As the Union Budget 2026 looms on February 1st, headlines are dominated by the fallout from US-China trade tensions, fluctuating export tariffs, and global supply chain recalibrations. Yet, beyond the diplomatic chessboard, a quieter but more consequential story is unfolding: India’s domestic apparel sector is emerging as the primary engine of growth for the textile industry, and its momentum could define the next decade of economic expansion.
For years, the narrative around Indian textiles has revolved around exports. But today, with global sourcing strategies tightening and competition intensifying, the focus is shifting inward. Domestic demand, led by rising incomes, urbanization, and digital-first consumption, is now where the real opportunity and risk resides.
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The domestic market takes center stage
According to industry projections, by FY25-26, India’s total textile and apparel industry will be valued at approximately $179 billion. Strikingly, nearly 80 per cent of this about $142 billion will come from the domestic segment, dwarfing exports, which are expected to account for only $37 billion. Online fashion retail alone is projected to reach $35 billion, growing at 25 per cent CAGR, highlighting the strong digital adoption across Tier-I and Tier-III cities alike.
Table: Domestic vs export market (FY25-26)
|
Segment
|
Estimated Size (FY25-26)
|
Projected Growth (CAGR)
|
|
Total Textile & Apparel
|
$179 bn
|
10%
|
|
Domestic Market
|
$142 bn
|
11-12%
|
|
Exports
|
$37 bn
|
8-9%
|
|
Online Fashion Retail
|
$35 bn
|
25%
|
The data underscores a shift: domestic consumption is not just keeping pace with exports it is outpacing it. For policymakers, this signals that nurturing internal demand may offer a more stable growth trajectory than relying solely on volatile international markets. “The Budget should balance fiscal discipline with measures that strengthen domestic consumption. With global markets in flux, our internal demand is our strongest safety net,” says Gautam Singhania, Chairman and Managing Director of Raymond Group.
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GST 2.0, fixing the domestic tax puzzle
A major bottleneck for the domestic apparel market remains taxation. Under the GST 2.0 framework rolled out in late 2025, garments priced up to Rs 2,500 attract a 5 per cent GST, but items above this threshold face 18 per cent. This sudden jump has triggered a noticeable slowdown in sales of mid- and high-priced garments, particularly ethnic wear and festive collections.
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CMAI Insight: According to the Clothing Manufacturers Association of India (CMAI), sales of garments above Rs 2,500 declined by 15 per cent in the recent season. This is particularly concerning for MSMEs, whose net profit margins often hover around 1-3 per cent. Rahul Mehta, Chief Mentor of CMAI, describes the current structure as disastrous, arguing that a uniform 5 per cent GST for all apparel would not only protect middle-class consumers but also prevent a slide back into informal, unbranded markets.
Implication: A rationalized GST structure could stimulate domestic premiumization, enabling consumers to spend on higher-quality apparel while keeping local manufacturers profitable.
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Digital-First, the rise of D2C brands
The domestic apparel market is also being transformed by digital-native brands. Over 800 homegrown D2C (direct-to-consumer) fashion labels have emerged in the last decade, catering primarily to Gen Z and Millennial consumers, who are expected to drive 75 per cent of domestic fashion spending by 2028.
- Zudio (Tata Group): By offering ultra-fast fashion at aggressive price points (mostly under Rs 999), Zudio has successfully penetrated Tier-II, III cities, demonstrating that organized retail can scale beyond metropolitan hubs.
- Libas: A legacy brand that pivoted to D2C channels, raising Rs 150 crore in 2025 to enhance its digital reach, enabling it to retain brand equity while meeting the demands of younger consumers.
Thus the D2C adoption is not just about sales it is redefining the supply chain, customer engagement, and product development. Brands that embrace direct feedback loops, AI-driven demand forecasting, and digital marketing are increasingly gaining a competitive edge.
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PLI 2.0, expanding access for smaller players
The Production Linked Incentive (PLI) scheme, extended through March 2026, has primarily favored large conglomerates. Industry experts advocate a scaled-down version for MSMEs, with a lower investment threshold (Rs 10-25 crore, compared to Rs 100 crore for large players). Such a move could enable smaller manufacturers to modernize factories with AI-driven quality control, automated production lines, and supply chain digitization critical tools to remain competitive against low-cost imports. As Tabby Bhatia, Founder, Brune & Bareskin says, “A uniform GST across apparel categories would reduce friction and help homegrown labels compete against unbranded imports.” Abhinav Kumar, Co-founder, Brand Concepts believes “The domestic value chain must move beyond assembly-led operations. Technology adoption and capital efficiency are crucial for MSME growth.”
Policy recommendations for Budget 2026
- Tax reform: Move to a uniform 5 per cent GST across all apparel categories to stimulate middle-class consumption and premiumization.
- Credit access: Establish SIDBI-backed retail finance schemes for apparel MSMEs to support modernization and inventory expansion.
- Infrastructure investment: Develop Mega Apparel Clusters in Tamil Nadu and Karnataka focused on domestic logistics, warehousing, and supply chain efficiency rather than just port connectivity.
- Raw material stability: Launch a five-year Cotton Productivity Mission to stabilize domestic fabric prices and reduce dependency on imports.
Thus as India braces for the Budget 2026 announcement, the apparel industry’s message is clear: the domestic market is no longer a consolation prize it is the new frontier. In a world where exports are increasingly volatile, Indian consumers, armed with rising incomes and digital access, represent the most reliable engine for sustainable growth. For policymakers, the opportunity is to strengthen this engine with reforms that nurture consumption, simplify taxation, and empower MSMEs. In short, while the world may be closing its doors, the Indian consumer is only beginning to open their wallet and the domestic apparel sector is ready to answer.
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