India is set to become the next outsourcing story in textiles after the recent success of business process outsourcing.

The dismantling of quota system from 2005 poses both challenges and benefits but the net result is expected to be positive for the country.

According to analysts, India's strengths in textile production include inexpensive, abundant and skilled labour force that is suited for labor intensive apparel exports, sufficient raw material supplies because India is third largest producer of cotton with highest area under cotton cultivation in the world.

It is still maintaining the position of second-largest textiles producer in the world having a long and deep routed tradition in textile production.

India needs to seize the opportunities thrown open by developed nations. High cost manufacturing locations such as the United States and Europe and also regional trading partners like Mexico and the Caribbean are set to shift of production to low cost manufacturing locations like China and India.

Besides, the volume growth in worldwide trade in textiles, especially apparel is significant.

It is worth noting that until recently, the international textile trade was based on bilateral agreements, skewed duty structures and quotas.

But by January 1, 2005, these quantitative restrictions band tariff barriers are being phased out with industry moving completely toward global integration.

Industry analysts expect that world trade in textiles will surge exponentially post the quota era, as India's labour cost advantage will result in a disproportionate market share gain for Indian exports.

The government's new textile policy has set a target of textile and apparel exports of $50 billion by 2010 from the present level of $12 billion of which the share of garments will be $25 billion (at present $6.20 billion).

The growth potential of the industry is also evident from the expected growth of the global textile trade, which is estimated to increase from $400 billion to $700 billion by the year 2010.

Currently, India is focused more on low value fabric exports than high value apparel/clothing exports partly due to quota restrictions and party due to past government policies.

However, going forward the growth opportunity lies clearly in increasing the share of garment exports (which leverages India's labor competitiveness model).

Taking into account the opportunities and threats arising due to the removal of quotas as well as the government's new textile policy, on balance analysts believe that textile exports will increase and, like software, textiles could possibly become the next outsourcing story after software.

The opportunity that could arise for textile exports in 2005 could be compared to the opportunity that software majors had on the Y2K issue.

However, a key difference is that the Indian textile industry is fragmented with only 5 per cent in the organised sector as compared with software exports where almost everything was in the organised sector.

But on the other hand, while Y2K helped software during 1999-2000, the removal of quotas is likely to be a sustaining factor. Thus net, net, analysts believe that textile exports will increase.

This coupled with buoyant trends in software exports (including IT enabled services), which are currently included under invisibles in the balance of payments, will result in a continuation of current account surpluses.

In a report by a foreign brokerage house, despite the general belief that the removal of quotas can be beneficial given India's competitive advantage in labor and raw material cost, it is likely that the opposite can also happen.

Given the technological obsolescence in the textile industry in India, the industry needs to invest significantly in building scale and upgrading its resources. The government has estimated that expenditure of approximately Rs 980 billion would be required to upgrade the entire textile industry.

Moreover, India needs to get rid of its own weaknesses such as lack of economies of scale, low productivity and weak quality control and severe technological obsolescence.

The threats posed to India include decline in unit values given decrease in prices as this is the key economic rationale for the developed countries to open their markets - welfare gains for their citizens through lower priced goods.

Analysts say that removal of quotas may open new frontiers, but will also close captive markets. The EU and US will no longer be restrained in buying as much as they want from the cheapest possible sources.

Consequently, the ending of quotas could result in cut throat competition among developing countries. Thus, while the world trade in textiles may grow in volume terms, due to the pricing pressure it may even stagnate or decline in value terms post the removal of quotas.

In addition, exporters in India fear that freer imports could lead to dumping of low-cost fabrics from China and other Southeast Asian countries.

China offers a credible threat to exporters across the world. With a focused approach from the Chinese government, China has built high economies of scale and has increased its share of textile exports dramatically from 9 per cent to 22 per cent.