Exploring Industrial Performance in Textile Sector of India Under Liberalised Trade Regime: A Study Through Economic Capacity Utilisation

Journal of International Academic Research (2011) Vol.11, No.3.
31 December 2011
Exploring Industrial Performance in Textile Sector of India

under Liberalised Trade Regime: A Study through
Economic Capacity Utilisation
Dr.Sarbapriya Ray, Dept. of Commerce, Shyampur Siddheswari Mahavidyalaya,
University of Calcutta, West Bengal, India.
sarbapriyaray@yahoo.com
Abstract
This study attempts to evaluate and analyse the industrial performance of Indian textile
sector in terms of economic capacity utilisation at aggregate level over a period from 1979-80
to 2008-09 and SWOT analysis has also been conducted to have an insight into the
performance of the said industry. In this study, Optimal output is defined as the minimum
point on the firms short run average total cost curve and the rate of capacity utilisation is
merely ratio of its actual output to capacity output level. Choice theoretic framework is
adopted to estimate the optimal capacity output. The empirical findings suggest that there
exist considerable variations in the capacity utilisation rates over years within same industry.
There has been declining trend in the growth rate of capacity utilisation in this industry during
post reforms period due to slow increase in actual output resulting from stagnated demand
probably and rapid expansion of capacity output as a result of abolition of licensing rule
consequent to economic reform. It has also been noticed that capacity utilisation in this
particular industry has been gradually increasing after Multi-fibre Agreement (MFA) has
phased out since 2005, and it continued till economic recession begins during 2008 and the
industry is gradually striving harder to sustain its past achievement.
JEL Class: L67
Keywords:
India, capacity utilisation, textile, industry, liberalisation.
1.
Introduction
Indian Textile industry is presently one of the largest and most important industries in the
Indian economy in terms of output, foreign exchange earnings and employment generation.
The diversity and richness of Indian culture reflects in its textile products in terms of variety,
colours, and patterns it offers to the world. The Multi-Fibre Agreement (MFA) introduced in
1974 exempted international trade in textiles and garments from the broad regulations of
GATT. It allowed countries to impose bilateral quotas on import of various categories of textile
products. MFA is an agreement through which developing countries of the world were
restricted to export their textile products beyond a certain level to the markets of developed
nations. Thus, the motive behind this was to provide a window of opportunity for developed
and underdeveloped economies or to save the interest of the domestic textile industry of the
European Union and the US. Now since the quota is phased out, it is a grand opportunity for
developing countries. This development may have a positive impact not only on the textile
sector of the country but also on the entire economy as a whole.
The Indian textile industry managed to penetrate its roots deep in the international market but
that was in the era when multi-fibre Agreement (MFA) was in existence, but now, since 1,
January 2005, the Multi-fibre Agreement has phased out and India needs to strive harder to
Exploring Industrial Performance in Textile Sector of India under Liberalised Trade Regime
43
31 December 2011
sustain its past achievement. This is a key alteration in the international trade scenario for
textile manufacturers across the world offering opportunities for penetration into markets that
have been off limits under the previous regime. At the same time, it causes threats of market
loss in the face of competition from other countries. For India, in particular, performance of
the textile industry in this new era can be of major implication for the economy as a whole.
In the pre-Reform era, several policies like reservation of production of a large number of
items for the small scale sector, high customs tariffs distorting resource allocation and
reserving the ability of Indian firms to compete in the global markets, restrictions on capacity
expansion restraining firms from attaining efficient size, frictions faced in establishing and
closing down of firms in response to normal competitive market dynamics and various
distortions created by the structure of domestic trade taxes and excise duties discouraged
efficiency and harmed productivity growth. With the introduction of economic reforms since
July, 1991, many changes have come upon industrial structure in India. Introduction of
various reforms and gradual liberalisation of both domestic and international trade marked
the beginning of the end of the earlier regulatory regime and recognition of the urgency on
the part of the Indian industries to become efficient so as to be able to withstand successfully
the pressure of foreign competition (Government of India, 2000-01, pp.149). Over the years
several measures have been taken by the government to help domestic industries achieve
efficiency. These include both financial measures such as rationalisation of excise duties,
liberalisation of tax laws and rates, reduction in interest rates and so on, as well as such
physical measures as those meant to remove infrastructural constraints in the power,
transport and telecommunications sectors.
The outlook in the Indian textile industry after phasing-out of the quota regime of the MultiFibre Arrangement (MFA) is optimistic with new investment flowing in and increased orders
for the industry as a result of which capacities are fully booked up to April 2005. As a result of
various initiatives taken by the government, there has been new investment of Rs.500 billion
in the textile industry in the last five years. Nine textile majors invested Rs.26 billion and plan
to invest another Rs.64 billion. Further, India's cotton production increased by 57% over the
last five years; and 3 million additional spindles and 30,000 shuttle-less looms were installed.
The industry expects investment of Rs.1,400 billion in this sector in the post-MFA phase. A
Vision 2010 for textiles formulated by the government after intensive interaction with the
industry and Export Promotion Councils to capitalise on the upbeat mood aims to increase
India's share in world's textile trade from the current 4% to 8% by 2010 and to achieve export
value of US $ 50 billion by 2010 Vision 2010 for textiles envisages growth in Indian textile
economy from the current US $ 37 billion to $ 85 billion by 2010; creation of 12 million new
jobs in the textile sector; and modernisation and consolidation for creating a globally
competitive textile industry. The believers of liberalisation suppose that this policy reform will
improve industrial growth and performance significantly while critics argue that total
withdrawal of restrictions on several matters will have a negative effect on future growth and
performance of the industry (Singh, 2007).
Concept of capacity utilisation plays an important role in evaluating economic activities by
means of explaining the behaviour of investment, inflation, productivity profit and output. The
concept of capacity utilisation (CU) has been basically analysed in economics from diverse
dimensions, both theoretically and empirically, and has been very often used to explain
changes in macroeconomic indicators like inflation rate, rate of investment or labour
productivity. Many alternative capacity utilisation measures have also been developed, but
due to interpretation problems, there is no unanimous acceptance regarding the most
appropriate way of defining and measuring capacity utilisation. If market demand grows,
capacity utilisation will rise. If demand weakens, capacity utilisation will slacken. Economists
and bankers often watch capacity utilisation indicators for signs of inflation pressures.
Therefore the estimation of capacity output and its utilisation will be very useful to evaluate
the variations in the performance of an industry over a period of time.
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31 December 2011
This presentation makes an attempt to evaluate the performance of Indian textile industry in
terms of capacity utilisation measured econometrically over a period of 30 years from 197980 to 2008-09 and also highlight major sources of opportunities for the industry and outlines
all the challenges the industry is facing and likely to face and the role it can play to clear all
the major impediments to make them globally competitive. However, SWOT analysis also
has been conducted to see the overall performance and prospects of the textile industry.
Economic capacity utilisation measure under choice theoretic framework has been adopted
to assess the performance of the textile industry. This paper is divided into the following
sections: Section 2 depicts brief review of literature on concept of capacity. Section 3
provides data base and methodological issues. Section 4 estimates capacity and its
utilisation and analyses the results. Impact of liberalisation on capacity utilisation is also
presented in this section. Section 5 depicts SWOT analysis and challenges faced by the
industry and section 6 presents summary & conclusions.
1.1. Brief overview of Indian textile industry
The Indian textile industry has made a major contribution to the national economy in terms of
direct and indirect employment generation and net foreign exchange earnings. The industry
contributes 4% to the countrys GDP, 14% to the countrys industrial production and around
12% to the countrys foreign exchange earnings, 18 per cent of employment in the industrial
sector, 9 per cent of excise duty collections and more than 30 per cent of Indians total
exports (Textile Review, 2009, 2010a, 2010b).
The Indian textile sector is also well placed globally as indicated by the statistical figures
mentioned in table-1. In terms of installed capacity of spinning machinery, it ranks second
after china while in weaving its ranks first in plain handlooms and fourth in the shuttle looms.
India has around 40 Million Spindles (23% of world) and 0.5 million rotors (6% of world
capacity). India has 1.8 Million Shuttle looms (45% of world capacity), 0.02 Million shuttle
less looms (3% of world capacity) and 3.90 Million handlooms (85 % of world capacity). The
Industry is highly fragmented except for spinning sub-sector and thus manually intensive.
Organised sector contributes to almost 100% of spinning but hardly 5 % of weaving of fabric.
Cotton products are stronghold of India and as of March 2004, India had 1787 cotton/man
made fibre textile mills including 1564 spinning mills (stand alone) and 223 Composite
verticals. Many organised sector giants are actually conglomerates of medium sized mills
(Gupta, 2006).
The Indian textile Industry had been plagued by obsolescence, labour problems, raw material
vagaries and lack of modernisation including that of spindles. The post fabric stage
processing technology has also been lagging but is now coming up fast with infusion of
textile processing technology. SSI firms perform the majority of weaving and processing
operations. The level of weaving technology is of lower order and knitting units don't possess
capacity to perform dyeing, processing and finishing to international standards.
The Indian Textile Industry is also globally well placed, in teams of installed capacity of
spinning machinery, if ranks second after china, while weaving it ranks first in plain
handlooms and fourth in the shuttle looms. Index of Industrial production shows the dismal
picture of textile production the decline in IIP for textiles started from June 2008 year
onwards by now the cumulative position has became positive trend. There is an increasing
trend of number of spinning mills. At end of Nov. 2010 there were 1,947 mills in the country
there were 552 closed mills by the end of Nov. 2010. The comparison of overall export to
textile export to textile export, the period of 2005-06 there is downward trend for textile
export. The Government has taken several positive steps of the textile economy in Indian as
like Integrated Textile Parks Shames, Tufs, Technology mission on cotton, fiscal
rationalisation etc.
45
Table 1: Indias position in World Textile Economy

