Understanding the India-UK Free Trade Agreement's Impact on Textiles

Understanding the India-UK Free Trade Agreement

The India-UK Free Trade Agreement (FTA) offers significant opportunities for the Indian textile and apparel (T&A) sector. By eliminating import duties on Indian T&A products entering the UK, which previously ranged from 11% to 12%, the FTA levels the playing field with competitors such as Bangladesh and Vietnam, who already enjoy duty-free access. This agreement is part of India's broader ambition to achieve a $120 billion trade target with the UK by 2030 and serves as a blueprint for future agreements with other major economies, including the EU and the US.

Significance of the UK Market

The UK market is crucial for Indian T&A exports, importing approximately $26.9 billion worth of T&A products annually, with apparel alone accounting for $19.6 billion. Currently, China and Bangladesh dominate this sector, holding 25% and 20% market shares, respectively, while India’s share stands at just 6% ($1.19 billion). The FTA not only eliminates cost disadvantages for Indian exporters but also opens avenues in fashion wear, uniforms, home textiles, and high-quality cotton garments.

Structural Bottlenecks in India's T&A Sector

• Fragmented Manufacturing: The T&A sector in India is marked by small and medium enterprises (MSMEs) operating independently. For example, a weaving unit in Gujarat often lacks integration with a stitching unit in Bengaluru, affecting speed and consistency.
• Geographical Dispersion: The production process is fragmented; cotton is grown in Gujarat and Maharashtra, yarn is spun in Tamil Nadu, dyeing occurs in Rajasthan, and garments are stitched in locations like Noida or Bengaluru. This separation leads to increased logistics costs and delays—India's lead time is 63 days compared to Bangladesh's 50 days.
• Inverted Duty Structure: The higher taxation of inputs compared to finished goods, such as the 18% GST on man-made fibres (e.g., polyester) versus 5% on finished garments, penalizes domestic manufacturers and makes imported garments cheaper.

Comparative Analysis with Competitors

• Faster Delivery: Integrated manufacturing clusters in Bangladesh enable quicker fulfillment of orders. Vietnam benefits from superior port infrastructure and efficient customs processes.
• Favourable Trade Terms: Both Bangladesh and Vietnam have existing FTAs that allow zero-duty exports to large markets like the UK and EU.
• Policy Support: Bangladesh offers cash incentives and simplified compliance, while Vietnam enjoys lower costs for MMF imports, making its synthetic garments competitive globally.
• Labour Costs and Scale: Bangladeshi factories are larger and focused on exports, benefiting from lower wages, while Indian production often remains smaller and less organized.

Reforms Needed to Maximize FTA Benefits

• Correcting the Inverted Duty Structure: Reducing GST on inputs like MMF yarn to be equal to or lower than finished garments will encourage value addition and reduce import reliance.
• Infrastructure Improvements: Accelerate the development of PM MITRA parks to create integrated T&A ecosystems with shared facilities.
• Export Facilitation: Implement single-window clearances and digitized documentation to streamline the export process and improve efficiency.
• Investing in Technology and Design: Promote research and development in performance fabrics and design innovation, aligning with environmental, social, and governance (ESG) standards.

Long-term Strategies for Competitiveness

To reposition its textile industry for global competitiveness, India must focus on:

• Technical Textiles: Expanding usage in sectors such as defence, agriculture, and healthcare.
• Sustainable Products: Developing eco-friendly dyes and biodegradable packaging.
• Fashion Integration: Establishing design studios and collaborating with global brands to adapt to evolving consumer preferences.

Focus on MMF-based Products

India is increasingly targeting MMF-based products as a growth area. Despite rising global demand for activewear and uniforms, high duties on MMF inputs inflate production costs. It is crucial to rectify the inverted GST structure and enhance domestic fibre availability. For example, lowering the GST on MMF from 18% to 12% would align tax rates and improve margins for exporters.

The Role of EU and US Post-FTA

The EU and US represent the two largest global apparel markets, with the EU importing over $193.6 billion in garments. India's current market share is low due to a lack of duty-free access. Following the model of the UK FTA, India must advocate for preferential trade agreements with both regions to enable T&A firms to compete effectively against suppliers from Bangladesh, Vietnam, and Cambodia, who already have tariff advantages.

Frequently Asked Questions (FAQs)

Q1. What is the benefit of the India-UK FTA for textiles?
Answer: The India-UK FTA eliminates import duties on textiles, allowing Indian exporters to compete effectively with countries like Bangladesh and Vietnam, thus aiming for a significant increase in trade to $120 billion by 2030.

Q2. How does the UK market impact Indian T&A exports?
Answer: The UK is a major importer of textiles, particularly apparel, providing an opportunity for India to increase its market share from the current 6% by enhancing access to a $26.9 billion market.

Q3. What are the key challenges faced by the Indian textile sector?
Answer: Challenges include fragmented manufacturing, geographical dispersion of production, and an inverted