Indian textile sector overview

The total size of the Indian textile industry is pegged at $47bn, of which $30bn is domestic and $17bn is exports. Currently, the Indian textile and apparel sector has a share of 3.9% in the global textile export trade. Competitors such as China have a share of 20.2% (excluding Chinese Taipei with 4.8%), Republic of Korea having 5.1%, Pakistan 3.5%, Turkey 3.5%, Indonesia 1.7% and Thailand 1.4%. As per an estimate worked out by the Ministry of Textiles (MOT), the textile sector needs an investment of Rs 1.5 lakh crore during the period 2007-2012. Keeping in mind the vision of achieving the target of $50bn worth of exports by the year 2010, the Textile Ministry envisages a growth rate of 16%, which would increase the share of the Indian textile sector to 7% in the global textile clothing and merchandise by 2012, with an export basket of $64bn.

However, the Indian textile sector is struggling to survive because of increasing raw material costs, poor off take of yarns coupled with poor realization from yarn dealers and a steep rise in interest rate and, to top it all, the rising value of the Indian rupee. Since the textile industry is targeting an export turnover of $50 billion by 2010, amounting to more than $100 billion including that for domestic consumption, it is imperative that the country leverages its inherent advantages and builds capabilities to position itself as a complete solution provider rather than only a manufacturer.

Exports feel the brunt of the rising rupee

The hardening of the rupee is hitting exporters, with Indias textile exports to USA taking a plunge in value terms even though volumes have surged during the period Jan-Apr 2007. During the period April-Jan 2007, exports of textile and apparel products to USA declined by 0.43% in value terms although export volumes surged by 7.49% as compared to the corresponding period in the previous year. On the other hand, China registered an increase in both value and volume terms, up by 46.47% and 24.86% respectively. Other key exporting nations like Pakistan, Sri Lanka and Indonesia, where local currencies have depreciated against the US dollar, have witnessed higher growth in value terms whereas volume growth was not significant.

Situation not likely to improve in the short term

Taking a macro perspective of the issue, with Indian imports at $72.41bn and exports worth $ 46.79bn recorded in Apr-July 2007, the trade deficit widened to $25.62bn. This trade deficit is likely to widen in the short term due to higher global crude oil prices, strong domestic demand and rupee appreciation. Thus, Indias exporters are likely to lose competitiveness in the short term.

However, taking a long-term perspective, the country is growing at over 9% and there have been huge gas findings taking place within the country, with Reliance Industries Limited announcing plans to begin expanded operations in June 2008. It is understood that the countrys dependence on oil imports will most likely reduce significantly in the coming years, thus narrowing the trade deficit. This will lead to a further strengthening of the rupee and also a fall in interest rates. So, the hit that Indian exporters will take due to the currency factor will partially be compensated by the fall in interest rates, as the industry is in a high leverage phase due to expansions. Secondly, there would still not be any drying up of export orders, as there is a huge gap between the labor cost component of India and that of major importing nations like US and Europe. Currently, the labor cost as a percentage of sales in India is 4-5%, whereas in developed nations, the ratio stands at approximately 30%. Even after factoring in a hike in labor cost in India, there still remains a huge gap. The Indian textile sector thus needs to expand its scale of operations to meet the growing needs of consumption-driven developed nations.

Remedial Measures

The textile exporting community is looking to reduce dependence on the US market and is focusing towards the European market for achieving further growth and to combat currency pressure. This is due to the fact that even though the rupee strengthens itself to Rs. 39.54 versus the dollar, the Euro-rupee equation is comparatively at a higher exchange rate of Rs. 56.

While many exporters are in talks with European buyers to raise revenues from the European market, keeping long-term interests in mind, they are also hoping to ramp up domestic activities, improve manufacturing efficiencies and production. For example, Bangalore-based Gokaldas Exports is trying to convince its existing clients in Europe to shift from paying in dollars to euros. While talks are on with Nike (Europe) and Marks & Spencer, Mothercare and Metro have already agreed to the new terms. Companies are also pondering over market diversification with greater emphasis on Europe.