Unit
World
India
India as
% of
World
31 December 2011
Indias
Rank in
the world
Country
with
first
Rank
Installed Capacity
A) Spining-2006
Spindles (Cotton
System)
Spindles (Wool)
Mn.No.
202.45
39.29
19.41
China
Mn.No.
14.98
1.04
6.94
China
Spindles (Coon
& Wool)
Mn.No.
217.43
40.33
18.55
China
Roters
Mn.No.
8.67
0.60
6.92
Russia
Shuttle Looms
Mn.No.
4.44
2.01
45.27
China
Shuttle Looms
Mn.No.
1.0
0.05
5.00
11
China
Handlooms.
Mn.No.
3.90
4.6
84.78
India
B) Weaving-2006
Source: Ministry of Textile Website.
The Indian textile industry is in a stronger position than it was in the last six decades. The
industry which was growing at 3-4 percent during the last six decades has now accelerated
to annual growth rate of 9-10 percent but various factors have effecting annual growth rate of
Textile Industry, Global recession is one of them. The impact of the global and domestic
economic slowdown directly affects the performance of the industry. While cost of raw
materials and inputs remain in competitive in comparison with competing countries, the
output and profitability of the industry have taken a nose dive in recent months. Index of
industrial production (IIP) data has been released by the central statistical organisation
(CSO) shows a dismal picture of textile production as can be seen in Table - 2 .The fact, the
decline in IIP for textile started from June of 2008 year onwards, after a reasonable growth of
6.1% in may 2008, the growth in the index declined to 4.5 in June, -1.8 in Jul-4.5 in August
-4.9 in September -7.1 in October 2008 by now the cumulative position has become positive
trend.
46
Table 2: Percentage Growth in Textiles

Products
2005-06
2006-07
31 December 2011
2007-08
2008-09
2009-10
1. Cotton
Textiles
8.5
14.8
4.3
-1.9
5.5
2. Wool, Silk &

MMF Textiles
0.0
7.8
4.8
0.0
8.2
3. Textile
Products
(Including
Garment)
16.3
11.5
3.7
5.8
8.5
4. Vegetable
Fibre
Textiles(Expect
Cotton)
0.5
-15.8
33.1
-10.0
-24.4
Total Textile
Section
(1 + 2 + 3 + 4)
6.7
7.0
7.5
0.2
3.7
Source: Ministry of Textile Website.
The Indian Textiles Industry is an export intensive industry and about one third of its total
production is exported in some form or the other, through export friendly government policies
and positive effort by the exporting community. The 50 percent exports of the entire textile
are the readymade garments, most of which is cotton, readymade garments and
accessories. This is followed by handicrafts, Silk Products, Woollen Textile, Jute and Coir.
The exports of textiles and clothing till 2004-05 have grown at a moderate pace. However
there was registered sharp growth in 2005-06.Till 31st December 2004, export were
regulated by a Quota an agreement a foreign country would give a quota saying that they
would by a particular amount of textile from India On 1st January, 2005 (Post Multi Fibre
Agreement) provision of free trade was made. Now all doors are open, opportunities are
numerous and the product should be sent to any country that is willing to trade. The volumes
went up in the financial year 2005-06 and from the next financial year the volume of India
rupee was devalued. Due to this amount of foreign exchange has been reduced in India.
There was further loss of 15% to 20% due to recession that struck the world in the year
2008. After recession period, textile export increased from in US$ 153018.22 million in 200809 to US$ 178751.43 million 2009-10.
During 2007-08, Indian textile exports were valued at US $ 18.51 billion .Indian textile
industry is also the second largest employment generating industry, after agriculture with
direct employment of 33.17 million people (as of March 2006). This also includes
employment in handloom, sericulture, handicraft and jute industry. In addition, the industry
generates significant employment through forward and backward linkages; the large number
of skilled and unskilled activities in the industry makes it extremely important from the
perspective of inclusive growth.
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31 December 2011
Table 3: Textile Exports Statistics

