of 1 May 1960
(thousand spindles)
' M G-1#AtAYA'~ ) -4
J I
AM /?~r~..~`
23 Am&
3 ASS
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India: Indexes of Cotton Cloth Production,
National Income, and Population
(1950-100)
opulation
expansion of capacity through licensing requirements and various selective
procedures favoring small, labor-intensive operations. Furthermore, imports
of machinery, spare parts, and production materials were strictly regulated,
with importers required to prove that such goods were not available
domestically.
8. Reflecting these government actions, cotton cloth production by
the large mills actually declined after 19:57 (see Figure 3), and their share
of total cloth production fell from 73% is that year to 54% in 1970. On
the other hand, small-scale production about doubled by 1970.
9. Fragmentary data suggest that investment in the large-scale sector
has generally been limited to increased spindleage used to produce yarn
required by the growing small-scale sector. The number of spindles neared
18 million in 1970, compared with 12 million in 1955 (see Table 1).
Spinning mills proliferated during those years and cotton yarn production
increased fairly steadily during the past two decades (see Figure 4). But
the number of composite mills, which weave cloth as well as spin yarn,
has remained virtually unchanged.
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India: Cotton Cloth Production,
by Sector
Million Linear Meters.
0
?Ercludee khadi cloth, estimated at 00 million square mete,. during year
ending 31 March 1000, Nhadi is handloomed cloth lot personal use or barter.
Figure 3
10. Except for the government's estimates of cotton cloth production,
few data are available on the small-scale sector, which New Delhi defines
as including all firms employing less than 50 workers with the aid of power
or less than 100 workers without the aid of power. J Small firms are
dispersed more widely than large firms, with many located in rural areas.
Indian sources estimate that the sector now employs about 6 million
w'irkers, including about 3 million part-time workers. This compares with
only about 900,000 employees in the large-scale sector in 1970, only slightly
more tiian in the early 1950s. Small-scale employment may have doubled
since the mid-1950s as did output.
2. Excludes khadi cloth which is handloomed cloth for personal use or
barter and generally only a part-time househould occupation. Khadi cloth
production is less than 1% of the country ys total cotton cloth output.
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India: Large-Scale Cotton Textile Mills
as of 1 January
Spinning Mills
Composite Mills
All Mill
s
Thousand
Thousand
Thousand
Million
Year
P4ills
Spindles
Mills
Spindles
Looms
Mills
Spindl
s
1950
94
1,860
268
8,695
191
362
10.6
1951
103
1,843
275
9,156
195
378
11.0
1952
107
1,911
276
9,341
196
383
11.3
1953
113
1,947
282
9,476
198
395
11.4
1954
114
2,097
286
9,554
202
400
11.7
1955
116
1,768
292
10,190
203
408
12.0
1956
121
1,857
291
10,194
203
412
12.1
1957
144
2,195
292
10,297
201
436
12.5
1958
175
2,557
295
10,497
201
470
13.1
1959
188
2,807
294
10,599
201
482
13.4
1960
186
2,931
293
10,619
200
479
13.6
1961
192
3,056
287
10,607
199
479
13.7
1962
196
3,188
285
10,645
199
481
13.8
1963
211
3,394
287
10,723
200
498
14.1
1964
223
3,550
291
11,111
203
514
14.7
1965
253
3,941
290
11,492
206
543
15
4
1966
283
4,362
292
11,756
209
575
.
16.1
1967
317
4,653
292
11,989
207
609
16.6
1968
346
5,012
289
12,073
208
635
17.1
1969
358
5,249
289
12,157
208
647
17.4
1970
366.
5,463
290
12,205
208
656
17.7
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India: Cotton Yarn Production
Million Kilograms
Figure 4
Current Problems of the Large-Scale Sector
11. Government restrictions on the large-scale sector not only have
constrained production but also have jeopardized the continuing private
operations of the mills. Indeed, mill failures reached such proportions that
in 1969 the government established the National Textile. Corporation (NTC)
to manage "sick" private textile mills. By December 1970 the NTC was
operating 24, textile mills...The mills were to revert to private, ownership
as soon as they were again profitable.
12. Profit rates in, the large-scale textile industry generally ranged
below those for other industries throughout the A 960s. This reflected a
cost-price squeeze, as both labor and raw material' costs rose faster than
cotton cloth prices. Raw cotton prices and wages increased 45% and 48%,
respectively, between 1963. and 1968, while cotton cloth prices increased
only 17% (see Figure 5). The trends. in wages, . clearly in excess of
productivity gains, reflect primarily wage -ndjustments in accordance with
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UUN P'1 UIi N I7AL
India. Cost and Price Indexes for Large-Scale
Cotton Textile Mills
(1963=100)
150 --- r -----
Figure 5
changes in the cost of living. The squeeze on profits most likely continued
through 1969 and 1970. Although cotton cloth prices may have risen
somewhat - as discussed below - cotton shortages have raised the price
of raw cotton even further, and wages increased at least in line with the
substantial rises in consumer prices.
