Will India’s new prime minister be able to implement badly needed economic reform in the world’s largest democracy? What if any impact will the election have on the global textile and apparel industry supply chain? And, will foreign brands finally be able to enter the Indian market and tap into the huge, growing demand by the country’s young and rapidly growing middle class?
These are just a few of the questions swirling around the results of last week’s historic election in India, where the Bharatiya Janata Party’s (BJP) pro-business candidate Narendra Modi defeated the left-leaning Congress Party led by the Nehru-Gandhi family in a landslide victory, giving Modi a clear mandate in the world’s largest democracy.
Although Modi’s challenge–to revive one of the world’s extraordinarily promising emerging economies–is a daunting one, citizens’ hopes are running high. In his past position as chief minister of the western state of Gujarat, the former tea seller managed to effect aggressive economic change by streamlining bureaucracy, making infrastructural improvements, and eliminating corruption.
But can he do it on a national scale? An estimated 2014 GDP growth of 5 percent is well below the much higher levels (8 percent – 9 percent) of a few years ago, and has weighed heavily on the Indian rupee, which plunged against the dollar for most of the past year.
Government regulations on private enterprise, limits on foreign direct investment in some industries, and tough labor laws have all discouraged large multinational companies from growing their presence in India, which has in turn stymied job growth in a country that has one foot reluctantly in its agrarian past, and the other in a more globally connected modern world.
Those rooting for reform are encouraged by the fact that Modi’s BJP won a majority in the lower house of parliament, which could make for a stable and supportive administration than those of his predecessors, which might make reforms easier to pass. And investors, anticipating a Modi win, poured billions into Indian bonds in the days before the election. The Indian Rupee hit an 11-month high on Friday as news of the election results reached currency markets.
The roughly $100 billion Indian textile and apparel industry, the country’s second largest after agriculture, has already received considerable support in recent years from the Indian government, support that is expected to accelerate should economic reforms take hold. According to the Indian Brand Equity Foundation (IBEF), the government plans to spend $9 billion on the industry in its current Five-Year Plan, more than double the amount of its previous budget, with a goal to double the industry’s total revenue to $200 billion by the end of the decade. The government’s Scheme for Integrated Textile Parks, or SITP, launched in 2005, has resulted in the construction of textile and apparel industrial parks throughout the country where companies like Welspun, Alok, Raymond and Arvind produce everything from apparel to home fashions to technical fabrics in quasi-vertically integrated environments.
Unlike in some industries in India, where foreign investment is limited, 100 percent foreign direct investment (FDI) is allowed in the textile and apparel sector. This has resulted in private investment totaling $35 billion coming into the sector in the past four years, helping to make India the world’s second largest producer of textiles and garments after China.
Though much of India’s apparel output is consumed domestically, exports have been growing at double-digit rates, helped somewhat by the weak rupee. Even with an expected stronger rupee, total textile and apparel exports are expected to grow from $14 billion in 2012 to $64 billion by 2017, according to IBEF.
Over the past several years India has become a less important supplier of U.S. apparel, losing share to Vietnam, Bangladesh and others. U.S. imports of apparel from India totaled $3.2 billion last year, or 4 percent of total apparel imports, according to the U.S. Department of Commerce Office of Textiles and Apparel (OTEXA), down from 4.5% five years ago. If trade with India becomes easier under a pro-business Modi regime, India’s share of U.S. apparel imports could grow significantly.
Another question surrounding the change in government involves its position vis-Ã -vis foreign retailers. Today, the Indian retail sector is largely comprised of millions of small independent “mom and pop” general stores, hand carts, kiosks and street vendors. Although organized retail is starting to develop in the country, there are dozens of regulations on the books that restrict growth of multi-brand retailers, dramatically limiting the ability of foreign retailers and brands to enter the Indian market. However, with its 1.3 billion population and rapidly growing, English-speaking middle class (250 million strong), it’s just too potentially lucrative an opportunity for big American retailers to walk away from. Walmart, eBay, Amazon and other companies, are working hard to get around some of these restrictions so they can do business in India.
Although limits to direct investment and business ownership by foreign retailers are not expected to be increased anytime soon–since doing so might seriously disrupt the retail status quo and rob millions of Indian merchants of their livelihood–the government might eventually have little choice but to become more welcoming to foreign brands. Many Indians, particularly younger ones, crave Western culture, entertainment, brands and products, and won’t be happy until they can get them.