Year
Textile Export US$
Millions
Total Exports US$

Millions
Percentage of Textile
Exports
2004-05
14026.72
83535.95
16.79%
2005-06
17520.07
103090.53
16.99%
2006-07
19146.04
126262.68
15.16%
2007-08
19558.53
143567.86
13.62%
2008-09
18519.96
153018.22
12.10%
2009-10
22418.00
178751.43
12.54%
Source: Department of Commerce NIC & DGCI and Kolkata, S.
Ministry of Textiles has targeted a growth of 16% per annum for the Indian textile industry to
reach US $ 115 billion by the end of Eleventh Five Year Plan. It also wants to secure a 7%
share in global textile and cotton (T and C) trade by the end of the Eleventh Five Year Plan.
Provided the targeted growth is achieved, Indian textile industry has potential to employ 45
million people by 2012. Further, the export earnings from this industry are estimated to
increase to US$ 55 billion by 2012. However, during the period April December, 2008 T and
C exports have missed the expected growth targets on account of economic slowdown in
major T and C export markets. As a result, production of T and C has also declined during
the same period as against the estimated levels under the Eleventh Plan.[Report of the
Working Group on Textiles and Jute Industry for the Eleventh Five Year Plan ].Under these
circumstances, textile industry is unlikely to achieve the envisioned targets unless the
industry makes a strategic shift in the coming year.
2. Review of literature on concept of Capacity

