Second, government regulations have been particularly severe on textiles and
apparel and, until very recently, have prevented India from taking advantage of
economies of scale in these sectors. Before 2001, most of the textile and clothing
industries were reserved for the small-scale sector and only in 2005 were knitted and
woven cloth and apparel “dereserved” from the small-scale list. Tax and other incentives
supporting small-scale producers have stifled integrated mill production and, in India,
most textiles are produced on small, individually owned power looms (figure 13).
India’s strict labor regulations have also kept Indian textile and apparel
establishments from expanding. Some estimates suggest the laws have limited the longrun
demand for employees at a given output almost 20 percent (Sato, 2006). McKinsey
(2001) finds average Indian apparel exporters have one-tenth the number of sewing
machines needed to function efficiently and non-exporters have even fewer machines.
Even large firms often divide workers into smaller establishments to prevent labor unrest,
at some cost to productivity (McKinsey, 2001). Such diffuse production results in
weaker quality control and less adaptability to changes in demand. It also generates one
of the longest supply chains in the world, with as many as 15 intermediaries between the
cotton farmer and final purchaser (Verma, 2002).
Third, strong domestic restrictions have hindered the ability of firms to export,
and textile exports have underperformed overall manufacturing exports since 2000, even
after the limits on importing from India in the Multi-Fibre Arrangement were fully lifted
in early 2005 (figure 14). Until recently, export of certain textiles and apparel was
forbidden. And into this decade, firms that received government permission to export
were required to ship over half of their output overseas each year, making it a risky
option for many firms. Foreign direct investment in certain types of textile and apparel
manufacture is restricted to only 25 percent of the operation, in those cases limiting the
use India as an export platform and the exposure of domestic firms to best practices and
productivity-enhancing competition. Regulations originally prohibited the use of
synthetic fibers and continued regulatory bias against synthetic or blended fibers, which