Mittal School of Business

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ANNEXURE:1

Course Code: ECOM525 Course Title: MANAGERIAL ECONOMICS

Course Instructor: DR. AASIF ALI BHAT Section: Q2245

Academic Task No. 1 Academic Task Title: Indian Textile Industry

Student’s Roll No. A04 Student’s Reg. No. 12206829

Max. Marks: 30 Marks Obtained:

Evaluation Parameters: As per rubrics

Learning Outcome: Briefly write about the learning outcome obtained from doing this
task.

Declaration:

I declare that this CA is my individual work. I have not copied it from any other students’ work
or from any other source except where due acknowledgement is made explicitly in the text, nor
has any part been written for me by any other person.

Student’ Signature:

Evaluator’s Comments (For Instructor’s use only)

General Observations Suggestions for Best part of the

Improvement Assignment

Evaluator’s Signature and Date:

Peer Rating:

Group Reg. Number Section Class Name of Student PEER

No. for Roll Rating
Assignm No.
ent
A 12206742 Q2245 A01 Samar Sharma 10

A 1227233 Q2245 A02 Sajal Chhabra 10

A 12206825 Q2245 A03 Mayank Yadav 10

A 12206829 Q2248 A04 Damanpreetsingh 10

Indian Textile Industry: Productivity trends and Determinants

Introduction
Textile industry stands out with an exceptional importance in the worldwide economy as textile and
clothing are amongst the foremost manufactured products. For developing countries textile industry
has become an appropriate preference towards the path to industrialization. The textile industry
has played a significant part in the in the initial hours of industrialization phases in Japan, Britain,
North America and East Asian economies, including Hong Kong, the Republic of Korea and
Taiwan which depended a great deal on textile & clothing exports from 1950 till 1980. The
emerging economies like India, Bangladesh, Sri Lanka and Pakistan have come forward as major
textile exporters in the past years. The textile industry of India comprises of business occupied in
spinning natural & man-made fibers into yarns and threads which are then changed into fabrics.
Finally, the process of dyeing and finishing takes place. Indian textile industry is a significant
contributor towards the economic development of the nation. The textile industry contributes to 14
per cent of industrial production, 4 per cent of GDP, 13 per cent in total export basket, 27 per cent
to the foreign exchange and 5 per cent in world textile exports. It also makes available
employment to over 45 million people. Textile industry is a very varied industry, with its products
being used by almost everyone. Availability of abundant raw material and lower cost skilled human
resources not only provides competitive advantage but also helps out the industry to be in
command of costs and also minimises the lead-time. India is one of the largest producers of cotton
in the world and is also rich in resources of fibers like polyester, silk, viscose etc. Textile industry
of India comprises of several competitive commodities like textile yarn and thread. Such
commodities are most potential commodities and can accelerate the pace of exports (Sharma &
Dhiman, 2014). Textile industry is also called as “Traditional Industry” and is also regarded as
leg of economy of the industry. It occupies an important place in the economy as it has
significant contribution towards industrial production, employment and exports (Dhiman &
Sharma, 2016). The industry is labour-intensive and it provides employment to those with simple
skills, including women. The countries such as Vietnam, Sri Lanka, Bangladesh, and Mauritius,
have high output growth in this sector (Chakrabarty, 2014).

The presence of certain determinants effect the performance of exports. Labour cost is one of
the major variables influencing the competitiveness of industry. Theoretically lower labour
cost increases the export competitiveness. Labour costs impact textile export performance in
various ways among developing countries in Asia. Theoretically more the labour costs,
poorer the performance of export (Wang, 2013). Labour cost also impacts the demand of
Indian products across the borders. In 2002, the average cost of labour in clothing industry in
India was the lowest i.e $ 0.38 per hour as compared to China ($ 0.68 per hour), Sri Lanka ($
0.48 per hour) and Bangladesh ($ 0.39 per hour) (USITC, 2004). The other variables
including GDP, REER, per capita GDP and population growth rate of the importers have
major influence. The devaluation of Indian Rupee would improve exports as the buyers
would enjoy cheaper textile products (Sharma and Dhiman, 2015). Apart from this variable
productivity is another vital driving factor in enhancing the competitiveness of any industry.
Several researchers have indicated the lower productivities in Indian textile industry. Lower
productivity of Indian firms has curtailed the advantages of low wages (Uchikawa, 1999).
Similar finding were reported by (Bheda, 2002; Joshi & Singh, 2010).and confirms that
productivity level of Indian firms is significantly lower than the productivity in the western
countries. This lower productivity can be enhanced by improving technical efficiency. Some
researchers have also focussed on the causes of lower productivity of Indian garment firms.
Some of the causes highlighted are poor technology, less number of machine per firm, less
investment per machine, and poor infrastructure (Joshi et. al., 2005; Rangrajan, 2005). Issues
related to labour productivity also need to be addressed in order to ensure competitiveness of
exports. Labour productivity can be enhanced by automation as it will reduce the labour
requirement and will also enhance the overall quality of the product.
Very few studies in India are undertaken by the researchers on examining the productivity
levels of textile industry. Previous studies have focussed on diverse problems like productivity
trends in cotton industry (Chadrasekharan and Sridharan, 1993), firm size, nature of ownership,
and technical efficiency (Kumar and Pillai, 1996), productivity level in textile production
(Bheda, 2002), and productivity and cost in Indian textile industry (Hashim, 2005). However
a few studies have been found highlighting the growth and productivity trends of entire textile
industry at both aggregate and disaggregate levels. Hence the present study is a footstep in this
direction and attempts to examine the growth behaviour of textile and textile products and
productivity trends in terms of labour and capital.

