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 Indiantextile and apparel sector has a share of 3.9% in the global textile exporttrade. Competitors such as China have a share of 20.2% (excluding ChineseTaipei 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 Ministryof Textiles (MOT), the textile sector needs an investment of Rs 1.5 lakh croreduring the period 2007-2012. Keeping in mind the vision of achieving the targetof $50bn worth of exports by the year 2010, the Textile Ministry envisages agrowth rate of 16%, which would increase the share of the Indian textile sectorto 7% in the global textile clothing and merchandise by 2012, with an exportbasket of $64bn.

However, the Indian textile sector is struggling to survivebecause of increasing raw material costs, poor off take of yarns coupled withpoor realization from yarn dealers and a steep rise in interest rate and, totop it all, the rising value of the Indian rupee. Since the textile industry istargeting an export turnover of $50 billion by 2010, amounting to more than$100 billion including that for domestic consumption, it is imperative that thecountry leverages its inherent advantages and builds capabilities to positionitself 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 duringthe period Jan-Apr 2007. During the period April-Jan 2007, exports of textileand apparel products to USA declined by 0.43% in value terms although exportvolumes surged by 7.49% as compared to the corresponding period in the previousyear. On the other hand, China registered an increase in both value and volumeterms, 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 notsignificant.

Situation not likely to improve in the short term

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

However, taking a long-termperspective, the country is growing at over 9% and there have been huge gasfindings taking place within the country, with Reliance Industries Limitedannouncing plans to begin expanded operations in June 2008. It is understoodthat the countrys dependence on oil imports will most likely reducesignificantly in the coming years, thus narrowing the trade deficit. This willlead 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 willpartially be compensated by the fall in interest rates, as the industry is in ahigh leverage phase due to expansions. Secondly, there would still not be anydrying up of export orders, as there is a huge gap between the labor costcomponent 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 indeveloped nations, the ratio stands at approximately 30%. Even after factoringin a hike in labor cost in India, there still remains a huge gap. The Indiantextile sector thus needs to expand its scale of operations to meet the growingneeds of consumption-driven developed nations.

Remedial Measures

The textile exporting community is looking to reducedependence on the US market and is focusing towards the European market forachieving further growth and to combat currency pressure. This is due to thefact 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 toraise revenues from the European market, keeping long-term interests in mind,they are also hoping to ramp up domestic activities, improve manufacturingefficiencies and production. For example, Bangalore-based Gokaldas Exports istrying to convince its existing clients in Europe to shift from paying in dollarsto euros. While talks are on with Nike (Europe) and Marks & Spencer,Mothercare and Metro have already agreed to the new terms. Companies are alsopondering over market diversification with greater emphasis on Europe.

Sops declared for textile exporters

The government has reduced customs duty on polyester staple fibre and polyester filament yarn from 7.5% to 5% and on other manmade fibers from 10% to 5%. It also gave tax exemption on three more services besides enhancing interest subsidy to provide relief to exporters in identified sectors hit by the rupees appreciation. Sectors benefiting from the package include leather, handicrafts, marine products and textiles.

Leather, handicrafts, marine products and textile sectors are particularly hard-hit by the appreciation of the rupee. The rupee has appreciated 15% against the dollar since October 2006 spelling doom for exporters, especially those in labor-intensive sectors.

Customs duty on intermediates for PSF and PFY polyester chips, DMT, PTA (purified terepthalic acid) & MEG (mono ethylene glycol) would be reduced from 7.5% to 5% and on paraxylene (a raw material for PTA) from 2% to nil. There is no change in customs duty on nylon chips, nylon yarn, caprolactum, rayon grade wood pulp and acrylonitrile. The Centre has exempted storage and warehousing services, specialized cleaning services (fumigation & disinfection) and business exhibition from service tax.

The government will provide an additional subsidy of 2% (2% already being offered earlier) to exporters of leather, handicrafts, marine products and all categories of textiles, excluding manmade fibre, for pre-shipment and post-shipment credit. For the carpet sector, the term would be 270 days for pre-shipment instead of 180 days for other sectors and 90 days (like other sectors) for post-shipment.

