The global textile trade landscape is undergoing a structural shift. India’s recent trade breakthroughs with the European Union and the United States reflect a deliberate strategy to capture a greater share of global textile exports. For Pakistan, where textiles form the backbone of export revenues, this is not simply a competitive challenge; it is a clear signal that the existing policy and industrial strategy framework is no longer sufficient.
Textiles contribute approximately 60 percent of Pakistan’s export earnings and employ millions across the spinning, weaving, and garment segments. However, the sector’s traditional competitive advantages—low labor costs and an integrated cotton-to-garment value chain—are steadily eroding. India’s preferential market access, combined with sustained investment in industrial infrastructure and value addition, sends a stark warning: Pakistan must urgently modernize its textile sector, diversify product offerings, and strengthen technological and productivity capabilities to preserve and enhance its global competitiveness.
India’s Strategic Advantage Beyond Tariffs
India’s trade agreements with the EU and the US have significantly lowered tariffs on textiles and apparel, strengthening its appeal as a sourcing hub. For example, US tariffs on certain Indian garments have dropped from as high as 50% to below 20%, creating a clear price advantage. Beyond tariffs, these agreements signal policy stability and regulatory certainty—key factors for global brands. Coupled with textile parks, compliance systems, and industrial incentives, India is positioning itself as a dependable long-term supplier and capturing orders shifting away from China and other exporters. “Global buyers now prioritize reliability and compliance as much as cost. India is leveraging this shift, and Pakistan must respond.”
Pakistan’s textile exports remain highly concentrated, with the EU and the US accounting for over 70% of revenues. While the EU’s GSP+ scheme has offered a competitive edge, preferential access is neither permanent nor guaranteed. With India now enjoying similar benefits, Pakistan risks losing market share unless it improves price competitiveness, speed, compliance, value addition, and quality. The threat is immediate, as global buyers diversify sourcing to reduce risk. Without strategic policy reforms, orders may shift to competitors better aligned with international buyer requirements.
Pakistan’s textile sector has a complete value chain from cotton cultivation to finished garments—a rare advantage. Yet several structural issues undermine competitiveness:
Cotton Decline
Cotton cultivation in Pakistan has declined steadily, falling from about 3.3 million hectares in 2015–16 to nearly 2.8 million hectares in 2025–26. This contraction is driven by low farm-gate prices, rising input costs, pest infestations, limited adoption of high-yield varieties, and the adverse effects of climate change, including higher temperatures, erratic rainfall, and floods. In addition, misalignment between support prices and production costs, declining yields, and constrained access to formal credit have discouraged growers from cotton cultivation. This downturn has resulted in a shortage of domestic raw material for an industry that accounts for over 60 percent of national exports, forcing manufacturers to rely on expensive imports and further compressing margins.
Energy Costs and Policy Uncertainty
Electricity and gas tariffs remain high and volatile. Textile manufacturing is energy-intensive, and unpredictability discourages modernization and investment in automation. Industries in Pakistan face a significant structural competitiveness gap due to energy pricing, with electricity tariffs at 11.5 US cents per kWh compared to 6.3 US cents per kWh in India, and gas/RLNG at $15/MMBtu compared to $9/MMBtu in India. This cost disparity and tariff volatility discourage technological upgrading and weaken Pakistan’s export performance.
Taxation Challenges
The effective tax burden in Pakistan is significantly higher than in competing economies. Although the statutory corporate income tax rate stands at 29 percent, exporters are also subject to additional levies, including the super tax, Workers’ Welfare Fund (WWF), and Workers’ Profit Participation Fund (WPPF). For large firms, these cumulative obligations raise the effective tax rate to nearly 46 percent. In comparison, India’s effective corporate tax rate ranges from 26 to 34 percent, Bangladesh applies rates between 22.5 and 27.5 percent, and Vietnam maintains a standard rate of 20 percent, with preferential regimes offering even lower rates. This substantial disparity constrains reinvestment, limiting firms’ ability to upgrade technology, enhance productivity, and expand into new markets.
The Finance Bill 2025 further complicated the tax framework by subjecting export proceeds to multiple advance tax deductions under Sections 154 and 147, treating the 1 percent tax as minimum rather than final. Combined with advance tax on local textile supplies, this creates a discriminatory and inequitable regime that discourages investment and weakens export competitiveness.
