Textile minister Kashiram Rana told a press conference that the five-year fund was being set up after the Cabinet committee on economic affairs (CCEA) cleared it this morning.

Though spinning units in composite mills would be eligible to avail the fund, stand alone units would not be eligible as they were covered under a Rs 750 crore modernisation fund during 1987-1991, he said.

Under the scheme, government would give an interest subsidy of five per cent on loans availed from financial institutions.

Guidelines for the fund would be framed by an inter-ministerial steering panel, which would monitor it, the minister said, adding TUF was expected to prepare Indian textile industry to face global competition after the phase out ofmulti-fibre agreement on December 31, 2004.

The government would soon come out with a special package for revival of the 117 sick National Textile Corporation (NTC) mills and the cotton technology mission, aimed at raising cotton productivity from the present 280 kg per hectare to at least the global average of 580 kg and improving quality. The package would be approved by the Cabinet soon, he said.

Elaborating on the scheme, Rana said the five per cent interest subsidy would be reimbursed by the textile ministry to the financial institutions on a half-yearly basis.

The subsidy burden would be Rs 3,000 crore during the first five years and subsequently Rs 3,000 crore during the tenth and 11th Plan.

Units availing the modernisation fund would be given a two-year moratorium and the period of repayment would be 10-12 years, he said.

The funds would be available to those units which were "economically viable, bankable and technologically upgradable," textiles secretary Shyamal Ghosh, said.

He said thefund could benefit 1,700 textile mills, 15 lakh powerlooms and 40 lakh handlooms. Industrial and Development Bank of India (IDBI) would be the nodal agency for funding textile industry, excluding powerloom and hosiery sector, while Small Industries Development Bank of India (SIDBI) would finance powerlooms and garment units and cotton ginning and pressing sectors.

The Industrial Finance Corporation of India (IFCI) would look after the needs of the jute sector. The inter-ministerial steering committee would be chaired by the textile secretary and the panel would prescribe the maximum period of repayment of loan under the scheme.

The steering committee would also review periodically the functioning of the fund. A special cell would be set up by the financing institutions for expeditiously processing loan applications under the scheme.

Ghosh said share of financial institutions' lending to the textile sector had declined to 7.4 per cent from 10 per cent a couple of years ago. With the setting up of TUF,government expected lending to the sector to double from Rs 4,000 crore annually to Rs 8,000 crore.

Indian textile industry was competitive as far as wages and raw material was concerned but higher interest rates was affecting its capital costs, thus making the sector uncompetitive, he said. With the subsidisation of the interest for the modernisation fund, capital costs to the sector was expected to be competitive, he said.

India's main competitor in textile sector China, which enjoyed a 25 per cent share in the export market against India's 2.9 per cent, lent funds at a low interest of less than eight per cent and for spinning sector's modernisation funds were available at a very low interest rate of 3.15 per cent.

With the modernisation of textile mills, government expected to raise its share in global textile market to five per cent. Textiles sector currently accounts for one-third of the country's total exports, bringing in foreign exchange of Rs 40,000 crore.

The textile industry is expected toface severe competition in the domestic market itself after the dismantling of the multi-fibre agreement and proposed lowering of customs duty on textile and clothing imports. One of the main reasons for predominance of low value items in India's textile products in both global and domestic market was lack of modernisation in weaving, processing and garment sectors.

It was, therefore, imperative for the textile sector to modernise to attain international quality levels in comparison to its competitors. Modernisation could be ensured through steady and adequate flow of finance at reasonable cost to different sectors of the industry.

Similar to the textile modernisation fund scheme launched for the spinning sector, a jute modernisation fund scheme was launched in November 1986 with a corpus of Rs 150 crore. The scheme was subsequently discontinued due to non-availability of indigenous machinery and high cost of imported machinery.