BANGALORE, India — The Indian government, encouraged by the success of a seven-year program to modernize and upgrade the country’s vital textile sector, has extended it for another five years.
Under the program, called the Technology Upgrade Fund Scheme, which kicked off in April 1999, the central government offers an interest subsidy of 5 percent to textile companies when they take loans to upgrade specified machinery in their factories. The government has identified several financial institutions to give loans to these textile factories. The program also includes capital subsidy for buying state-of-the-art machinery.
“The TUFS has surely been successful,” said D.K. Nair, secretary general of the Confederation of Indian Textile Industry. “It is one of the most successful schemes of the government, as the benefit goes directly to the targeted group. The offtake of loans has increased in recent years.”
A. Sakthivel, president of the Tirupur Exporters’ Association, estimated that at least 500 factories in Tirupur, including his own, have taken TUFS loans. Tirupur is a major center for knitwear manufacturing and exports in south India.
The Indian government drafted the scheme to modernize the textile sector because it is the second largest provider of employment after agriculture. Textiles also contribute 14 percent to India’s industrial production and 17 percent to export earnings.
According to data published by the Office of the Textile Commissioner, about 11,200 applications for loans totaling 369.5 billion rupees, or about $9.2 billion at current exchange, were approved during the seven years ended March 2007. The program initially received lukewarm response, but picked up significantly once the abolition of global textile quotas in 2005 neared.
The Indian textile industry, which ranges from simple hand looms in the small business sector to large composite mills, has been characterized by technological obsolescence due to the protected quota market it enjoyed for many years. Every segment of the industry is now taking loans under TUFS. However, the spinning and composite mills have been the largest beneficiaries of the program, followed by processing, weaving, apparel, synthetic fibers and knits.
According to Crisil Ltd., a Standard and Poor’s company involved in rating and research, the well-developed spinning sector has been the biggest beneficiary. Figures show that the spinning sector has taken 33 percent of the loans, while the weaker processing and weaving sectors have received just 11 and 7 percent, respectively.
Crisil said investments in weaving and processing segments were grossly inadequate due to small unit sizes, poor capital productivity and profitability of units. Crisil believed that there was a need to not only correct the investment bias toward spinning, but also to channel larger flows into weaving and processing.
Nair explained that apparel manufacturing in India is labor-intensive, while spinning is the most capital-intensive and needs more funds. Many of the spinning mills are big companies listed on the stock exchanges. In the case of processing and weaving, more than 60 percent of the units are small businesses, and many of them may not even have bank accounts and would be unable to produce a balance sheet for taking loans.
Sakthivel said apparel factories have lower capital costs, and therefore it is understandable that total loans taken by them are much less than spinning and composite mills.
In an attempt to correct the bias, the government modified the program in December, lowering the interest subsidy to 4 percent for spinning machinery, while retaining the 5 percent subsidy for all other segments. It also extended 10 percent capital subsidy to apparel and technical textile segments. The TUFS program will enable an investment of 1.5 trillion rupees, or $37.12 billion, in the textile industry in the next five years, an official statement said.
In the national budget for fiscal 2009, the central government allocated 10.9 billion rupees, or $268.6 million, for TUFS. P.D. Patodia, chairman of the Confederation of Indian Textile Industry, said this was not enough and demanded it be increased.