Objectives
1. To examine the growth performance of Indian textile industry at aggregate and
disaggregate level.
2. To examine the labour and capital productivity trends of textile industry.
3. To analyze the impact of select determinants on export competitiveness of
Indian textile industry.

Research Methodology
The present study uses the time series secondary data gathered from a variety of government
published sources. The major data sources for various aspects of textile industry and its
groups is collected from Annual Survey of Industries (various issues), Directorate General of
Commercial Intelligence and Statistics (DGCI&S), Kolkata; Economic Survey (various
issues), UN Comtrade database, Office of Economic Advisor and Reserve Bank of India. The
present study takes in to account the period of 24 years (1991-92 to 2014-15) for examining
the growth and productivity trends of textile industry. E Views 8 has been used for analysis
purpose.
Techniques of Analysis
Compounded Annual Growth Rates (CAGR): CAGR indexes is calculated using
exponential function for three periods 1991-92 to 2014-15; two sub-periods i.e. 1991-92 to
2002-03 and from 2003-04 to 2014-
15.
Yi = a(bi)t
Log Yi = log a + t log (bi)
Where,
Yi = export value/volume/unit price of ith item,
t = time variable
The Annual Growth rate (r) can hence be calculated using the formula,
r = [anti log (log bi) - 1] ¥ 100
or
= (b - 1) ¥ 100
where, b = Slope of semi-logarithmetic trend
Augmented Dickey Fuller (ADF) Tests for Stationarity: The most important prerequisite to
proceed for time series analysis is to check whether the data is stationary or not. In the present
study stationarity is tested using ADF tests.
Regression Analysis: In order to access the effects of select variables on export competitiveness
regression analysis has been carried out using e views 8. The equation for multiple (step-wise)
regression analysis can be written as follows:
Y = a + b1LP + b2CP + b3ULC + b4ER + b5REER
Here, Y is the dependent variable, i.e. the share of textile exports to output and a is the intercept
which gives the autonomous change in Y (the dependent variable). The regression coefficients like
b1, b2, b3, b4 and b5 provides the measure of change in Y for a unit change in the corresponding
independent variable,
i.e. LP, CP, ULC, ER and REER respectively.
The fit of the regression model is also checked by using Breusch-Godfrey Serial Correlation LM Test;
Breusch- Pagan-Godfrey Heteroskedasticity Test and Jarque-Bera test to check the normal distribution
among residuals.
Variable Selection: The growth of Indian textile industry and its groups ‘Textile’ and ‘Textile
Products’ has been examined in terms of various aspects like number of factories, gross value
added, number of employees and capital stock for the whole period i.e. 1991-92 to 2014-15; two
sub-periods i.e. 1991-92 to 2002-03 and from 2003-04 to 2014-15.Following variables are
considered for the analysis.
Output: Output has been measured in terms of real gross value added, i.e. gross value added at
1993-94 prices. GVA measures the values of goods and services produced in an industry of the
economy.
Labour: Labour input was measured in terms of number of persons employed.
Capital input: Capital input was measured by subtracting depreciation from gross fixed capital and
deflating the resultant value by wholesale price index for industrial machinery for textiles.
Export Competitiveness: There are various indicators for measuring export competitiveness.
The first indicator is ratio of India’s textile exports to world’s textile exports indicates how
much Indian textile industry is contributing to world textiles needs. This ratio is very small in value
i.e. about three percent. The share of the industry of a country in world exports of that industry may
depend upon developments at the global level, like rise/fall in production elsewhere, in other major
exporting countries, hence the indicator