Capacity utilisation is an economic concept which refers to the extent to which an enterprise
or a nation actually uses its installed productive capacity. Thus, it refers to the relationship
between actual output produced and potential output that could be produced with installed
equipment, if capacity was fully used. Capacity utilisation measures as a procyclical indicator
have been widely used to explain economic fluctuations. Unlike many well defined concepts,
capacity has been subjected to alternative definition and misconceptions.
Engineers idea of capacity may differ from economists idea because if certain volume of
production is technically possible, it may not be economically desirable. One of the most
used definitions of CU rate is as the ratio of actual output to potential output. Concerning the
potential output, there are several ways to define it. One is the engineering or technical
approach according to which potential output represents the maximum amount of output that
can be produced in the short run with existing stock of capital (see Nelson, 1989, p273). A
similar discussion can be found in Johansen (1968, see Fare, Grosskopf Kokkelenberg,
1989,p655) where the author defines the capacity as being . the maximum amount that
can be produced per unit of time with existing plant and equipment ,provided that the
availability of variable factors of production is not restricted. Following the last definition, in
one of his paper, Fare (1994) describes the necessary and sufficient conditions for the
existence of plant capacity as defined by Johansen. In a similar fashion, Fare, Grosskopf and
Kokkelenberg(1989) developed measures of plant capacity, plant capacity utilisation and
technical change in the short run for multi product firms, based on frontier models using non
parametric linear programming methods (DEA).
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31 December 2011
But, operating managers notion of installed capacity may differ which assumes a variety of
considerations such as number of shifts in work, quality of managerial staff, and availability of
repair and replacement parts all of which suppose to modify the engineering estimation of
plant capacity. Concept of installed capacity particularly is linked to the shift work decision
problem which associates the problem of selecting an optimal number of shifts of work single, double or triple shift. If a firm desires to operate on a single shift basis, the capacity
output can be based on this assumption and it would be possible to have 100% capacity
utilisation rate if time utilisation rate of capital is nearly 33% ( as because firms operates on a
single shift basis of eight hours for each shift assuming that there exists maximum three
shifts).Whether decision of capital expansion or multi-shift operation will be undertaken
depend ,by and large ,on the matter of weighing the alternative costs and gains both in short
run and long- run. Between two alternatives- expansion of new plant facilities or moving
towards multi-shift operation, it is inevitable that most of the developing countries like India
would favour the use of multi-shift operation in comparison with the further expansion of
investment project because if customers demand is rising gradually and new equipment is
not available or is costly to replace, multi-shift operation would save additional capital outlay
and at the same time generates employment opportunities without involving additional capital
expenditure. It is also true that where there is underutilisation of capacity, there is ample
scope of utilising capital more extensively by increasing working shifts in the industry.
Nevertheless, a major lacuna in this engineering approach is that it does not explain the
variations in capacity utilisation mainly due to lack of any economic foundation.
The economic approach, on the other hand, defines the potential output as being the
optimum level of output from the economic point of view. This alternative considers capital as
a quasi fixed input and allows for distinction between short and long run cost curves. In the
long run, capital can be adjusted in order to achieve optimal (cost minimising/ profit
maximising) level. In the short run, capital is fixed and only the variable inputs can be varied.
The short run equilibrium output , for a competitive firm , is then given by the equality
between exogenous output price and the short run marginal cost curve (SRMC), Y*. The
potential output would then correspond to that level of output at which short run average total
cost (SRATC) is minimised-Y**( and equal to long run average total cost, LRATC).
The definition of output as Y** corresponds to the cost-minimisation problem while Y*
corresponds to the profit-maximisation. As pointed out in Berndt, Hesse & Morrison(1981),
this difference can affect short run equilibrium in the sense that it may or may not occur at the
level of output were the SRATC reaches its minimum:Y* > Y** OR (Y*< Y**) when the output
price greater than (lower than) the minimum level of SRATC. The authors address also the
issue of how variations in input prices might affect the minimum point of the SRATC and
hence Y**.
The economic approach was first analysed by Cassels (1937) and latter on two more
definitions have been introduced. The first was suggested by Klein (1960) and
Friedman(1963) and recently Segerson and Squires(1990) who define the potential output as
being the output level at which the long run and short run average total cost curves are
tangent. Klein (1960) argued that long run average cost curve may not have a minimum and
proposed the output level where the short run average cost curve is tangent to the long run
average cost curve as an alternative measure of capacity output.
The second approach supported by Cassel (1937) and Hickman (1964) takes as reference
the output level at which the short run average total cost curve reaches its minimum.
Therefore, an economically more meaningful definition of capacity output originated by
Cassel (1937) is the level of production where the firms long run average cost curve reaches
a minimum. As we consider the long run average cost, no input is held fixed. For a firm with
the typical U shaped average cost curve, at this capacity level of output, economies of scale
have been exhausted but diseconomies have not set in. The physical limit defines the
49
31 December 2011
capacity of one or more quasi-fixed input. Klein defined capacity as the maximum
sustainable level of output an industry can attain within a very short time, when not
constrained by the demand for product and the industry is operating its existing stock of
capital at its customary level of intensity.
Hickman (1964) suggests that capacity is defined as that output which can be produced at
minimum average total cost, given the existing stock of plant and equipment and existing
techniques and factor prices. The level of capacity is inferred from observed investment
behaviour. Regression methods are used to estimate a relationship between desired capital
stock and several explanatory variables including output, relative prices and time, on the
hypothesis that net investment occurs in proportion to the excess of desired over actual
stock. The relationship between desired capital stock and output is then inverted to yield a
corresponding relationship between capacity and actual capital stock for given prices and
techniques. The method is used to calculate aggregate capacity annually for 1949-60 and
the properties of the resulting estimates are discussed. New estimates of capacity and its
utilisation in manufacturing are also presented and compared with those of other
investigators.
The relationship between the two economic measures of capacity utilisation (CU) depends
on the degree of scale economics for the unit that is being analysed. Berndt and
Hesse(1986) advocate that under the assumption of prevailing constant return to scale in
the long run, the tangency point between the long run and short run curves will coincide with
the point where the long run and short run average total cost curve reach their minimum.
Hence, two economic measures of CU would be equivalent. Nelson (1989) argued that
Capacity utilisation (CU) is usually defined as the ratio of actual output to the output
corresponding to (i) the minimum point on the SRATC curve, (ii) the point of tangency
between the LRATC and SRATC curves. In practice, however, CU is often measured as the
ratio of actual to the maximum potential output consistent with a given capital stock. This
paper demonstrates how to estimate the theoretical measures of CU, and examines the
correlation between the three measures of CU, and the McGraw-Hill estimates of CU, using
data from a sample of US privately owned electric utilities for 1961-83. Nelson (1989,p274),
using data from a sample of US privately owned electric utilities reaches the conclusion that :
The choice of a particular measure of CU may be little consequence if all of the measure are
highly correlated, and if the correlation is constant over time and across firms. If this is not
the case, however, the choice may influence the conclusions to be drawn from a study.
Questions about the definition and construction of capacity utilisation measure are often
based on distinctions between engineering or technical as compared to economic
measures, maximum versus optimal usage of capacity, and primal as contrasted to
dual representations of the notion of best, or optimum. The many combinations and
permutations of these concepts offered in the literature often differ in terms of the definition
and treatment of the stocks defining the capacity base, and the variable inputs determining
their utilisation. The basic conceptual issue is that engineering or technical measures
represent the most output that can physically be produced given the existing input base,
whereas one might think a policy-relevant measure of potential output should instead be
founded on some notion of (economic) optimisation rather than (physical) maximisation.
By contrast, economic measures are founded on the idea of an optimum amount of output
that might be produced, in terms of the costs or profits emanating from production. This
alternative perspective can be represented by a dual cost (or profit) function, defined in terms
of the minimum possible input costs required to produce a given amount of output, taking
both technological and behavioural optimisation into account.
In India, a few attempts have been made to evaluate the trends of capacity utilisation in
Indian manufacturing sector (see, for example, Gulati (1959), Nag (1961), Koti (1968),
Mathur (1969), Sandesara (1969), Paul (1974), Gupta and Thavaraj (1975), Nayar and
Kanbur (1976), Sastry (1980), Mohandoss and Subrahmanyam (1981), Subba Rao (1981),
50
31 December 2011
Burange (1992), Goldar and Ranganathan (1992), Ajit (1993), Burange (1993), Pohit and
Satish (1995), Azeez (2002) and Ray and Pal (2008). The existing studies concentrated
either on a particular industry or on a set of industries. The present study is an attempt in this
direction and aims to enrich the literature on capacity utilisation in Indian industries. In
particular, we intend to study the trends in capacity utilisation in Indian textile industry at
aggregate level using the time series data from 1979-80 to 2008-09.
3.
Methodology
This paper covers a period of 30 years from 1979-80 to 2008-09. The entire period is divided
into two phases as pre-reform period (1979-80 to 1991-92) and post-reform period (1991-92
to 2008-09).Our estimated results in the result section have been derived by solving the
econometric equation by Ordinary Least Square method.
Considering variations in CU as a short-run phenomenon caused by the quasi-fixed nature of
capital, an econometrically tractable short-run variable-cost function which assumes capital
as a quasi-fixed input has been used to estimate CU.
3.1. Econometric Model
Considering a single output and three input framework (K, L, E) in estimating CU, we assume
that firms produce output within the technological constraint of a well-behaved 1 production
function.
Y = f (K, L, E) where K, L and E are capital, labour and energy respectively.
Since capacity output is a short-run notion, the basic concept behind it is that firm faces
short-run constraints like stock of capital .Firms operate at full capacity where their existing
capital stock is at long-run optimal level. Capacity output is that level of output which would
make existing short-run capital stock optimal.
Rate of CU is given as:
CU = Y/Y*
(1)
Y is actual output and Y* is capacity output.
In association with variable profit function, there exist a variable -cost function which can be
expressed as:
VC = f (PL, PE, K, Y)
(2)
Short run total cost function is expressed as:
STC = f (PL, PE, K, Y) + PK .K
(3)
PK is the rental price of Capital.
Variable cost equation 2 which is variant of general quadratic form for (2) that provide a
closed form expression for Y* is specified as
K 1
+ KL. PL + KE .PE )
Y
VC = 0 + K-1 ( K + KK
+ PL ( L + LL .PL + LE .PE + LY .Y )
1
A production function is considered to be well-behaved if it has positive marginal product for each
input and it is quasi concave and also satisfies the conditions of monotonocity. Quasi-concavity
required that the bordered Hessian matrix of first and second partial derivatives of the production
function be negative semi definite.
Similar functional form has been previously estimated by Denny et al (1981). The variable cost
function is based on the assumption that some input like capital cannot be adjusted to their equilibrium
level. Therefore, the firm minimizes variable cost given the output and the quasi-fixed inputs.
51
31 December 2011
+ PE ( E + EE .PE + EY .Y ) + Y( Y + YY .Y )
(4)
K -1 is the capital stock at the beginning of the year which implies that a firm makes output
decisions constrained by the capital stock at the beginning of the year.
Capacity output (Y*) for a given level of quasi-fixed factor is defined as that level of output
which minimises STC. So, the optimal capacity output level, for a given level of quasi-fixed
factors, is defined as that level of output which minimises STC. So, at the optimal capacity
output level, the envelop theorem implies that the following relation must exist.
STCK=VC/K+PK=0
In estimating Y*, we differentiate VC equation (4) w.r.t K-1 and substitute expression in
equation (5)
Y* =
(K +
(5)
KK. K-1
KLPL + KEPE + PK )
(6)
The estimates of CU can be obtained by combining equation (6) and (1).

