Textile Industry Decoded Can India Create Jobs The Daily Brief 496

In today’s episode, we’ll break down two important stories. First, we’ll do a deep dive into the textile industry and then we’ll talk about whether we can find jobs for the next billion workers. Welcome back to the daily brief by Zerodha, where we cut through the noise to help you understand what’s actually happening in the most important stories from business and markets.

[music] I’m your host Akshara and today is Tuesday, 30th June. Coming to the first story. So, pull out a cotton t-shirt from your almirah and look at the tiny tag stitched inside the collar. Chances are it probably says made in Bangladesh or made in Vietnam. The chances that it’ll say made in India are much lower. Now, this should be strange. We have more land under cotton than any country on earth, more spindles running than almost any country on earth, and more textile workers than most countries have citizens. Our textile industry is enormous in scale and the textile and apparel industry is India’s second largest employer after agriculture. 45 million people work in it directly and many millions more depend on it for their livelihoods, especially in small towns across Gujarat, Tamil Nadu, Uttar Pradesh and West Bengal, where formal industrial work is otherwise hard to find. This sector brings in about $37 billion in export earnings every year. So, when it slows down, the effects show up in the larger economy. And yet, it doesn’t make the t-shirts in your almirah. Now, to understand why we’re missing from the world’s closets, it helps to understand the chain that connects a cotton field to a finished t-shirt. So, this is a value chain that flows through five stages and it all begins with raw fiber, either cotton from a farm or synthetics from a chemical plant. This fiber goes first into a spinning mill where it’s cleaned, combed, and twisted into yarn. That yarn is then sent to a weaving unit where it becomes cloth. At this point, the cloth is colored a neutral beige, but before it becomes something you’d like to wear, it must go to a dyeing and processing unit where it’s bleached, washed, and colored. Finally, that colored cloth reaches a garmenting unit where workers cut and stitch it into clothing. So, at each of these stages, it picks up value. A kilo of raw cotton is worth about rupees 170, and over the course of its journey, it turns into two to three finished garments worth rupees 800 to 1,000. That is a five-to-sixfold multiplication, but most of that appreciation happens at the very last stage, garmenting. And this is also where most human labor comes in. Until this point, things are largely mechanized with spinning mills and weaving units doing most of the work, but garmenting is almost entirely manual. Hundreds of workers at sewing machines assembling each piece by hand. The economics here are driven by labor cost and skill, not machinery. And that is where our issue lies. India is genuinely strong at the earlier stages. We run more than 43 million active spindles and are the world’s second largest spinning hub, but we are weak at garmenting. Only that’s where the most money is made and where most jobs are created. And we’ve been stuck here. India’s share of global apparel exports has barely moved for nearly 20 years, and over the same period, Bangladesh went from 2.2% to nearly 10%. Vietnam went from 1% to nearly 8%. Both were behind us in 2000. So, this is the outcome of two factors. One, the fiber we chose to build our industry around, and two, specific policy decisions that kept our factories small. So, the clothing world runs on two types of fiber, cotton and man-made fibers or MMF. Now, cotton comes from farms. Its supply moves with weather, harvests, and pest cycles. Man-made fibers like polyester, nylon, or viscose come from chemical plants, and these run at a predictable cost year round. So, over the last 20 years, fast fashion, activewear, and athleisure drove a massive global shift towards synthetic cloth. Globally, 70% of all fiber consumed for any purpose today is man-made. Even when it comes to apparel specifically, cotton and synthetics are at a roughly equal footing. India, meanwhile, has stuck steadfastly to cotton. 60% of the yarn we make is cotton, and this has made us the world’s largest cotton yarn exporter. But, we’re nowhere close in the global man-made fiber trade. And this is reinforced by a structural tax problem for anyone working with synthetic fiber. So, MMF fiber is taxed at 18% and yarn at 12%. But, the fabric woven from it, meanwhile, is taxed at only 5%. So, if you want to try your hand at making synthetic yarn or fabric, you must pay the higher rate up front and wait months for a refund, locking crores of working capital in the system. This is a constant drag for anyone in the value chain. Now, our cotton comes with its own problems. India has the largest cotton growing area in the world, but our yields run at roughly half the global average. For a brief period of a dozen years, our yields were improving massively, but in 2015, the government capped what biotech companies could charge for their seeds, and this killed any incentive for them to develop better varieties for India. Our progress stalled, production levels fell as pests adapted to existing strains, and domestic cotton prices now swing 18 to 22% in a single year, causing immense volatility for spinning mills and weavers downstream. In fact, government policy makes many appearances in the story. Until the year 2000, the Indian government reserved the entire garmenting sector for small scale industries. And of course, this was well-meaning. The government wanted to protect artisans. The practical effect, however, was that nobody could build a large garment factory in India for decades. China and Vietnam, meanwhile, spent the 1990s building massive integrated hubs where spinning, weaving, and