Transforming the textile value chain

Islamabad:

Pakistan’s textile value chain (TVC), the cornerstone of the economy, is on a transformational journey. As the country’s largest and oldest manufacturing industry, it plays a critical role in sustainable exports and GDP contribution, aligning with global trends for corporate responsibility and optimization. Despite the fact that textiles are an important factor in the economy of Pakistan, a significant number of enterprises still operate in an incomplete structure. However, the sector successfully exports a significant proportion of its total output. In integrated sectors, each participant contributes to the added value of textile products.

The paradox of a long-standing economic powerhouse with mostly non-integrated factories highlights both the resilience and the challenges facing the textile value chain (TVC) in Pakistan. Pakistan is a major producer, consumer and exporter of cotton yarn worldwide. However, the average size of spinning mills in Pakistan is comparatively smaller than the global standard, making them less competitive, particularly with small spinning units using outdated technology and producing yarn below global market requirements.

Integrated textile mills offer many advantages that contribute to operational efficiency and product quality. However, they face challenges such as being capital intensive, less responsive to technological developments, and susceptible to disruptions that can affect the entire production process. Under multi-stage turnover tax, non-integrated factories face increased gross taxes compared to their integrated counterparts. This discrepancy arises from the unique tax structure in non-integrated industries, which imposes turnover tax at each stage of production. Consequently, as a product moves through multiple factories, cumulative taxation results, leading to increased costs for the final product, making the non-integrated sector less competitive and reducing profits.

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Furthermore, the sales tax collection mechanisms differ between integrated and non-integrated factories. Integrated factories often benefit from a sales tax advantage due to integrated reporting of the entire production process, while non-integrated units suffer from reduced transparency, resulting in reduced sales tax refund at the final export stage. According to IMF reports, the inclusion of certain cost elements in the product price, facilitated by the refund of sales tax on exported goods from incomplete factories, makes the final product less competitive. This complexity in the tax landscape affects the competitiveness and operational efficiency of both integrated and non-integrated industrial players.

The imposition of tariffs on raw materials exacerbates the challenges for Small and Medium Enterprises (SMEs), especially as they struggle to take advantage of duty-free benefits in the export duty structure. Large, well-integrated companies can benefit from duty-free regimes for exporters, while smaller companies face difficulties in using these tools due to the complexity of the application procedures. Consequently, SMEs find it difficult to compete as these tariffs significantly inflate production costs throughout the production process, creating a barrier to competitiveness. This prevents their innovation from aligning with global trends, limiting their ability to offer cost-effective products and contributing to the existing imbalance in Pakistan’s textile trade.

Financial institutions naturally view SMEs as riskier due to their smaller size, limited track record and insufficient collateral. Consequently, SMEs face difficulties in obtaining loans or credit on favorable terms. Integrated factories, on the other hand, enjoy potentially easier access to credit due to their more integrated and stable business model.

Flexibility is a key aspect worth noting, particularly in integrated textile industries, where imports for re-exports can improve efficiency and ensure a stable supply of raw materials. It is an important parameter, although it can increase dependence on foreign suppliers. Conversely, non-integrated industries may prioritize domestic sourcing for better control. However, when these non-integrated industries import for re-export, they could face coordination challenges.

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Finally, traceability in Pakistan’s textile industry varies. Integrated factories benefit from easier traceability due to the centralized nature of their production process, while non-integrated factories may find traceability more difficult due to the involvement of many actors at different stages of production. On the other hand, non-integrated textile mills offer several advantages, mainly specialization. By focusing on specific stages of the production process, these factories can achieve a high level of expertise and efficiency in their chosen areas. This focused approach enables a targeted allocation of resources, contributing to a more sustainable and energy efficient production model. The model also allows for increased flexibility, enabling rapid adaptation to market demands and technological developments. In addition, spreading risks across different stages mitigates the impact of failures, enhancing the overall resilience of unfinished plants.

The debate on integrated versus non-integrated textile units is also important from the point of view of sustainable practices. The impact of processes such as picking, transport and ginning on cotton quality is particularly important here. Integrated units have the potential to implement more coordinated and sustainable practices at these stages. This integrated approach enables better control throughout the supply chain, leading to improved cotton quality and reduced environmental impact. In contrast, non-integrated units face challenges in maintaining consistent and sustainable practices throughout the cotton processing cycle. Addressing sustainability issues in these processes is becoming imperative for both integrated and non-integrated units in Pakistan, highlighting the need for the industry to adopt eco-friendly methods and ethical sourcing practices to ensure high quality and environmentally sound production. responsible fabrics.

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Non-integrated textile factories face serious challenges such as lack of communication between different actors involved in the production process. Pakistan’s autonomous spinning units are becoming increasingly out of step with competitors. Globally, textile businesses are moving towards full or partial integration. To remain competitive and relevant in the evolving textile sector, Pakistan will have to align itself with this trend. This makes it imperative for standalone spinning units to integrate and differentiate their offerings. Integration is not just a necessity, but a critical imperative to survive in the competitive landscape. Pakistan’s textile sector, with its numerous units and challenges in small textile units, is leaning towards non-integration. They will have to deal with issues of outdated technology and access to credit. In contrast, Bangladesh’s textile industry, represented by the Bangladesh Textile Mills Association which oversees yarn mills and fabric mills, exhibits a higher level of integration, fostering collaboration at various stages. Meanwhile, India’s textile landscape, characterized by an extensive number of mills and extensive production capacity, suggests a significant degree of integration.

In conclusion, the integration of Pakistan’s textile industry, especially SMEs, with monitoring and tracing systems is crucial to take advantage of the GSP+ status and expand into new markets. The establishment of the National Compliance Center marks an important step towards the improvement of traceability and compliance standards, necessary to strengthen the competitiveness and sustainable development of the sector. However, more comprehensive measures and strategic policies are needed to bridge this gap and enhance sustainable growth in the export sector.

SHAHID SATTAR HAS SERVED AS AN ENERGY MEMBER OF THE PLANNING COMMITTEE AND IS ALSO AN ADVISOR IN THE MINISTRY OF FINANCE. AMNA UROOJ WORKS AS A RESEARCH ANALYST AND HAS A BFIL IN PUBLIC POLICY FROM PIDE

Published in The Express Tribune, January 15^u2024.

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