These are troubled times for India's textile industry. As the rupee appreciates against the U.S. dollar, more and more small and medium-size firms are laying off workers or closing down. Industry experts say that in the southern textile hubs of Tirupur and Bangalore, a factory closes every week. Premal Udani, chairman of the Clothing Manufacturers Association of India, estimates that 500, 000 to 600, 000 jobs are at risk. As exporters struggle to secure profitable orders, the Ministry of Textiles' $25.06 billion export target for the fiscal year seems well beyond reach.

While the rupee has appreciated more than 15% compared with the dollar over the last year and a half, competing countries currencies have not appreciated correspondingly. "Our currency is destined to appreciate," said Anees Noorani, vice chairman and managing director of Zodiac Clothing, one of India's leading brands in men's shirts and ties. "But does the appreciation have to be as sudden or sharp as from 47 rupees to 39 rupees between July 2006 and now?"

The troubles come amid slackened demand from the Western consumer. With U.S. economic growth slowing, U.S. retailers have offered deep discounts. That has left India's exporters squeezed by customers who want more for less and by a currency whose appreciation provides less when they do make sales.

"Our competitiveness for the time being has gone away," said P.D. Patodia, chairman of the Confederation of Indian Textile Industry. The association estimates that for every 1% fall in the value of the dollar compared with the rupee, profit falls by 1.2%. "Some exporters will be permanently damaged and not all will survive," said Subir Gokarn, chief economist for Standard & Poor's Asia-Pacific.

This isn't the first time prices have shrunk. Free on board prices fell two years ago when quotas imposed by the Multifiber Arrangement were lifted. India's ready-made garment exporters, who contributed 3% of the global clothing trade, responded by boosting export values 30%. Ready-made garments now account for 43% of India's textile exports. "Exporters were helped in reducing costs by the disappearance of the quota premium expense," Udani said. "This time around the dollar is in a free fall, so exporters can't plan anything."

The United States is the largest buyer of Indian textiles and apparel, at 19% and 33%, respectively. That helps explain the degree of pain the dollar's fall has inflicted. Apparel and textiles together contribute more than 30% of India's net export earnings.

Supplier Consolidation

The currency-driven troubles come at an already-challenging time. Retailers are using a smaller number of vendors, bypassing traditional buying houses to source directly from a few chosen manufacturers. Committing large sums for expansion requires nerves of steel. "Unfortunately, interest rates overall in India, too, have moved up, from 7.5%-8% to 12%-13% per annum," said Rakesh Valecha, director of corporate ratings at Fitch Ratings India. So after a federal government interest subsidy for upgrading certain machinery, "the effective cost for exporters has gone up from 2%-3% per annum to 7%-8% per annum."

India is not well-suited for high-volume, low-margin production, Zodiac Clothing's Noorani said. "We have not built the kind of scale that Vietnam or China has. Nor do we have the productivity to compete with the best. I therefore feel that India has missed the bus with respect to this part of the textile outsourcing business. You can see that vendors of Wal-Mart and the like are now in distress and we have a crisis."

As recently as 2006, India, among the top five apparel exporters, seemed to be making rapid strides. The new outlook is a sea change from industry projections of exports doubling every year. "Today we are nowhere on that trajectory and are in fact selling at prices which are lower than what we sold at even five years ago," Udani said. Many small firms operate at net profit margins between 3% and 8%. "Thanks to low gross margins, any production loss quickly turns into a net loss as well," the Textile Industry Confederation's Patodia said.