3.2. Description of data and variables
There are difficulties faced by researchers in conducting studies on CU in Indian industries.
The available official data on Industrial capacities are quite unsatisfactory. The present study
is based on industry-level time series data taken from several issues of Annual Survey of
Industries, NAS and Economic Survey ,Monthly statistics of foreign trade, Govt. of India,
Statistical Abstracts (various issues), RBI bulletin, CMIE etc covering a period of 30 years
commencing from 1979-80 to 2008-09. Selection of time period is largely guided by
availability of data 3
Output and Variable cost
Details of methods employed for the measurement of variables are given in Appendix. Output
is measured as real value added 4 produced by manufacturers (Y = PLL+ PK.K-1+ PE.E)
suitably deflated by WIP index for manufactured product (base 1981-82 = 100) to offset the
influence of price changes variable cost is sum of the expenditure on variable inputs (VC =
PLL+ PE.E).
Labour and price of labour
Total number of persons engaged in Indian textile sector is used as a measure of labour
inputs. Price of labour (PL) is the total emolument divided by number of labourers which
includes both production and non-production workers5.
Energy and Price of energy:
Deflated cost of fuel (Appendix-A1) has been taken as measure of energy inputs. Due to
unavailability of data regarding periodic price series of energy in India, some approximations
become necessary. We have taken weighted aggregative average price index of fuel
3
Till 1988 89, the classification of industries followed in ASI was based on the National Industrial
classification 1970 (NIC 1970). The switch to the NIC1987 from 1989-90 and also switch to NIC1998
requires some matching. For price correction of variable, wholesale price indices taken from official
publication of CMIE have been used to construct deflators.
4
Griliches and Ringstad (1971) have preferred GVA to gross output and reasons for imposing
preference have been mentioned in their study.
5
One serious limitation of this assumption is that this does not take into account variations in quality
and the composition of labour force.
52
31 December 2011
(considering coal, petroleum and electricity price index, suitably weighted, from statistical
abstract) as proxy price of energy. 6
Capital stock and price of capital:
Deflated gross fixed capital stock at 1981-82 prices is taken as the measure of capital input.
The estimates are based on perpetual inventory method. (Appendix-A2) Rental price of capital is
assumed to be the price of capital (PK) which can be estimated following Jorgenson and
Griliches (1967):
PtK= rt +d t -
P k
Pk
Where rt is the rate of return on capital in year t, d t is the rate of depreciation of capital in
the year t and
P k
is the rate of appreciation of capital .Rate of return is taken as the rate of
Pk
interest on long term government bonds and securities7 which is collected from RBI bulletin
(various issues). The rate of depreciation is estimated from the reported figures on
depreciation and fixed capital as available in ASI which Murty (1986) had done earlier.
However, we have not tried corrections for the appreciation of value of capital 8 in the
estimates of price of capital services.
The variables are depicted below in table 3 in a nut shell.
Table-3: Description of variables for calculating CU levels
variable
Description
Output:
Inputs:
Labour
Energy
Capital
4.
Nature in production
process
Deflated real value added
---------
Total persons engaged(Production workers+nonproduction workers)

Deflated cost of fuel
Variable
variable
Quasi-fixed
Real gross fixed capital stock (t) = real gross fixed

capital stock (t 1) + real gross investment (t).
Analysis of capacity and its utilisation:
6. To compute the price of energy inputs, some studies have aggregated quantities of different energy
inputs using some conversion factors (say British Thermal units or coal replacement etc.) and then
take the ratio of expenditure on energy to the aggregate quantity of energy. This method is criticized
because it assumes different types of energy inputs to be perfect substitutes.
Prime lending rate is generally viewed as an opportunity cost of capital, but problem is that there is
no unique lending rate available for use. So, we have used rate of interest on long term government
bond and securities as rate of return on capital [as previously used by Jha, Murty and Paul
(1991)].Alternatively, one can use the gross yield on preferential industrial shares, if available, as
Murty (1986) has done.
8
As Jorgenson and Griliches note capital gains should be deducted from ( r t +dt ) but several studies
have not done so and adjustment for capital gains does not seem to make much difference to the
result.
53
31 December 2011
In this section, analysis of the results regarding measurement and trend in capacity utilisation
of Textile industry in India under our consideration is presented. In order to facilitate
comparison of the estimates, we have also subdivided the entire period into 1979-80 to
1991-92 which is termed as pre-reform period and 1991-92 to 2008-09 as post-reform
period. Before presenting the result, descriptive statistics showing the differences in the
statistics for the variables under consideration for the two time periods are depicted in the
following table4.The descriptive table indicates that mean and standard deviation of all
variables have been enhanced significantly during post reform periods.
Table-4: Descriptive Statistics
Variables
Pre- reform period
Minimu
Maximu
m
m
Variable
1357
2792
cost(Rs
crore)
Output(Rs
1651
3816
crore)
Capital(Rs
14522
27291
crore)
Energy
0.6821
2.763
price(Rs)
Labour
0.00126 0.00376
price(Rs)
7
3
Price of
0.1174
0.2159
capital(Rs)
Total
observation 13
s
Source: Own estimate.
Mean
Post-reform period
Minimum
Maximu
m
Mean
Standar
d
deviation
2387
8351
5163.29
428.49
4772.95
2
2057.02
1577.54
Standar
d
deviatio
n
104.46
2645.39
748.62
3752
18612
9240.17
18762
1134.32
26376
48492
1.54
0.1456
2.847
7.89
38927.5
4
4.91
0.00234
5
0.1557
0.00024
0.004471
8
0.1415
0.0174
0.0096
0.00091
0.2349
0.1847
0.00584
0.0097
0.4473
18
At first hand, the result section depicts the results of a multiple regression analysis applied to
measure capacity output and the trend in capacity utilisation. The variable cost equation
shown as equation (4) has been estimated by the ordinary least square methods (OLS). Our
model assumes that capacity utilisation (CU) is a function of input prices, output and quasifixed capital. We find that capacity utilisation and input prices have a negative relationship
and capacity utilisation (CU) and output have a positive one. The derivative of VC (equation
4) with respect to K is negative since capital will substitute labour and energy. In order to test
for the concavity of the variable cost function with respect to variable input prices , its
Hessian matrix for negative semi-definiteness is evaluated and it is found that concavity
condition is fulfilled at all observation points. Therefore, the partial derivative with respect to
each of input prices is negative. The partial derivative of VC with respect to output is positive
because in our empirical results, KK > 0 and (K + KLPL + KEPE + PK ) < 0 for all data points.
Therefore, positive relation between output and capacity utilisation (CU) is an indication that
an increase in demand will lead to higher levels of capacity utilisation.
The variations in capacity utilisation in Indian textile industry are presented in Table 5. The
key observations emerged out of the analysis of Table 5 are depicted below.
First, it emerges from the estimated results that CU ratios are less than unity for all
observations. There is a prominent diminishing trend in capacity utilisation over years
because average CU declined from 0.7370 in pre-reform period to 0.6487 in post-reform
period implying a decline of 11.98% as well as same declining trend was set in average
growth rate of CU(from 1.62% in pre-reform period to -0.91% in post reform-period) as is
54
31 December 2011
evident from table 5.This implies that actual output fell far short of capacity output of Indian
textile industry which in turn signifies a widening difference between capacity output and
actual output. Trend in capacity utilisation indicates the presence of idle or excess capacity in
the industry for the entire study period. It is a well known fact that in the pre-reform decades,
numerous regulations enforced through rigid bureaucratic control created a permit-license
Raj that effectively stunted capacity growth and reserved technical utilisation in Indian
manufacturing thus restricting them to operate at full capacity.
Second, if capacity output is taken to be the economic capacity derived from optimisation
process, the CU ratio could exceed one or it may be less than one. The implication of
economic CU less than unity (as our result suggests) is that production is to the left of the
minimum point of short-run average total cost curve which further signifies that Indian textile
sector could have reduced its short run generation costs with gradually moving to the
tangency point or minimum point of the short run average cost curve.
Third, it is apparent from our study that the economic CU index ranges from about 0. 5285 to
0.8313. Capacity expansion varies from 5.96% to 10.55% during these two time frames.
Moreover, the correlation between actual output (Q) and capacity output (CQ) is quite high
over the entire time period which is nearly 0.9845.
Fourth, a comparison of the average utilisation of capacity in the two periods (Table5 above)
showed a lower average utilisation in the post- reform period as compared to pre- reform
period. The CU trends have also registered a gradual decline since mid- nineties and middle
of this decade. Increasing trends have been noticed in the average growth rate of capacity
output and actual output during those two periods. During pre-reform period, capacity
expansion was not improved rapidly probably due to licensing restriction but relaxation of
license rule to some extent since 1991 in case of Indian textile industry during post-reform
period paved the way for drastic expansion of capacity. Although it is true that there is no
precise way of distinguishing the various factors that contributed to declining utilisation rate,
a shift from a restrictive trade regime to a more liberalised trade perhaps decelerates the
utilisation rate because it might be mainly due to gradually rapid and abrupt expansion of
capacity but comparatively slow improvement in the growth rate of actual output as well as
actual demand. Moreover, specifically, it has also been noticed that capacity utilisation in this
particular industry has been gradually increasing after Multi-fibre Agreement (MFA) has
phased out since 1st January 2005, and it continued till economic recession begins during
2008.
55
31 December 2011
Table-5: Capacity utilisation of Textile industry in India at aggregate level, 1979-80 to 2008 -09.
Pre-reform period(1979-80 to 1991-92)
Year
Actual
Capacit
CU
output
y output
(Cr. Rs)
(Cr.Rs)
79-80
80-81
81-82
82-83
83-84
84-85
85-86
86-87
87-88
88-89
89-90
1651
1543
1764
2134
2319
2729
2697
2654
2949
2986
3396
2453
2527
2687
2912
3157
3283
3357
3713
3873
3758
4749
0.6730
0.6106
0.6565
0.7328
0.7346
0.8313
0.8034
0.7148
0.7614
0.7946
0.7151
90-91
91-92
3816
3752
4971
4778
0.7677
0.7852
13.73
12.37
-1.68
26.37
4.67
-3.88
Growt
h
rate
of CU
-9.27
7.52
11.62
0.25
13.16
-3.36
-11.03
6.52
4.36
10.01
7.36
2.28
0.7370
7.43
5.96
1.62
avera
ge
Outpu
t
growt
h
-6.54
14.32
20.98
8.67
17.68
-1.17
-1.59
11.12
1.25
Capa
city
growt
h
3.02
6.33
8.37
8.41
3.99
2.25
10.60
4.31
-2.97
Post-reform period(1991-92 to 2008-09)