13. The price of cotton cloth has been deliberately held down by New
Delhi's "cheap cloth" policies. Because cotton textileF are an important
component in consumer purchases and their prices have a substantial impact
on the cost of living, maintaining an adequate domestic supply of
inexpensive cloth has been a major government objective. The greater
profitability of higher quality cloth caused the large-scale sector to restrict
low-quality cloth production. Because small-scale ma.wfacturers could not
keep up with the expanding markets, there were shortages of low-priced,
low-quality cloth. In 1964 the government acted to halt, this trend by
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requiring that at least 40% of each mill's output be of specified varieties -
generally of low quality - to be sold at controlled prices. The so-called
"cotton fabric price control quota" was reduced to 25% in May 1968 in
the wake of increasing mill failures, and average prices may have risen in
1969.70. There is no evidence, however, that the mills' profit picture
improved much, partly because of a sharp rise in cotton prices.
14. The two-year drought of 1966-67 cut domestic cotton production
by about 15%. Although most agricultural crops ha ,re since surpassed their
1965 production levels by large margins, cotton production last year was
still about 10% below that level. Lower cotton production resulted primarily
from competition for land from wheat, which benefited from higher
government support prices and greater yields from improved seeds. Under
normal circumstances, reduced cotton production and an accelerating
domestic demand for cotton textiles brought on by rising incomes would
signal higher imports. But the government's restrictive import policy reduced
cotton imports in 1966-70 (see Figure 6) by an average of almost 25%
from the preceding five-year period. As a result there was an acute cotton
shortage. Supplies of domestically grown short staple cotton, which is
generally suited to the small-scale sector, dropped only slightly. The
large-scale sector, however, which needs imports of long staple cotton to
manufacture high-quality, higher priced cloth was hard hit.
15. The cotton shortage reached crisis proportions in early 1971,
when domestic raw cotton prices averaged about 50% above the previous
year. Prices of uncontroiled piecegoods rose 25% to 60% from October
1970 to February 1971. Since profits on the sale of high-grade cloth at
these higher prices more than compensated for the small fine levied by
the government for underproduction of cheap cloth, mills generally stopped
producing their quota. To combat this situation, the government demanded
in April that the mills increase production of quota cloth or face higher
penalties. Cheap cloth production was to be subsidized jointly by the mills
producing higher quality cloth and by the government. In addition, the
government took over most of cotton imports and promised increased
purchases from abroad. Increased production of quota cloth will probably
depress sales of higher quality cloth, lowering industry profits which, in
turn, will reduce the incentives to expand and modernize.
16. In addition to a cost-price squeeze on profits, government policy
also has shaped the mill owners' 3titude toward modernization and
production for export. Restrictions on textile imports gave local producers
a monopoly in the vast domestic market. At the same time, restrictions
on capacity expansion through various licensing procedures effectively
discouraged producers from modernizing their plants. Less than 20% of
India's looms are automatic, compared with 100% for the United States
and Hong Kong and 70%o for Pakistan. Most of the industry's power
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CON 111)EN"I'IAL
India: Raw Cotton Availability
Thousand 180 kg. Bales
6,000
0
1951
..: I
60
L-1- I I I I I I
65 1970
equipment is of pre-World War II vintage. For example, only one-quarter
of carding machines are postwar models and nearly half the speed frames
are 40 years old. Furthermore, lack of investment and inability to import
chemical fibers prevented the textile industry from following the worldwide
trend toward synthetic textiles. In 1968, rayon and other synthetics
represented only 10% of the fibers used in yarn production in India,
compared with about 50% in Japan and over 40% in Taiwan. For all these
reasons, India's share of the world cotton textile market was only 4.2%
in 1968, compared with 11.3% in 1948-50, and India's exports of cotton
cloth have declined by about two-thirds during 1951-70 (see Figure 7).
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India: Indexes of Quantity and
Value of Cotton Cloth Exports
(1950-roe)
Textiles in the Fourth Five-Year Plan
Figure 7
17. India's Fourth Five-Year Plan (fiscal years 1969-73 J) provides
for the continuing promotion of the small-scale sector, but incorporates
the hope for a substantial increase in large-scale textile production as well.
The plan, published in final form in . 1970, projects an 8%-10% annual
increase in industrial production, with production of cotton textiles
increasing at an average rate of 2-1 /2%-3%. Growth of small-scale production
(3-1/2%) was projected to exceed that of large-scale production (about 2%).
18. Now that the economy is two years into the plan, it is clear
that the cotton textile targets are virtually beyond reach. Not only were
the benchmarks used by the planners for the fiscal. year (FY) 1968
overstated, but also progress during 1969 and 1970 has been well below
expectations (see Table 2). To achieve the fiscal year (FY) 1973 target
'
growth of production would have to
of 9.4 billion meters of cloth, the
average more than 6% annually, during the last three years of the plan period.