stitching happened under one roof at enormous scale. And by the time India deregulated, they’d already built deep relationships with every major global brand while our textile industry remained artisanal. But even after deregulation, our labor laws penalized growth. Under our labor laws, once a factory crossed 100 workers, one could only fire them with government permission. Reducing headcount during a downturn became nearly impossible. So instead, factory owners chose to stay small by design. Today, over 80% of Indian apparel factories are MSMEs scattered across fragmented clusters. They’re unable to take on the large, complex orders that global brands need. So cotton grown in Gujarat may be spun in Tamil Nadu and woven in Maharashtra, all connected through a broken logistical system. Each handoff across that geography adds cost and time. As a result, Indian manufacturers are slower and more expensive than their main competitors. For a brand managing tight inventory cycles, this lack of speed is fatal. Meanwhile, countries like Bangladesh began to undercut us on labor costs. Our garment workers earn about $200 a month on average. In Bangladesh, they earn about $120. And that 67% wage premium is a consistent drag for the volume driven orders that fast fashion brands place. Now, for most of the last 20 years, the condition for India to break into global apparel trade simply weren’t there. China dominated the industry, beating us on size organization. Bangladesh beat us on costs and we were crushed in between. But that might now be shifting. So China is making a slow retreat from the global apparel trade. So about 80% of China’s domestic cotton comes from the Xinjiang region. And in 2021, the US passed a law effectively barring imports of goods made with Xinjiang cotton citing forced labor concerns. Now this made global brands deeply cautious about Chinese supply chains both on tariff grounds and on compliance and reputational ones. China’s share of global apparel exports has fallen from around 37% a decade ago to about 27% today. Brands are actively looking elsewhere. Now Bangladesh had been the biggest beneficiary of that shift, but lately it’s under pressure from multiple directions. So political crisis in 2024 forced a violent change in government making buyers nervous about having too much sourcing concentrated in one country. Meanwhile, its energy has worsened. The country depends heavily on imported LNG, the cost of which has spiked. Grid failures are limiting factory hours and their government recently imposed duties on synthetic fiber imports to protect local chemical producers raising yarn costs for their own manufacturers at exactly the moment they needed to shift to synthetics. And to add to its misery, Bangladesh’s trade access will also narrow from 2029. So the EU currently gives zero import tariffs to countries classified as least developed countries or LDC under a scheme called Everything but Arms. Now this is essentially a gift to the world’s poorest nations to help their exports compete. Bangladesh qualifies as an LDC, which is why its garments walk into European stores paying nothing while Indian garments face a 9 to 12% tariff. But its success has made Bangladesh wealthy enough that the UN wants it to graduate out of LDC status. For now, it has a 3-year extension that will go on till November 2029, but after that, it will lose its zero tariff benefit unless it can qualify for a separate EU scheme called GSP plus, which offers partial duty-free access to developing countries that meet certain labor rights and governance conditions. But nobody knows yet whether Bangladesh will qualify. India, meanwhile, is negotiating a full free trade agreement with the EU. If that deal closes around the same time, Indian garments could enter the EU at zero tariff for the first time just as Bangladesh is losing its own preferential access. So in the US, India faced tariffs on textile exports as high as 50% at the peak in mid-2025. While we can say nothing about the United States with certainty these days, for now, the tariff rate is set at 10% and the government, meanwhile, is actively pushing export competitiveness. So there are now seven PM Mitra textile parks in development with a budget of rupees 4,445 crore, which are designed to collocate spinning, weaving, dyeing, and garmenting under one roof. If this works out, it could bring the fragmentation problem to a close and slash the lead time gap that has held us back. Now there’s a lot of detail we’re yet to explore in India’s second largest industry, and gaining market share isn’t easy even now. Our success is conditioned on many variables falling into place. So right now, there are hundreds of power loom owners in small towns like Bhiwandi. Many have been the same machine for years braving tumultuous changes to their yarn costs because they lack the ability to retool for synthetics. And the new industrial parks could take years to come up. In the meantime, can they begin a turn of India’s fortunes beating out international competition and bagging contracts? A lot of the future direction of the industry hinges on questions like this. If you prefer reading the daily brief instead of watching the video, check out the link to the newsletter in the description. Coming to the second story. So, there’s a puzzle in the field of development economics. Through the 2010s, the average developing economy grew more than 3% faster than the average rich one. And yet, across the decade, their employment levels grew barely 0.2% faster. For all that extra growth, the jobs dividend was a mere rounding error. Now, the World Bank has just published a 252-page-long report called the global jobs challenge trying to explain why. And it grapples with a sobering challenge. Roughly 1.2 billion young people are reaching working age in emerging and developing economies by 2035. This will