Year
Actual
Capacit
CU
output
y output
Output
growth
Growth
rate of
CU
-1.68
10.15
15.00
0.86
8.14
6.06
7.80
15.98
11.71
10.16
Capa
city
growt
h
-3.88
9.69
11.89
20.82
14.99
13.64
21.13
5.72
2.36
19.65
91-92
92-93
93-94
94 - 95
95-96
96 97
97 98
98 99
99 00
00 01
01 02
3752
4133
4753
4794
5184
5498
5927
6874
7679
8459
9426
4778
5241
5864
7085
8147
9258
11214
11856
12136
14521
16246
0.7852
0.7885
0.8105
0.6766
0.6363
0. 5939
0. 5285
0. 5798
0.6327
0.5825
0.5802
02 - 03
03 04
04-05
05-06
06-07
07-08
08-09
10287
11053
11744
14684
17317
18612
16147
18181
19524
20776
22114
24624
25429
25621
0.5658
0.5661
0.5652
0.6640
0.7033
0.7319
0.6302
11.43
9.13
7.45
6.25
25.03
17.93
7.48
-13.24
11.88
11.91
7.39
6.41
6.44
11.35
3.27
0.76
-0.39
-2.48
0.05
-0.16
17.48
5.92
4.07
-13.90
0.6487
9.25
10.55
-0.91
Source: Own estimate.
56
2.28
0.42
2.79
-16.52
-5.96
-6.66
-10.95
9.71
9.12
-7.93
31 December 2011
Trends growth rate of capacity utilisation of Indian textile industry at aggregate level are
presented in Table 6 to support the above mentioned result. The semi-log function was
finally selected to explain the trend. The semi-log model is log Z = a + bt, where Z =
Capacity utilisation, a = Constant, t = Time in years, b = Regression coefficient and in this
model, the growth rate will be (b x 100) in terms of percentage.
Table-6: Trend Growth rate of capacity, output and capacity utilisation
Pre- reform period (1979-80 to 1991-92)
Post- reform period (1991-92 to 2008-09)
Industry/y
ear
Indian
Textile
Industry
Capacity
2.61*
(17.67)#
output
3.23
(13.52)
Capacity
utilisation
0.6146
(2.66)
Industry/year
Capacity
Indian Textile
Industry
4.51
(25.49)
adjusted 0.96
0.94
0.39
R2
Source: Estimated from semi log trend
*trend growth rate.
# t values.
0.97
output
Capacity
utilisation
4.15
(30.52)
-0.361
(-2.46)
0.98
0.21
Estimated result in table 5 supports the contention that capacity grows rapidly in post
reform period, simultaneously output grows but at very slow pace as compared to capacity
growth. This results in declining growth rate in capacity utilisation. It is expected that no
single explanation for variations in capacity utilisation in this industry group will hold true.
Nevertheless, it seems that due to heavy investment in the 1990s, unaccompanied by
commensurate expansion of demand, capacity utilisation went on worsening in this
manufacturing industry.
4.1. Impact of liberalisation on Economic CU
The impact of liberalisation on capacity utilisation has been judged more precisely, by
using a piecewise linear regression equation (popularly known as Spline function) where it
is assumed that capacity utilisation increases linearly with the passage of time until the
threshold time period ( t0 )[Here, t0=1990-91 being last year of pre-reform period after
which post-liberalisation era begins] after which also it changes linearly with the passage
of time but at a much steeper rate. Therefore we have a piecewise linear regression
consisting of two linear pieces or segments. The CU function changes it slope at the
threshold value (t0=12). Given the data on CU, time period and the value of threshold
level, the technique of dummy variables can be used to estimate the slopes of the two
segments of the piece-wise linear regression. The piecewise linear regression equation is
as follows:l n Yt = + t + (t t0) D t
Result of the regression equation is as follows:l n Yt = -0.3697 + 0.0053t -0.0185D t
(-5.71) (2.72)
(-2.77)
2
R = 0.31
Figures in the parentheses are the absolute values of t statistics and R2 is the goodness of
fit. Here gives the slope of the regression line in pre-reform period which is positive and
significant at 5% level. This implies that growth in CU shows positive trend immediately
before liberalisation starts.
57
31 December 2011
Co-efficient of the difference between two time period is significant at 5% level and
negative (coefficient being -0.0185), It can be inferred that liberalisation has its significant
adverse impact on capacity utilisation during post- reforms period.
It is visible from the estimated average growth rate in CU as shown in table 3 that there is
a significant decline in average growth rate of CU from 1.62% in pre-reform period to -0.91
% in post -reform period.
5. Challenges ahead
The onset of globalisation of trade and economic liberalisation within the country has
posed new challenges and opportunities for the Indian textile industry. As part of
Agreement on Textiles and clothing (ATC) under the WTO framework, all the quantitative
restrictions (quotas) on imports and exports have ceased to exist from January 1, 2005.
Such integration of markets will provide several opportunities as well as threats to Indian
textile industry. It is an opportunity since the market access is unlimited and unrestricted. It
is a threat since minimum assured quantities, hitherto available for exports under quotas
are not available. In such a highly competitive environment, only those companies with
strong fundamentals and conscious of several market compliances and price alone can
survive. Apart from integration of markets without any quotas the WTO framework
demands the gradual phasing out of non-compatible (to the WTO agreement) protections,
currently available to the industry, in the form of subsidies and other incentives. The Indian
industry will also have to guard its domestic market share, in addition to consolidating and
enlarging the export market share.
Therefore, the Indian textile industry will have to look for competing and surviving purely
on its strength and competitive edge. A comprehensive strategy, involving the Government
and industry partnership is the need of the hour to convert the threats into opportunities
and, sustain and enlarge our domestic and international market shares.
The first challenge is the scalability of operations while the total size of the industry is
around Rs 1,40,000 crore comprising of Rs 52,000 crore of exports there are hardly 2 or 3
companies clocking a turnover of Rs 2,000 crore. This shows the fragmented nature of the
industry and compared to international standards our capacities are small. For example in
the spinning sector, a capacity of 1,00,000 Spindles is considered large in India. But
compared to international standards this capacity is small to average. In China for
example, a capacity of 3 lakh spindles is quite common, where there are units, which are
large with one million (10 lakh) spindles. Similarly, in the weaving processing and garment
sectors our capacities are miniscule compared to international standards. In China and Sri
Lanka the average machine per garment factories is 500 compared to 50 in India.
The second biggest challenge facing the industry is the supply chain management. It is
estimated that by 2010, more than 25% of the world's textile trade will be controlled by
retail giants. In such a scenario an efficient supply chain management cannot be
overemphasised. The retail giants will determine the export prices and only an efficient
supply chain will be able to compete effectively. In fact it will be competition between
supply chain and not between companies. There are hardly any companies in India
having a presence in the entire textile chain from yarn to garments.
The third challenge facing the industry is the effective integration of the various sectors of
the textile industry. For more than 25 years the various wings of the industry like the
power loom, handloom, mill sector, knitted garments, woven garments have been
competing with each other for fiscal incentives and duty concessions. Now that a level
playing field has been brought about the role of each sector has to be clearly defined
while the power loom sector can cater to the mass market in the domestic sector for the
lower and mid sections of the society, with of course the exception of some modernised
58
31 December 2011
units at the apparel parks, etc. The mill sector could be allowed to take over garments
units and cater to the export sector and upper-end of the market in the domestic market.
The fourth challenge facing the industry relates to moving up the value chain. There are
two dimensions when it comes to moving up the value chain and one relates to what
China did. China consciously decided that they will export value-added products instead
of exporting yarn, the highest value being in garments China's share in global textile trade
is 13.5% and in global clothing trading is 20.6% amounting to US$ 20.56 billion and US$
41.30 billion respectively. While this may hurt some of the sectors adversely in the short
run over an extended period of time, this will be beneficial to the entire industry. This could
also give a fillip to the developments of weaving and processing sectors, which at present
are the weak links in the textile value chain. The other dimension of moving up the value
chain relates to the higher end of the market. A majority of exports of garments cater to
the lower end of the value chain. The industry needs to move up to the middle and higher
end, where the value realisations are much higher.
The next challenge facing the industry is improvement in the crop yield of cotton: while we
boast of availability of all the varieties of cotton, our yields are one of the lowest in the
world and inconsistent in quality. Enough attention had not been paid to the modernisation
of the ginning sector in the past.
Yet another challenge facing the industry relates to the management structure. Most of the
textile units are family managed. In order to overcome the various challenges outlined
here and as a measure of good corporate governance, ownership needs to be diverted
and distinguished from management control. We have seen this trend taking roots in other
industries but textiles is an industry having presence in both the organised as well as the
unorganised sectors. There are good owner-managers of spinning sectors but to
accelerate growth and vertically integrate to value addition, economics of scale
professionalism is the need of the hour.
5.1. SWOT Analysis of the textile Industry
SWOT analysis is a strategic planning method used to evaluate the Strengths,
Weaknesses, Opportunities, and Threats involved in a project or in a business venture. It
involves specifying the objective of the business venture or project and identifying the
internal and external factors that are favourable and unfavourable to achieve that
objective. It is an important step in planning. The role of SWOT analysis is to take
information from environment and separates it into internal issues (strengths&
weaknesses) and external issues (opportunities and threats).Once this is completed,
SWOT analysis determines if the information indicates something, that will assist the firm
in accomplishing its objectives or if it indicates an obstacle that must be overcome or
minimised to achieve desired results (Ferrell, Lucas and Luck, 1998). The technique is
credited to Albert Humphrey, who led a convention at Stanford University in the 1960s and
1970s using data from Fortune 500 companies.
A SWOT analysis must first start with defining a desired end state or objective. A SWOT
analysis may be incorporated into the strategic planning model. Strategic Planning has
been the subject of much research.
Strengths: characteristics of the business or team that give it an advantage

