India's Textile Sector: ESG Challenges

GS Paper III

News excerpt:

The Indian textile industry faces challenges from EU's CBAM, ESG norms, prompting sustainability shifts.

More about the news:

  • There is palpable concern in India’s textile sector, dominated by small businesses, about impact of new rules like EU’s Carbon Border Adjustment Mechanism (CBAM) and complying with environmental, social, and governance (ESG) norms.
  •  There is also recognition this might be the moment to attempt a paradigm shift in sourcing, production, pricing and supply processes.

Sustainable practices in India’s textile sector

Some sustainable practices which  India’s textile and clothing sector has invested in over the past two decades. For example:

  • The textile and apparel sector in Tamil Nadu contributes more than 50% of installed renewable energy capacity in the State; nearly 300 textile processing units in Tirupur are connected to common effluent treatment plants with zero liquid discharge.
  • In Panipat, Haryana, open-end spinners use only recycled fiber; and India recycles almost 90% of its used PET bottles into fiber.

EU’s Environmental, Social, and Governance (ESG) goals

  • The European Union (EU) has introduced the CBAM as part of its ESG goals.
  •  CBAM aims to address carbon emissions associated with imported goods by imposing charges on products from countries with lower environmental standards.
  •   This mechanism encourages adherence to sustainable practices, aligning with the EU's commitment to the European Green Deal.
  •  The CBAM rules impact India's textile sector, particularly small businesses, requiring compliance with stringent environmental norms to continue accessing the EU market.
  • This underscores a need for a significant shift in sourcing, production, and supply processes within the sector.

Carbon Border Adjustment Mechanism (CBAM)

  • Carbon Border Adjustment Mechanism (CBAM) is a regulation of European Union (EU).
  • The introduction of the CBAM has a significant impact on businesses importing goods into the EU. 
  • The EU needs the Carbon Border Adjustment Mechanism to achieve its ambitious emission reduction targets and achieve climate neutrality by 2050. 
  • The CBAM will tackle the risk of carbon leakage in a non-discriminatory way and in full compliance with WTO rules.

ESG challenges in India's textile sector

  •  Hurdle for MSME: The ESG challenges in India's textile sector are multifaceted. Dominated by Micro, Small, and Medium Enterprises (MSMEs), the sector faces significant hurdles in complying with ESG standards, especially those set by the EU.
  •  Multifaceted challenges:  These challenges include the need for substantial investments in sustainability, documentation of sustainable practices, and the certification of compliance.
  •  Need for paradigm shift: The sector is urged to embrace a paradigm shift in various aspects, such as sourcing, production, pricing, and supply processes, to align with global sustainability demands.  The transition is deemed a "do or die situation" by industry experts, emphasizing the urgency for the sector to adapt.
  • Additional costs: The compliance and documentation processes come with additional costs, impacting the already thin profit margins of MSMEs.  
  •  Reluctance of buyers: The variation in ESG standards among individual European countries and the reluctance of buyers to support increased product prices further complicate the sector's transition to sustainable practices.
  •  Balancing sustainability demands : Despite positive strides and governmental support, the textile sector faces a crucial moment in balancing sustainability demands with economic viability and global competitiveness.

Other issue facing textile industry in India

  • Rise in price: The sudden upward trend for man-made fiber or fabrics started in 2022 which was largely on account of last year’s skyrocketing cotton prices.  This pushed many domestic small and medium units to compromise on quality to meet the domestic textile demand at lower cost. 
    •  With the cotton crop expected to touch a 15-year low in 2023-2024, a rise in prices is anticipated, further paving way for more textile, natural and manmade, hitting the domestic market.
  • Inverted Duty Structure: The man made fiber (MMF) value chain in the textile industry faces an inverted duty structure, where taxes on final products are lower than taxes on inputs. This leads to an accumulation of input tax credit, causing working capital flow issues for businesses and a revenue outflow for the government.
  • Limited Market Access for Exports: India faces a disadvantage in international markets due to duties imposed by importing countries. Unlike countries such as Bangladesh, Sri Lanka, and African nations, India does not enjoy duty-free access, making its textiles less competitive on the global stage.
  •  Skill shortage: The skill shortage in the Indian textile manufacturing landscape also warrants a mention. 
  •  Overdependence on manual labor: It is causing mistakes, oversights and random negligence, resulting in suboptimal machine usage (Utilisation of Machines), frequent downtimes, and considerable loss of productivity. 

Textile Industry & Market Growth in India

India exports 16% of its cotton textiles to the EU, 40% of its synthetic fabric and about a third - 28% of the country’s total apparel exports are to European countries.

Various Steps taken by India

  • The Indian government has taken several steps to address the challenges faced by the textile sector. The Ministry of Textiles has formed an ESG task force, considering supportive interventions for the industry.
  •  Industrial associations are collaborating with organizations to help exporters implement systems, document measures, and obtain necessary certifications.
  •  The Cotton Textiles Export Promotion Council is promoting the Indian cotton brand Kasturi with traceability.
  •  Additionally, some financial institutions are reaching out to MSMEs to fund green and sustainable projects.

Way forward:

  •  Collaboration: To navigate ESG challenges, India's textile sector should intensify collaboration between government, industry, and financial institutions.
  • Uniform ESG standards: Emphasis on MSME support, streamlined certification processes, and uniform ESG standards can mitigate compliance hurdles.
  •  Education campaigns:  Industry-wide education campaigns can enhance domestic consumer awareness of sustainable practices, fostering a market for recycled materials.
  • Diplomatic efforts: The diplomatic efforts to align with EU exemptions for MSMEs in ESG norms and the creation of specific Harmonized System codes for sustainable exports would further fortify India's position as a global textile supplier.
  • Strategic & unified approach: A strategic, unified approach will enable the sector to thrive amid evolving global sustainability expectations.

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