Access to Affordable Finance
Limited access to competitive financing remains a critical constraint. While the State Bank’s Export Finance Scheme (EFS) offers credit at approximately 8 percent, allocations are insufficient, forcing exporters to rely on commercial borrowing at double-digit rates. By comparison, India offers 7–10 percent, Bangladesh 4 percent (local) and 6–7 percent (foreign), and Vietnam 3.9–6.2 percent. This financing gap restricts capacity expansion, technology upgrades, and market diversification, particularly for SMEs.
Multiple Levies and Refund Delays
Exporters are subject to more than twenty federal and provincial levies, adding roughly 2 percent to business costs. Sales tax refunds are delayed by 4–6 months, tying up working capital and increasing borrowing costs. In contrast, Bangladesh and Vietnam provide near-instant duty-free access through bonded warehouses, while India processes refunds within one month.
Recent EFS Amendments
The exclusion of cotton, yarn, and fabric from the EFS and the imposition of import duties on these inputs have increased production costs and reduced competitiveness. Upfront duty payments block working capital, disproportionately impacting SMEs and disrupting production and export volumes. Additionally, the reduction of the EFS consumption period from 18 months to 9 months has created operational challenges for exporters.
Delayed Refunds and Working Capital Strain
Persistent refund delays severely strain industry liquidity, forcing exporters to bear interest costs on outstanding refunds and limiting expansion. Sales tax refunds under the FASTER system should be processed within 72 hours in accordance with Rule 39F of the Sales Tax Rules, 2006.
Investment Gaps
The removal of the Long-Term Financing Facility has raised the cost of capital and constrained investment in modernization and energy-efficient machinery. This weakens productivity and export competitiveness compared to regional peers offering concessional financing.
Without addressing these weaknesses, Pakistan risks being left behind even in markets where it once held a clear advantage.
A Roadmap for Enhancing Competitiveness
India’s trade agreements offer a blueprint for Pakistan to strengthen its textile sector. Key steps include:
* Accelerate Trade Negotiations: Pursue agreements with major markets, including the US, UK, EU, and ASEAN, to secure preferential access and level the playing field.
* Increase Cotton Production: Promote the adoption of high-yield, pest-resistant cotton varieties alongside modern agronomic practices such as precision irrigation and mechanized sowing to enhance farm-level productivity. Encourage the cultivation of high-quality, long-staple cotton to meet evolving industry requirements and improve yarn quality.
* Cost-Effective, Regionally Competitive Energy Supply: Ensure stable and regionally competitive energy tariffs to enhance cost competitiveness and stimulate investment.
* Tax Rationalization: Reduce advance tax on export proceeds to 1 percent, restore the Final Tax Regime (FTR), abolish the super tax for exporters, and reduce sales tax on exports to single-digit levels to improve cash flow and competitiveness.
* Financing Measures: Restore the EFS to its pre-FY2024–25 structure and reinstate the Long-Term Financing Facility (LTFF) to provide affordable and predictable long-term financing.
* Value-Added Export Incentives: Introduce a Duty and Local Taxes Drawback (DLTL) at 5–6 percent for value-added exports achieving at least 10 percent annual growth.
* Product and Market Diversification: Promote high-value and technical textiles, specialty fabrics, and blended yarns. Invest in R&D and design innovation while supporting SMEs.
* Invest in Technology and Automation: Support modernization, automation, and digital supply chain integration through financing schemes, grants, and leasing options.
* Strengthen Compliance and Sustainability: Implement national standards for carbon reporting, traceability, and social compliance.
* Develop Integrated Textile Parks: Establish large-scale industrial clusters with shared infrastructure and compliance facilities.
“The textile sector’s future depends on integrating trade policy, industrial reform, energy and tax rationalization, technology adoption, and sustainability into a unified strategy.”
India’s trade agreements serve as a wake-up call. Pakistan’s textile industry still retains significant advantages: an integrated value chain, skilled labor, and a strong export legacy. However, these strengths are eroding in a rapidly evolving global market. Global buyers increasingly favor reliable, compliant, and technologically advanced suppliers. Countries that fail to adapt risk losing market share permanently. Pakistan must now embrace a proactive and strategic approach, integrating trade policy, industrial reform, energy and tax rationalization, technology adoption, and sustainability into a coherent framework. The future of Pakistan’s textile sector, export revenues, and millions of jobs depends on the choices made today.