3. The fiscal year begins .1 . April of the stated year.
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Table 2
India:
Cotton Textiles in the Fourth Five-Year Plan
FY 1969-73
Million Linear Meters
Total
Large Scale
Small Scale
FY 1968 benchmark
8,193
4,597
3,596
1968 actual
7,896
4,366
3,530
1970 actual
7,805
4,205
3,600
FY 1973 target
9,350
5,100
4,250
19. The planned expansion of the small-scale sector was to be achieved
with continuing government assistance, including excise tax reductions,
concessional credit schemes, direct subsidies, and arrangements to ensure
the supply of raw materials and equipment. At the same time, the small-scale
sector would continue to have a monopoly "on production of specified
varieties of cloth already reserved exclusively for the handloom sector."
The government is also -ngaged in designing and developing improved
spinning wheels and sub: idizing their sale.
20. With respect to the large-scale sector, the plan provided only for
an appropriation to the National Textile Corporation to "help reconstruct
viable but sick mills.," Otherwise, the plan indicated only that existing
financial institutions could support the modernization needs of the
large-scale mills, suggesting that production goals could be achieved without
a significant. expansion of capacity.
Prospect
s
21. Government discrimination in favor of the small-scale cotton
textile sector is likely to succeed in expanding both production and
employment in that sects r, but at the expense of a continuing deterioration
of large-scale mills. Small-scale sector growth cannot possibly keep pace
with domestic demand for cotton cloth; shortages and rising: prices -
especially for higher quality fabrics - are inevitable unless production in
the large-scale sector accelerates.
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CONIPI1)ENTIA1,
22. A review of the Fourth Five-Year Plan currently underway
probably will not stimulate those policy changes essential for the large-scale
sector to grow. The profit squeeze could be eased in a vu qty of ways,
most dramatically by raising the price ceilings that are a part of the
"cheap-cloth" quota system. But instead New Dell;, has recently tightened
them. Wage controls are another way, but this does not appear politically
acct ptablc. Liberalization of the government's restrictions on imports could
free the foreign exchange needed for textile machinery to modernize the
antiquaicd mills, but with a protected market, mills would probably be
slow to respond. Some liberalization of the licensing requirements for
expansion would permit the more profitable large firms to meet rising
dcrnand, but the government is unlikely to do this,
23. Liberalizing policies toward the large-scale firms would necessarily
detract from government efforts to promote the small-scale sector. The
commitment to the latter involves the government's desire to expand
employment opportunities in both rural and urban areas quickly.
Furthermore, the existing restrictions on the large-scale mills are typical
of India's policies toward the private sector generally - to restrict the
growth of concentrations of wealth.
24. It is possible, but not likely, that the Indian government will opt
to resolve the dilemma by nationalizing the large-scale sector of the industry.
The National Textile Corporation, charged with taking over "failing and
mismanaged" Mills, could become the instrument of nationalization if mill
failures multiply under the cost-price squeeze. Nationalization, however,
would not constitute a panacea for the industry, as India's public sector
in general has been notoriously inefficient.
Conclusions
25. Postwar development of the Indian -~!xtilc industry reflects the
Indian government's simultaneous attempts to raise output, maximize
employment, minimize imports, prevent the growth of private economic
power, and reduce inequality in income distribution. These objectives were
partly conflicting and could not all be achi:ved. India was, successful in
greatly increasing textile employment. But in the 1960s, per capita textile
output and textile exports fell, and technology in the industry was stagnant.
26. The structure of India's cotton textile industry has changed
dramatically since the 1950s as a result of government policies favoring
small firms and restricting the growth of large firms. By 1970, small firms
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CON F1DENTIA1,
were producing about 459, of the nation's cotton cloth and accounted for
all of tlt^ increase in production since 1957. The large-scale sector has been
allowed only to expand its spindlcage capacity to provide yarn for small
firms.
27. While the small-scale sector has benefited from various subsidies
and a monopoly on the production of certain cloth varieties, the large-scale
sector has experienced a cost-price squeeze, culminating In numerous mill
closures during the late 1960s. The failure of cotton textile production
to grow during 1969.70 was a significant factor in the sluggish growth of
India's total industrial production during those years.
28. The continuing growth of the small-scale sector has probably
doubled employment In that sector. Ilowever, it has restricted the growth
and modernization of the textile industry as a whole, which, in turn, has
lost the country the benefits of faster industrial expansion, increased
exports, and those increased employment opportunities that would have
accrued to the economy from the multiplier effect of such an expansion.
The large-scale mills will remain in tiu; doldrums if the government follows
existing policies and implements the additional restrictions placed on the
industry early this year. Thus the growth of industry in the near term is
heavily dependent upon government policy, and the trend, so far, appears
to be toward more and tightening restrictions,
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