may not reflect true competitiveness. Moreover, the ratio being very small in magnitude may
not capture the effect of determinants adequately.
The second indicator is the ratio of India’s textile exports to its total exports may also not
able to reflect the correct competitiveness index as the total exports includes the exports of
other commodities also and hence the relative increase or decrease in exports of other
commodities will influence the share of textile exports in total exports.
The third indicator, i.e. the ratio of India’s textile exports to its total output is a relatively
better indicator as it reflects the capacity of the country to export textiles out of our domestic
production. This ratio can be increased either by producing more or by reducing our domestic
consumption of textiles or by following suitable polices. Because of these features of this
indicator, it has been used as an indicator of competitiveness to study the determinants of
competitiveness of Indian textile industry and its groups- ‘Textiles’ and ‘Textile Products.
Labour Productivity: LP was measured as ratio of gross value added (V) to the number of
persons employed (L).
Capital Productivity: CP has been measured as ratio of gross value added (V) to capital stock
(K) and represents amount of output produced per unit of capital
Unit Labour Cost: Unit labour cost was measured as the quotient of labour cost per
employee to value added per employee. Labour cost was taken as the sum of wages and
salaries, employer’s contribution as provident fund and other funds and staff welfare
expenses.
Theoretically, Increase in labour and capital productivity is expected to increase the export
competitiveness of a country. A larger or stronger REER indicates that the home country is
less competitive, while less or weak REER indicates that the home country is more
competitive. So, depreciation of REER indicates an increase in competitiveness, while
appreciation of REER indicates loss of competitiveness. Nominal exchange rate appreciation
is harmful to export competitiveness; therefore, depreciation of exchange rate is expected to
increase competitiveness of exports. In case of Unit Labor Cost (ULC), competitiveness of
exports is expected to increase with decrease in ULC and vice-versa.

Growth Performance of Indian Textile Industry

The growth performance of the India textile industry and its two groups ‘Textile’ and ‘Textile
Products’ has been examined by growth in number of factories, gross value added, number of
employees and capital stock from 1991-92 to 2014-15 (see Figure 1, 2 and 3).
Number of Factories: The number of factories in 1991-92 and 2002-03 was 14612 and
16071 respectively. The compounded annual growth rate for this period was -0.28 percent.
However with the impact of economic reforms the number of factories grew to 28599 in
2014-15. CAGR of 6.36 per cent was reported for sub-period 2003-04 to 2014-15. For the
whole period i.e. 1991-92 to 2014-15 CAGR amounted to 2.11 percent for number of
factories.
Gross Value added: Gross value added (V) was 8425 crores in 1991-92 and reached 20538
crores in 2002- 03 with CAGR of 7.81 percent. The GVA kept increasing and grew at 13.65
percent and 10.87 percent for the periods 2003-04 to 2014-15 and 1991-92 to 2014-15
respectively.
Number of Employees: A stable trend was found in the growth of number of employees. In
1991-92 the numbers of employees were 1442000 and reached to 1801000 till 1997-98,
thereafter slight decline has been observed till 2004-05 with 1714000 employees. CAGR was
0.04 percent for 1991-92 to 2002-03 and improved to 2.23 percent for the sub period 2003-04
to 2014-15. CAGR of 1.74 percent has been observed for the entire period i.e. 1991-92 to
2014-15.
Capital Stock: Capital stock has observed fluctuations and declined from 29603 crores in
1999-00 to 22732 crores in 2005-06. Thereafter significant increase has been observed till
2014-15 and CAGR was
11.48 percent for the period 2003-04 to 2014-15 and 6.47 percent for the entire period.

