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Global crisis could badly hit textile industry

By K G Narendranath,

ECONOMIC TIMES Bureau

DELHI, 5 Nov 2008

Much before the index of industrial production (IIP) showed a big decline (IIP grew just 1.3% in August against 10.9% a year ago and 7.4% in the previous month), the production data from the textile industry indicated a slump.

IIP had risen 8.1% in 2007-08 but during the year, major textile groups reported dismal growth figures—wool , silk and manmade fibre textiles grew just 4.2%, cotton textiles 4.1% and textile products (which includes garments), a more tepid 3.3%.

As per textile ministry data, spun yarn output increased 4% in 2007-08 and cloth production, 3.9%. These figures compare poorly with the corresponding figures in the previous two three years. Available official data for this fiscal indicate the growth might have slipped further.

The global financial crisis has undermined the viability of India’s textile and clothing (TC) players’ business, according to the Confederation of Indian Textile Industry or Citi. With a serious contraction in both export and domestic demand and a pervasive liquidity crunch, many units are already gasping for breath.

Those units which had hoped to come out of a financial morass with the help of the RBI-mandated CDR (corporate debt restructuring) have recently begun defaulting on even the restructured loans. This situation, according to the industry body, would aggravate by December.

As CDR tag would hit the rating of these companies, they would find it nearly impossible to get new loans to get their business going. (Think of their predicament when there is anyway a severe credit squeeze).
The textile industry is one of the few industries in India that are “export weighted”.About 55% of the domestic textile production, loosely valued at $40 billion, is exported. As per latest data, India’s TC exports to US have declined 1.5% in January-August this year, bucking the trend of 10-15 % annual increase in exports in the last three-four years. “We expect September-October data to be more dismal,” says an industry official.

“The global financial crisis has hit TC industry hard since USA, EU and Japan are our largest markets. Our textile exports are already faltering and there are reports of more and more importers and retailers closing operations in all developing countries,” says Citi in a note.

There are other problems too, like the 40% increase in MSP (minimum support price) for cotton in October-September 2008-09 season, even as there is likely be a glut in the market — cotton production this season is estimated to be a good 322 lakh bales and export prospects are dim.

The government’s procurement agency, Cotton Corporation of India, would not be able to procure such quantities because of infrastructure constraints. The global fall in prices of petrochemicals like PTA, polyester filament yarn and staple fibre would not suffice to offset the MSP-induced spike in cotton prices.

The only solace is the depreciation of rupee but it is of no great help given the export demand slump.
Citi has therefore a few demands : cut the interest rate on working capital loans for purchase of cotton to 7%, reduce margin money to be provided by mills for working capital for purchase of cotton to 10% from 25% and increase the period for which working capital loan is provided for purchase of cotton from 3-4 months to 9 months.

According to a recent study by Third Eyesight, a consulting firm, “Indian exporters are now trying to increase their share in the EU market and diversify into other markets other than the US. However, the market scenario in most major global markets is looking grim in the short-term.”

Unless decisive policy action is taken, India’s grand plans to catch up with China, which has established a domineering presence in the global textile markets, might also go awry. As per the study, “Given the current market share positions, it is unrealistic to expect India to catch up with China any time soon.”

However, the trend is clearly towards re-integration of India’s industry with the global trade,” the Third Eyesight qualified its assertion in the study titled ‘Eternal hope to reality’.

Though the dollar’s appreciation against the rupee in recent months should have brought a breather to exporters, the benefit of a weaker rupee has been offset by the surge in costs and global economic slowdown.

According to the study, textile companies’ margins are under severe pressure due to rising costs of raw materials, fuel, real estate and more expensive credit. The investment binge that was seen in this industry for the last two-three years— assisted by the soft-loan scheme called TUFS— has almost come to an end.

Partly, this is due to the general credit squeeze, but specific problems faced by the textile industry in terms of cost escalation and difficult competition in global markets also contributed to drying up of new investment proposals.

External developments also worked towards the detriment of textile and garment exporters. Many competitors have been strengthened by government incentives. For example, China has increased Vat refund rates from 9% to 13% for synthetic textiles and from 11% to 13% for other textiles.

If one has to look at the long-term competitiveness of India textile exports, the disconcerting reality is that the export basket at present consists of raw materials and intermediates rather than finished products.

Clearly, there is a need for more investments in the weak links of the textile manufacturing chain like weaving and processing. This would enable the domestic industry which is fairly integrated and supported by a rich and diversified raw material base, to win its spurs. Policymakers must pay heed and come out with incentive schemes.

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