In today's Finshots, we see why Indian textile stocks are rallying as Bangladesh continues to grapple with a political crisis.

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Now, on to today's story.

The Story

Bangladesh is in a state of lawlessness.

Last week, violent anti-government protests rocked Dhaka, Bangladesh’s capital. In the midst of the turmoil, the Prime Minister stepped down and sought refuge in India. Meanwhile, the army is seeking to form a temporary government.

Unsurprisingly, the country’s economy is also bearing the brunt of the political instability. Many businesses have temporarily shut shop due to fears of vandalism.

And as these tragic events unfold in our eastern neighbour, Indian textile stocks have rallied and shown significant gains, ranging from 11% to 20%.

Surprised, right?

Well, the current rally is fueled by the promising news that India’s garments sector is riding the wave of Bangladesh’s ongoing clashes. But why would Bangladesh’s misfortune be a boon for India?

Well, that’s a bit of a long story.

So let’s take it from the top.

Bangladesh gained independence after a nine-month-long war with the state of Pakistan in 1971. Since then, the country has faced it all, from struggling with a primarily agrarian economy to battling continued political instability and relentless floods year after year.

Yet, despite these obstacles, it has grown, halving poverty and significantly boosting its gross domestic product (GDP). In 1972, its GDP was a mere $6.2 billion. Currently, it is nearing the half-trillion-dollar mark, with per capita income topping $2,500, surpassing even India.

And this massive transformation has been primarily driven by the ready-made garment (RMG) sector.

In the 1970s international companies like South Korea’s Daewoo saw potential in Bangladesh’s low labour costs. Daewoo set up a joint venture with local firm Desh Garments, bringing skilled supervisors and setting up a foundation for the industry.

By the 1980s, Bangladesh had started to develop a vibrant garment sector. Foreign investment played a key role, and as global quotas on garment exports were lifted in 2005, Bangladesh seized the opportunity. For starters, the World Bank had established global quotas to protect the textile industries in developed nations from being overwhelmed by cheaper imports from developing countries.

And when the quotas went away, Bangladesh made massive inroads.

The momentum only carried on in the 2010s, as China’s share of the garment market shrank due to rising labour costs. To put things in perspective, in 2014, China held a dominant 38% of the global garment market, but by 2023, this had dropped to around 30%.

Meanwhile, Bangladesh’s garment exports skyrocketed from $25 billion in 2014 to over $38 billion in 2023. While China’s exports still amounted to a hefty $160 billion, Bangladesh’s rapid growth highlights its successful capture of the shifting market.

And the last two decades have been particularly game-changing for Bangladesh, which has now positioned itself as the world’s third-largest RMG exporter after China and the EU.

Also, the country’s success isn’t just due to favourable trade deals; it’s also a result of improved safety and labour standards and a strong partnership between the garment industry and the government. Today, Bangladesh boasts over 4000 garment factories, employing over 4.4 million people, mostly women.

Now, when we look at India’s stats, its textile exports languished at $14.5 billion, which is in stark contrast to the figures from China and Bangladesh. This dip isn’t an anomaly but part of a troubling trend fueled by several critical issues.

And we are not saying this. A recent Global Trade Research Initiative (GTRI) report highlights this fact very succinctly.

India’s textile industry has missed a significant opportunity by under-representing synthetic apparel, which now dominates global markets. With less than 40% of exports in this category, India has failed to tap into a massive segment of global demand.

Moreover, India’s small, outdated weaving units struggle with high production costs and inferior quality, which again puts them far behind international competitors like China.

Further, only a handful of factories in India meet the fast fashion standards required by major retailers. This gap limits India’s access to global markets and weakens its competitive position.

To top it all off, rigid labour laws and weak contract enforcement worsen the situation. These regulatory hurdles stifle growth and adaptability, making it challenging for India to compete internationally.

With this introduction, we can finally get back to the main story. How does India gain in all this?

Amid the current prevailing tumultuous backdrop, Bangladesh’s garment manufacturing body called for a complete halt to the operations of all garment facilities in the country.

This could turn the tide for India. Foreign companies and major international brands currently reliant on Bangladesh for their sourcing needs may want to diversify if they encounter delays and reduced product availability.

And industry experts seem to think that if 10 to 11% of Bangladesh’s exports are diverted to Indian garment manufacturing hubs like Tiruppur, India could add additional business of $300–400 million per month.

However, there is one big question here: Will it last?

To answer this, let’s look at what happened when Sri Lanka was reeling from the most difficult economic crisis after COVID-19. The country was facing an acute foreign exchange crisis, which affected its capacity to even import food and fuel. Amidst this backdrop, Sri Lankan apparel exports also hit rock bottom.

Back then, foreign companies had turned to Indian garment manufacturers, particularly the textile hub in Tiruppur, Tamil Nadu. And consequently, Indian apparel makers’ revenues grew by 16–18% during this period.

But this diversion was short-lived.

And eventually spinning mills and fabric manufacturers in Coimbatore and Tiruppur began struggling due to a drop in Western orders and high competition from cheaper imports. An 11% import duty on cotton and strict quality controls exacerbated their difficulties further despite falling cotton prices.

Today, most local mills are struggling, and some are even shutting down. They’re calling on the government to remove the cotton import duty and ease synthetic fibre import norms to boost their competitiveness and help them cope with global competition.

So nothing really changed despite the short boost.

In a similar vein, global garment demand may shift to other destinations, including India, but once Bangladesh bounces back, the only factor that will weigh in will be export competitiveness.

Evidently, India must solve the deep-rooted structural problems that are ailing its garment manufacturing industry to compete with countries like Bangladesh and Vietnam.

The Foreign Trade Policy 2023 emphasises that the real challenge and opportunity lie with the Indian states, particularly those rich in labour potential but lacking business-friendly environments (Bihar, Uttar Pradesh, Odisha, West Bengal and the like).

You see, tapping into this potential requires a strategic overhaul in three key areas:

First, launching an investor concierge service to cut through bureaucratic delays, addressing issues like labour and regulations swiftly.

Second, liberalised labour rules should be adopted to enhance flexibility and competitiveness, match global standards, and reduce costs.

Third, implementing an employment-linked incentive scheme to bridge wage gaps. By offering incentives tied to job creation and investment, states can attract manufacturers and stimulate local economies, turning these labour-rich regions into vibrant garment production hubs.

So yes, it’s crucial to tackle the underlying issues and implement targeted policy changes to truly revolutionise India’s garment export sector.

Quick fixes won’t cut it; we need sustainable solutions for long-term success.

Maybe we can take a page out of Bangladesh’s incredible success story!

Until then…

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