Growth Performance of Indian ‘Textile’ Group

Number of Factories: The number of factories in 1991-92 and 2002-03 was 10840 and
12764 respectively. The compounded annual growth rate for this period was 0.14 percent.
However the number of factories grew to 18743 in 2014-15. CAGR of 3.97per cent was
reported for sub-period 2003-04 to 2014-15. For the whole period i.e. 1991-92 to 2014-15
CAGR amounted to 1.92 percent for number of factories.
Gross Value added: Gross value added (V) was 6970 crores in 1991-92 and reached 16620
crores in 2002- 03 with CAGR of 7.77 percent. The GVA kept increasing and grew at 12.16
percent and 10.40 percent for the periods 2003-04 to 2014-15 and 1991-92 to 2014-15
respectively.
Number of Employees: A stable trend was found in the growth of number of employees. In
1991-92 the numbers of employees were 1264000 and reached to 1431000 till 1997-98,
thereafter slight decline has been observed till 2005-06 with 1337000 employees. CAGR was
-1.06 percent for 1991-92 to 2002-03
and improved to 1.19 percent for the sub period 2003-04 to 2014-15. CAGR of 0.66 percent
has been observed for the entire period i.e. 1991-92 to 2014-15.
Capital Stock: Capital stock has observed fluctuations again and declined from 23115 crores
in 1997-98 to 17850 crores in 2005-06. Thereafter significant increase has been observed till
2014-15 and CAGR was
12.27 percent for the period 2003-04 to 2014-15 and 6.23 percent for the entire period.

Growth Performance of Indian ‘Textile Products’ Group

Number of Factories: The number of factories declined in 1991-92 from 3772 crores to 3307
crores in 2002-03. The compounded annual growth rate for this period was -2.02 percent.
However the number of factories grew to 9856 in 2014-15. CAGR of 13.27 per cent was
reported for sub-period 2003-04 to 2014-15. For the whole period i.e. 1991-92 to 2014-15
CAGR amounted to 2.54 percent for number of factories.
Gross Value added: Gross value added (V) was 1455 crores in 1991-92 and reached 3918
crores in 2002- 03 with CAGR of 7.84 percent. The GVA kept increasing and grew at 18.63
percent and 12.41 percent for the periods 2003-04 to 2014-15 and 1991-92 to 2014-15
respectively.
Number of Employees: A stable trend was found in the growth of number of employees. In
1991-92 the numbers of employees were 178000 and reached to 440000 till 1999-00,
thereafter slight decline has been observed till 2003-04 with 379000 employees. CAGR was -
5.18 percent for 1991-92 to 2002-03 and 4.9 percent for the sub period 2003-04 to 2014-15.
CAGR of 5.41 percent has been observed for the entire period i.e. 1991-92 to 2014-15.
Capital Stock: Capital stock has observed fluctuations again and declined from 4228 crores
in 2000-01 to 2782 crores in 2007-08. Thereafter significant increase has been observed till
2014-15 and CAGR was
7.57 percent for the period 2003-04 to 2014-15 and 8.19 percent for the entire period.

Productivity Trends and Determinants of Indian Textile Industry

Labour and Capital Productivity trends in Indian textile industry and its 02 groups ‘textile’
and ‘textile products’ are examined from 1991-92 to 2014-15. Exchange Rate and REER are
same for textile and textile products.
Labour Productivity: Labour productivity of industry has witnessed an increasing trend from
`58426 in 1991-92 to `73893 in 1994-95. Thereafter it declined to `58565 in 1995-96. After
this period significant increase has been observed and labour productivity increased to
`372542 in 2014-15. The use of technology can be attributed for this increase in the
productivity.
Capital Productivity: Capital productivity represents the amount of output produced per unit
of capital. From 1991-92 to 1999-00 slight fluctuation are observed but thereafter capital
productivity has increased from `0.75 to `1.65 in 2014-15.
Export Competitiveness: The ratio of exports of Indian textile industry to its output increased
from 33.83 percent in 1991-92 to 53.33 percent in 2014-15 (with fluctuations in between).
Unit Labour Cost: Unit Labour Cost (ULC) increased from `0.37 lakh in 1991-92 to `0.45
lakh in 1999-00. There after declining trend has been observed which is a god indicator for
export competitiveness and reached to 0.32 lakh in 2014-15.
Exchange Rate and Real Effective Exchange Rate: Exchange rate of rupee in terms of
dollars increased from `24.47 in 1991-92 to `61.14 in 2014-15, indicating depreciation of
Indian rupee. Real Effective Exchange Rate (REER) has shown fluctuations. REER was
103.84 in 1991-92 and reached to 94.52 in 1998-99. Thereafter fluctuations are observed and
reached 111.2 in 2014-15.

