After Multi Fiber Arrangement (MFA) is phased out, the textile industry of developing economies like India will have a reason to be optimistic about the long-term growth opportunity. The textile manufacturers will have a chance to increase the share of exports to the European Union (EU) and US markets.

The government has set an ambitious textile export target of US$ 50 bn by 2010 as compared to US$ 11 bn currently. Considering the huge potential in the European and the US markets, it seems possible.

Key Positives It's a free world:  Post 2004, the Multi Fiber Arrangement (MFA) has been phased out. This will enable Indian companies to export their products in any quantity to any country as against a specific quota provided for export. Lower labour costs:  Due to cheaper labour available in India as compared to European countries, the big brands have started outsourcing garments from Indian companies. Thus, the growth potential expands post 2004. TRF showing results:  In order to restructure the sector, the government set up a textile reconstruction fund that will help in reducing the effective interest burden on viable textile companies. This fund targets reduction in interest rate for all borrowers in range of 8%-9%. This move has proved to be very successful thus far. Huge potential:  The government has set an ambitious textile export target of US$ 50 bn by 2010 as compared to US$ 11 bn currently. Considering the huge potential in the European and the US markets, it seems possible.		Key Negatives Stringent labour laws:  Impractical labour laws also restrict large players to lay off redundant workers to improve competitiveness. Though promise of labour reforms have been made n the past, there has been a lag in terms of implementation. High fragmentation:  One of the biggest drawbacks of the India textile sector is that it is highly fragmented at lower levels. Access to finance and technology has been hard to come by, thus affecting growth prospects of smaller manufacturers. Volatile raw material prices:  Since raw material cost as percentage of expenses is significant, the textile majors have suffered.

This is part of Equitymaster's Budget 2005-06 series. Equitymaster.com is one of India's premier finance portals. The Web site offers a user-friendly portfolio tracker, a weekly buy/sell recommendation service and research reports on India's top companies.