The total interest subvention will be subject to the condition that the interest rate, after subvention, will not fall below 7%, which is the rate applicable to the agriculture sector under priority lending. This would remain valid from November 1, 2007, to March 31, 2008.

The allocation for reimbursement of terminal excise duty and central sales tax has been raised from Rs. 300 crore to Rs. 600 crore. Presently, 6% interest is paid for delay in reimbursement of drawback claims beyond 30 days.

The government has decided to extend a similar provision for delays in payment of terminal excise duty and CST. The process for payment of interest will be finalized shortly.

The government has already offered two relief packages to exporters, one in July and one in October. The July package, which cost the exchequer about Rs 1,400 crore, included accelerated reimbursement of TED and CST dues to exporters, interest subvention of 2%, upward revision of duty drawback and duty entitlement passbook scheme rates and service tax refund in respect of port services, transport of goods, transport by railways and other port services.

The government has already notified the following seven taxable services and the service tax paid on these seven taxable services, which are attributable to exports even if they are not used as input services, shall be refunded to exporters:

• Port services provided for export.

• Other port services provided for export.

• Services of transport of goods by road from ICD to port of export provided by a goods transport agency.

• Services of transport of export goods in containers by rail from ICD to port of export.

• General Insurance Services provided to an exporter in relation to insurance of export goods.

• Technical testing and analysis agency services in relation to technical testing and analysis of export goods.

• Inspection and certification agency services in relation to inspection and certification of export goods.

• Storage and warehousing services

• Cleaning activity services

It provided for the payment of interest on Exchange Earners Foreign Currency accounts of exporters on outstanding balances subject to a maximum of $1 million. The Centre also added four more sectors jute and carpets, cashew, coffee and tea, solvent extraction and de-oiled cake, and plastics and lanolin to the list of export sectors eligible for interest subvention under pre-shipment and post-shipment credit.

Experts views

Analysts from fibre2fashion conducted a survey focusing on the requirements for Indian textile exporters, highlighting the following key areas:

• Rupee Appreciation and its management.
• View on recent sops declared by the Finance Ministry for exporters.
• Additional requirements to cope up with this situation.

When experts from the industry were asked about their views on management of the rupee appreciation situation, many of them had already opted for Forward Contracts. However, this is only a short-term view to manage the rupee appreciation. Some of them took it positively and have taken the advantage by importing new machineries for expanding capacities as well as importing raw material at a lower rate due to dollar depreciation. A majority of them are focusing on the domestic market due to boom in the retail sector.

The government has recently declared sops in 3 instances for exporters for TED and CST reimbursement, reducing interest rates on pre and post shipment credit given to exporters along with service tax reimbursement and, lastly with reduction in custom duty for fiber and its intermediates. When our analysts asked industry experts their views on the sops declared, most of them opined that the demand-supply equation controls the prices more effectively when it comes to reducing the rates. Cartelization in some products will not allow the benefit to be passed on to subsequent users. Acrylic fibre manufacturers are not happy with the recent sops declared as duty has been charged for all the fibers except acrylic and nylon. Raw material (acrylonitrile) duty is also unchanged. This seems to be a big loss to such companies, as they have to compete with cheap imports. Their margins have squeezed down by more than 5%. A majority of them believe that the announcement of the sops did not create much impact on the profits of the industry.

Experts from the industry believe that these are only short-term benefits and will not be beneficial to small and medium enterprises to cope up with rupee appreciation. They expect the government to take some measures on CENVAT accumulation along with cancellation of 1% NCCD from POY. In order to compete with cheap imports, duty on all raw materials / intermediates needs to be rationalized.

As per industry statistics, the European market cannot bring in as much volumes as the American market fetches. Secondly, there will always be a resistance to the incremental prices that exporters can enforce upon their foreign clients. Thus, targeting the burgeoning domestic market that has considerable growth potential should be the long-term strategy for the Indian textile sector. Besides this, while bigger companies like Gokaldas Exports and others have managed to plug losses by hedging, it is time smaller companies too looked at this option, as the textile industry has had to grapple with issues such as job cuts and profit losses this year.

Reference:

Press release from Press Information Bureau

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