over others in the industry.
Weaknesses: are characteristics that place the firm at a disadvantage relative
to others.
Opportunities: external chances to make greater sales or profits in the
environment.
59
31 December 2011
Threats: external elements in the environment that could cause trouble for the
business.
Strengths
The Indian textile industry is Most of the inputs required for this sector being available
from domestic sources and there is very little requirements of imports and precious foreign
exchange.
Existence of more than sufficient productive capacity and globally more
competitive than any other industries in India.
Easy availability of skilled labour.
Managements with business background.
Presence of qualified technical personnel.
Comfortable availability of raw materials.
Large domestic market.
Material and machinery available for many of the products.
Ability to run short batches.
Availability of testing facilities.
Weaknesses
Low level of modernisation and up gradation of technology.
Low level of productivity due to inadequate formal training.
Horizontal growth of power looms (SME's).
No exposure to export markets.
Difficulties in accessing of testing designing and technical services.
Cost based market set up.
Not ready for diversification of products.
No willingness to change existing work practices.
No access to market information/inadequate market information.
Unfriendly labour laws.
Fragmented structure with the dominance of the small scale sector.
Foreign investments are not coming in as the overall factors influencing the
industry are not investment friendly In many instances Indian export consignments
faced non-tariff barriers in the US market, mainly in the form of shipments being
subjected to rigorous labelling and marking requirements, security parameters and
document verification at US ports and issues relating to compliance with labour
and environmental norms.
Opportunities
Indias strong performance and growth in the textiles sector is aided by several key
advantages that the country enjoys, in terms of easy availability of labour and material,
buoyant and large market demand, presence of supporting industries and supporting
policy initiatives from the government.
Growing domestic and international markets.
Untapped markets in Latin America and other countries also.
Product mix and product diversification.
Becoming sub-contractor to large units.
Catering to bulk orders by distributing the work over the cluster units to form
networks.
Abundant scope to supply to multinationals shops setting up in India.
Forming of raw material consortium/raw material bank.
Threats
Various regulatory, technological and marketing changes were expected to affect Indias
textile industry over the next few years. There are few factors such as infrastructure and
60
31 December 2011
government policies that have caused wide gap in the economic development between
India and other nations for textile industry in particular, in spite of enjoying the benefits of
abundant cheap labour, low manufacturing cost, available raw materials and a large
domestic market.
Entry of multinational in domestic markets.
Stiff competition from other countries (The performance of global competitor's in
fabrics and garments indicates that there are at least 4 countries ie, China,
Indonesia, Thailand and Pakistan).
Slow improvement in quality to international standards and adoption to fast
changing fashion demands.
Logistical disadvantages in terms of shipping costs and time pose serious threats
to its Growth
The India's textile industry should aim at becoming the most preferred and competitive
textile hub for global sourcing. This can be achieved through a strategy called out from
leveraging the strengths and opportunities and combating the weaknesses and
challenges. The textile industry in India is one of the few industries, which has the
potential to emerge as a true global player. A well-devised action plan coupled with
effective delivery mechanism can see India is emerging as a winner in the quota free
market.
6. Summary and Conclusion