be the largest youth cohort in history. So, how will we find jobs for them all? The report tries to wrestle with this challenge looking at why growth doesn’t automatically create jobs and where new jobs could actually come from. Now, this report may be interesting for the world, but nowhere is it as salient as it is for us here in India. We have the largest jobs challenge in the world in absolute numbers, and that makes this a report we should take notice of. So, here’s the basic problem. Across the world in the next decade, about 1.2 billion young people shall enter their working years. Of course, many others will retire, but even accounting for that, the world’s workforce will expand by 450 million. Now, compared to those that came before, these new workers will also be unusually educated. In fact, they’ll be the best educated generation the developing world has ever produced. Now, this won’t happen everywhere at once. India shall see the largest problem in terms of size with the world’s largest youth population. But the epicenter of the surge will shift from the Indian subcontinent to sub-Saharan Africa, which is increasing faster in percentage terms. So, roughly three quarters of the world’s new working-age workers until 2050 shall come from that region. And more than a fifth of them will live in fragile or conflict-affected states. So, do we have a way of employing them productively or is the world staring at a potential lost generation? Structurally, the world economy is slower than before. The world’s growth potential, according to the World Bank, runs a third below where it was in the 2000s. And we are already seeing the impact of it. In 1991, out of every 100 working-age adults, 69% were actually employed. By 2019, that number had fallen to 64. Now, this makes our problem particularly frustrating. A capable generation of workers is entering a global economy that has become substantially worse at accommodating them. So, the bank carves out a group of 12 high-jobs-need economies where the problem is especially acute. India is one of them, alongside others from our region like Bangladesh and Pakistan. So, what options do these countries have? One would assume the answer lies somewhere in pursuing prosperity. But, there’s a weird statistical problem. In rich countries, an extra percent of GDP growth brings approximately 0.6% more employment growth. For the average developing economy, that drops to 0.23%. Now, for these 12 countries, it’s just 0.08%. The correlation was so small that you can’t even trust the number. It could be random noise. Now, to be fair, these countries are adding some jobs in absolute terms. Some of their numbers simply seem off because of how fast these countries’ populations have exploded in recent years. And to paraphrase the Red Queen, these countries have to run as fast as they can just to stay in place. But, fundamentally, for countries like ours, growth, while important, isn’t a reliable job creation strategy. So, why is this relationship so weak? The answer is informality. The informal sector in developing economies acts in practice as an unemployment insurance system. So, when growth slows in countries like ours, people absorb the shock by working outside the formal economy. They might help out at a family plot, lend their labor to a construction site, or run a roadside pakora stall. And when growth picks up, some of those people get pulled back into wage work. In fact, in much of the developing world, even when someone is classified as employed, they may actually secure wage work for only 20 to 50% of their days. So, that means where wage employment follows growth positively, informal self-employment runs opposite to it. Now, unlike developed countries which have formal unemployment support programs, in the developing world, many workers sit in an informal buffer instead. In the Indian subcontinent, for instance, nearly 90% of workers are informal. And this buffer absorbs shocks in both directions. It can keep employment figures looking stable even while livelihoods remain fragile, and at the same time, growth doesn’t create more employment. It just shuffles people out of the informal sector and into the formal one. Now, this doesn’t mean growth is unimportant, but the quality of growth matters. Good growth happens when it comes from better productivity. So, when you sort countries by how much they improved their productivity, those in the top quartile by productivity growth saw extreme poverty levels fall by 1% every year between 1981 and 2015. On the other hand, a country can also grow mathematically because more people are entering its workforce. But countries that took this path actually saw their poverty levels increase. Unfortunately, the path to the best sort of growth, one that raises productivity, increasingly appears to be closing. So, manufacturing is the best sector for turning growth into jobs. It creates well-paying employment at a significantly higher rate than any other sector of the economy. But, it’s harder to become a manufacturing giant now than it was a generation ago. Countries like China still dominate industries across levels of complexity, while trade restrictions have more than tripled since before the pandemic. Pollution-heavy industries, often the first rung on the ladder, are harder to set up in an era marked by climate change. Elsewhere, workers must contend with AI eating into routine tasks. So, what then should a country pursue? While there isn’t a clear link between GDP growth and jobs, there is a strong link between investment growth and jobs. So, when countries see investment booms, they also experience a major uptick in their levels of employment growth. So, the report studies five countries with sustained employment booms: Australia, Chile, Colombia, Korea, and Singapore. All of them had a common signature. They saw a sustained period when investments