Productivity Trends of Indian ‘Textile’ Group

Labour Productivity: Labour productivity of industry has witnessed an increasing trend from
`55142 in 1991-92 to `69677 in 1994-95. Thereafter it declined to `53764 in 1995-96. After
this period significant increase has been observed and labour productivity increased to
`386979 in 2014-15.
Capital Productivity: From 1991-92 to 2001-02 slight fluctuation are observed but thereafter
capital productivity has increased from `1.05 in 2002-03 to `1.35 in 2014-15.
Unit Labour Cost: Unit Labour Cost (ULC) increased from `0.41 lakh in 1991-92 to `0.55
lakh in 1999-00. Theerafter declining trend has been observed which is a god indicator for
export competitiveness and reached to 0.29 lakh in 2014-15.

Productivity Trends of Indian ‘Textile Product’ Group

Labour Productivity: Labour productivity of industry has witnessed an increasing trend from
`81742 in 1991-92 to `90966 in 1994-95. Thereafter it declined to `83750 in 1998-99. After
this period significant increase has been observed and labour productivity increased to
`341505 in 2014-15.
Capital Productivity: From 1991-92 to 2005-06 slight fluctuation are observed in textile
products but thereafter capital productivity has increased from `2.86 in 2006-07 to `3.55 in
2014-15.
Unit Labour Cost: Unit Labour Cost (ULC) increased from `0.17 lakh in 1991-92 to `0.40
lakh in 2014-15.

Augmented Dickey Fuller (ADF) Tests for Stationarity

In the present study stationarity of the series is tested using ADF tests. ADF test is applied for
‘textile industry - Model 1’; ‘textile’ group - Model 2 and ‘textile products’ group- Model 3.
The series for three models is stationary at first difference. The results of ADF tests are given
in Table 1.
Null Hypotheses: Ho: Series has unit root.
Since the corresponding p-values for all the three models i.e. Textile industry, textile group
and textile products group is less than 5%. Hence the null hypothesis is rejected and can be
concluded that all determinants are stationary at first difference for three models.

IMPACT OF DETERMINANTS ON EXPORT COMPETITIVENESS OF TEXTILE

INDUSTRY

Regression Analysis
This section of the paper analyses the impact of select determinants on the export
competitiveness of textile industry and its 02 groups i.e. ‘textile’ and ‘textile products’. The
results of regression analysis for three models have been calculated by taking Export
Competitiveness (EC) as DV and other variables as independent variables. The values of R
Square and Adjusted R Square in all the three models are high which indicates the percentage
variations in dependent variables are due to other independent variables. The p-values are
also found to be statistically significant at 5 per cent.

Tests for Goodness of Fit

The fit of the regression model is also checked by using Breusch-Godfrey Serial Correlation
LM Test; Breusch-Pagan-Godfrey Heteroskedasticity Test and Jarque-Bera test to check the
normal distribution among residuals. The results of these tests for the three models are given
in Table 3.
Null hypothesis formulated to perform the tests are mentioned below:

Since the p-values in all the three models are less than 5 percent so null hypothesis is
accepted in all the above three cases. Since all the three conditions in the regression models
i.e. high R square value, no serial correlation, no heteroskedasticity and normal distribution
among the residuals are satisfied. Hence we can conclude the regression model to be a good
fit.
CONCLUSION
From the above analysis it can be concluded that growth rate of factories, number of
employees and capital stock was negative in Indian textile industry and ‘Textiles’ group
while factories and employees in ‘Textile Products’ group showed a positive growth rate. The
positive growth rate of employees in ‘Textile Products’ group indicated its more employment
generating potential or more labour-intensive nature of this group as compared to ‘Textile’
group. Gross value added (GVA) grew at slower pace in Indian textile industry and its two
groups. The comparison of textile and textile products showed that growth rate of GVA in
‘Textile Products’ group is more than ‘Textiles’ group indicating better performance of
‘Textile products’ group. Also capital productivity in ‘Textiles’ group grew at a faster pace,
while the growth rate of capital productivity in ‘Textile Products’ group was negative. On the
whole, the capital productivity in Indian textile industry increased. Sharp decline in the
growth rate of labour productivity and capital productivity in ‘Textile Products’ group is
observed which appeared to be a big concern, given the fact that the global market is getting
more competitive and it requires to be more productive and capital intensive.
Export competitiveness is influenced significantly with the introduction of Labour
productivity (LP), Capital Productivity (CP), Unit Labour Cost (ULC), Exchange Rate (ER)
and Real Effective Exchange Rate (REER). Adjusted R squared change in all the three
models i.e. textile industry, ‘textile’ group and ‘textile products’ group is high indicating the
influence of IDVs on DV. The regression model is also found to be fit as all the conditions of
good regression model are satisfied.
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