Using time series data of 30 years ranging from 1979-80 to 2008-09, the study tries to
assess the economic performance of Indian textile industry in view of capacity utilisation
measured econometrically. The major findings of the paper are:
First, the trend in growth rate of capacity utilisation follows a decelerating path during the
post reform period as there was a sharp decline in average capacity utilisation rate in
post-reform period as compared to pre-reform period.
Secondly, annual average growth rate of capacity output shows steep upward trend but
actual output grows at a much slower rate than capacity output resulting declining growth
rate in CU.
Thirdly, the liberalisation process is found to have its significant negative impact on
capacity utilisation since there is a fall in average growth rate of capacity utilisation during
the post-reform period.
Fourth, the empirical findings suggest that there exist considerable variations in the
capacity utilisation rates over years within same industry.
Lastly, it has also been noticed that capacity utilisation in this particular industry has been
gradually increasing after Multi-fibre Agreement (MFA) has phased out since 1st January
2005, and it continued till economic recession begins during 2008and the industry is
gradually striving harder to sustain its past achievement.
There is an urgent need of stimulating thinking amongst the industry leaders and policy
makers in order to enable them to come up with a well thought out comprehensive
strategy and an action plan for their sustainable growth and profitable operations.
7. References
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31 December 2011
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Azeez, E.A. (2002) Economic Reforms and Industrial Performance: An Analysis of
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8. Appendix
Appendix: A-1 Energy Inputs
Industry level time series data on cost of fuel of Indian textile sector have been deflated by
suitable deflator (base 1981-82 = 100) to get real energy inputs. An input output table
provides the purchase made by manufacturing industry from input output sectors. These
transactions are used as the basis to construct weight and then weighted average of price
index of different sectors is taken. Taking into consideration 115 sector input -output table
(98-99) prepared by CSO, the energy deflator is formed as a weighted average of price
indices for various input-output sectors which considers the expenses incurred by
manufacturing industries on coal, petroleum products and electricity as given in I-O table
for 1998-99. The WIP indices (based 1981- 82) of Coal, Petroleum and Electricity have
been used for these three categories of energy inputs. The columns in the absorption
matrix for 66 sectors belonging to manufacturing (33- 98) have been added together and
the sum so obtained is the price of energy made by the manufacturing industries from
various sectors. The column for the relevant sector in the absorption matrix provides the
weights used.
Appendix: A-2 Capital Stock
The procedure for the arriving at capital stock series is depicted as follows:
First, an implicit deflator for capital stock is formed on NFCS at current and constant
prices given in NAS. The base is shifted to 1981-82 to be consistent with the price of
inputs and output.
Second, an estimate of net fixed capital stock (NFCS) for the registered manufacturing
sector for 1970-71 (benchmark) is taken from National Accounts Statistics. It is multiplied
by a gross-net factor to get an estimate of gross fixed capital stock (GFCS) for the year
1970-71. The rate of gross to net fixed asset available from RBI bulletin was 1.86 in 197071 for medium and large public Ltd. companies. Therefore, the NFCS for the registered
manufacturing for the benchmark year (1970-71) as reported in NAS is multiplied by 1.86
to get an estimate of GFCS which is deflated by implicit deflator at 1981-82 price to get it
in real figure. In order to obtain benchmark estimate of gross real fixed capital stock made
for registered manufacturing, it is distributed among various two digit industries (in our
study, textile industry) in proportion of its fixed capital stock reported in ASI, 1970-71).
Third, from ASI data, gross investment in fixed capital in textile industry is computed for
each year by subtracting the book value of fixed in previous year from that in the current
year and adding to that figure the reported depreciation on fixed asset in current year.
(Symbolically, It = (t - t-1 + Dt ) / Pt) and subsequently it id deflated by the implicit deflator
to get real gross investment.
Fourth, the post benchmark real gross fixed capital stock is arrived at by the following
procedure. Real gross fixed capital stock (t) = real gross fixed capital stock (t 1) + real
gross investment (t). The annual rate of discarding of capital stock (Dst) is assumed to be
zero due to difficulty in obtaining data regarding Dst.
65

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Journal of International Academic Research (2011) Vol.11, No.3.