grew by 9.5% a year, nearly four times the norm. And with it came an employment growth of 3.4% Some of them began their investment cycles from modest income levels, riding these waves to reach prosperity. So, attracting investment, in other words, is a key ingredient in job creation. But, investment chases places with foundational infrastructure, a business-friendly environment, and low barriers to moving private capital. Only bringing this together, as India’s currently learning the hard way, is harder said than done. Now, the report identifies five sectors as most likely to absorb workers at scale: infrastructure and energy, agribusiness, tourism, health, and value-added manufacturing. So, no country faces this problem at the scale that India does. In 2035, we shall have the world’s largest youth cohort with 238 million people aged 15 to 24. This cohort shall be 40% larger than the only country with a population of rival size, China. We’ll add an extra 132 million working-age people by 2050, and all of these people will need jobs. So, how many jobs exactly? This isn’t entirely clear. One prominent study estimates that India needs between 60 million and 148 million new jobs by 2030, and that is a 2.5 times range. This wide dispersion exists because it isn’t clear how many women we can even hope shall enter the workforce. And if India’s female participation stays roughly where it is, you get the easier target of 60 million. If India manages to bring women into paid work at scale, we shall need roughly 148 million new jobs. So, in other words, our gender issues add a substantial amount of confusion to our job requirements. Now, to be fair, some recent data shows more women entering the workforce. The periodic labor force survey puts female LFPR at over 40% in recent rounds, up from about 23% in 2017-18. But those numbers are complicated. These new jobs are overwhelmingly in unproductive quarters, coming from rural self-employment and agriculture. So, these look like jobs, but they’re the sort of informal work that become part of the employment buffer without improving people’s lives substantially. Now, this is characteristic of a larger problem with India’s economy. So often, people participate in the labor force without real demand for their labor, and they’re counted as being employed, but are in reality badly underemployed. Meanwhile, we’re struggling to create high-quality jobs. So, this is why chasing jobs alone isn’t enough. India’s larger challenge is to ramp up investment and create productive jobs, and that has proven challenging. On one hand, India has a reasonable degree of public investment. Public capital expenditure has risen more than fourfold since FY18 to over rupees 11 crore budgeted for FY26. Gross fixed capital formation, accordingly, has held at around 30% of GDP for three straight years. Unfortunately, private corporate investment has not followed at the same pace, while household sector capital formation appears to have weakened. So, while the government is working on infrastructure, for it to turn into jobs, we need broad private investment. But, things aren’t hopeless. We are one of only two large developing economies, alongside China, where per capita incomes actually grew closer to those of rich countries between 2019 and 2025. In fact, we’ve already seen the sort of investment acceleration the report talks about. The report cites India’s 1990s liberalization as an example of just that. As we cut tariffs, shut state monopolies in steel and telecom, and let the rupee float, we saw a massive influx of investment through the later half of the decade. That is what we need to replicate, but we won’t have that opportunity forever. As we’ve covered before, our demographic window is closing. The size of our youth cohort is already falling, and this opportunity won’t stay open forever. As the forward to the report says, a jobs crisis is not preordained. Population sets the stage, but policy writes the script. And this report spells that script out for us. Private capital has been reluctant to reach large parts of the developing world over the last couple of decades. This is a trend we need to invert. Every rupee we can get in investment translates into greater productive capacity for Indian workers. And if Indian workers can do more with their time, that improves the lot of everyone else. So, there’s a lot of discussion on whether India’s growth is jobless, but that isn’t the most important question in this debate. A better question is whether India’s public investment surge can precipitate a broader investment and reform cycle. That is what all of the report success cases have managed, and that is what turns a construction boom into a jobs boom. Now coming to the tidbits, the RBI has proposed allowing NBFCs to borrow and lend in the term money market, while companies would be allowed to participate as lenders. The move aims to deepen India’s short-term funding markets and improve access to liquidity beyond banks. Coming to the next tidbit, Azurac Insurance study estimates that nearly 90% of India’s planned renewable energy pipeline faces high climate risks from floods, hailstorms, wildfires, and other extreme weather by 2030. Investing about $4.6 billion in resilience measures could nearly half the projected damage. Coming to the final tidbit, India is likely to approve a $370 million investment by Horse Powertrain, a Renault-Geely joint venture, marking one of the first major Chinese-linked manufacturing investments since foreign investment rules were relaxed earlier this year. The company plans to build hybrid powertrains and engines at Renault’s Chennai plant. That’s all the news I have for you. Thank you so much for watching, and see you in the next one. Disclaimer, this content is for informational purposes only. None of the stocks, brands, or products mentioned are recommendations or endorsements.