S.P. Oswal, CMD, Vardhaman Spinning and General Mills: He is doubling fibre making capacity in anticipation

As far as India's retail galas go, there's nothing to beat KSA Technopak's annual summit. Hundreds of retailers, merchandisers, mall developers, and manufacturers descend on Delhi to schmooze, catch a bit of industry trends, but mostly look for deals to strike. And this year, the three-day razzle-dazzle outdid itself, at least on one count: About a billion dollars (Rs 4,600 crore) worth of sourcing contracts were sewn up. The dealmakers? Wal-Mart, which placed orders worth $500 million; compatriot J.C. Penny Company, which doled out contracts worth $300 million, and French retail giant Carrefour, which also tied up $100 million of supplies. What's common to the three deals? All of them were for sourcing textiles and garments from the country.

To be sure, textiles and garments have been one of India's biggest export items. In fact, last year, they raked in $14 billion (Rs 67,200 crore). But as the three deals indicate, a whole new chapter may be opening up in the industry's story. It's even possible to put a date to the event: January 1, 2005. Just the day before, the 10-year-old Agreement on Textile and Clothing (ATC) would have expired, marking the death of a quota regime that has decided how much of the stuff countries could sell to each other under the WTO norms. (Actually, the ATC was the WTO's attempt to correct an aberration called Multi-Fibre Agreement that allowed countries to negotiate quotas bilaterally-a system not in keeping with the WTO's principle of free trade.)

Is the death of quotas a big deal for a country like India? It is. The existence of quotas meant that low-cost countries like India, China, Pakistan and Indonesia could not increase their exports to highly lucrative markets such as the US and the EU. With quotas gone, buyers in those markets are not bound to buy from countries that are not competitive suppliers of textiles and garments. They will be free to buy more-like the three retailers did at the summit mid-February-from others, say, China and India. Agrees Sanjay Lalbhai, Managing Director, Arvind Mills, which already supplies to big brands like Tommy Hilfiger, Klopman and Phillips-Van Heusen: "The opportunities will be immense when the global markets open up."

Industry consultants KSA Technopak even have numbers for the expected opportunities. Textile exports, they say, could jump from $14 billion to as much as $50 billion by 2010. In terms of world share, that could mean a rise of about 2 percentage points to 5.6 per cent. Exports of garments and made-ups (bed sheets and towels), which account for more than half of the current exports, are also expected to soar to $20 billion. Says Dinesh Hinduja, Executive Director, Gokaldas Exports, India's single-largest exporter of apparel: "When the quotas go, a lot of production from countries like Sri Lanka and Bangladesh could move to India."

Not just our neighbours, but Mexico, Caribbean and central American countries too could lose out to India and China. Here's why: the two most populous countries not only produce their own cotton, but make everything in between, including yarns, fabrics, and garments. In contrast, their competitors-be it Vietnam or Bangladesh-import raw materials and use their cheap labour to produce finished garments. Once manufacturers elsewhere ramp up production, cost of raw materials will go up for these countries. Says O.P. Lohia, Managing Director, Indo Rama Synthetics: "Most of the least developed countries have frittered away their 10-year advantage by not building up enough manufacturing base."

In the new free regime, contends S.P. Oswal, Chairman and Managing Director, Vardhaman Spinning and General Mills, buyers are likely to prefer suppliers who are present in all parts of the textile chain-from yarn to finished products. "You have to be a one-stop shop to interest buyers," says Oswal. Such players are present mainly in India and China. Already some of the orders are coming back to India. For instance, Hinduja's Gokaldas Exports used to manufacture around 9 lakh shirts a month as recently as three years ago. But because of the quotas, the number was cut back to around 2 lakh a month. Now, however, the exporter is gearing up to crank up the production.

''In the aftermath of SARS and bird flu, buyers will be derisking their business by placing a lot of orders in India'' Gautam Singhania, MD, Raymond

In fact, so are the others. Raymond Ltd, for instance, is planning a Rs 200-crore expansion that will up denim production at its Yavatmal facility in Maharashtra from 20 million metres per annum (MMPA) to 30 MMPA, set up a new suit and formal trousers facility in Bangalore, besides adding a denim wear line in the same location. Says Gautam Singhania, Managing Director, Raymond: "We are moving up the value chain to offer an integrated service to our customers-from fabric to design to apparel."

Indo Rama is pumping in a whopping Rs 900 crore to double polyester fibre capacity to 6 lakh tonnes per annum at its Botiburi (Maharashtra) plant. Lohia's calculation: Since cotton production has remained more or less constant and the production of viscose is dogged by environmental concerns, polyester will likely drive the export boom. Oswal's Vardhaman is doubling fibre making capacity to 50 million metres per annum and adding spindles at a cost of Rs 260 crore. Similarly, Arvind Mills, which was slammed by a slump in the world denim market, will begin commercial production at a brand new shirt factory in the Garden City, doubling output to 4.8 million garments per annum. Its denim jeans unit in Mauritius started in 2003 with a capacity of about a million garments, but is already thinking of doubling that number.

Survival of the Fittest

While it's clear that India will be one of the big beneficiaries of the quota-free regime, it's equally clear that not all Indian exporters will benefit. Take GAP, for example. Until three years ago, it used to buy from about 300 suppliers in the country. Today, that number has shrunk to 80. This is a trend (which actually bears out what the others have been saying) that will accelerate in the days to come. Therefore, to retain buyers like GAP, suppliers will have to scale up not just their capacities but skill levels. Says Hinduja of Gokaldas: "I see the death of single-factory units and merchant exporters, unless they find some niche."

That apart, China may spoil India's party. For example, in 22 categories where quotas were dismantled in 2002, China has gone on to capture a staggering 80 per cent of the world market. Indian exporters, on the other hand, have not been able to make much of an impact. For China, the argument goes, it may take less to swamp the newly opened markets, considering that at $60 billion, its exports are approximately four times that of India. Besides, there are only a handful of vertically-integrated players in India, and therefore the benefits may be limited. Says Darshan Mehta, CEO, Anagram Stockbroking: "In the post-quota world, it will not be a country play but a company play."

''When the quotas go, a lot of the production that is happening in countries like Sri Lanka and Bangladesh could end up moving to India'' Dinesh Hinduja, Executive Director, Gokaldas Exports

Then, there's the hot button of jobs that some countries, mainly the US and those in the European Union, will likely hit. According to a study done by the American Textile Manufacturers Institute, Washington, D.C., more than 6.3 lakh textile jobs could be lost in the US and 1,300 plants could shutter over the next three years due to the shift of manufacture to countries like China and India. If that becomes a political issue, like it has in the case of outsourcing of it-enabled services, non-quantitative barriers such as minimum wage, working conditions, and child labour etc. may be erected against imports into the US.

Yet, there may be a silver-lining-a couple, actually. For one, China will continue to attract selective quota restrictions till 2008 because of its late entry into the WTO. Even if China continues to offer a compelling case, suppliers may want to develop India as an alternate source, not just to weaken China's leverage, but also to ensure flexibility. Says Raymond's Singhania: "After realising their folly of putting all their goods in one basket in the aftermath of SARS and the bird flu, buyers will be derisking their business by placing a lot of the orders in India." Also, private companies will continue to go to countries where they get the best deal, politically correct or not.

If infrastructure improves and transaction costs come down further, India may get on to an even stronger footing. Then, billion dollar deals will pretty much be par for the course.

-additional reporting by Venkatesha Babu