A very recent study by Assocham brought out more clearly the impact of global meltdown than what has been admitted by even a more recent interview of Kamal Nath, on BBC. It is certainly far more than "ripple effect" or "indirect effect" as being made out by the Government. Even the Prime Minister did acknowledge the "indirect" impact of the global meltdown on Indian economy, though its severity has not been spelt out by him, for obvious reasons. He has, however, cautioned to be prepared for a temporary slowdown".

The Study, undertaken by Assocham, as referred to above, states "Due to meltdown in Indian economy and its after-effects leading to higher input costs and credit access virtually getting out of hands of large corporates (with) turnover of over Rs.5,000 crore, have brought 68% of CEOs a complete restlessness in fulfilling their commitments in the last 9-10 months." The survey adds, " 68% CEOs continue to reel under tremendous stress and fatigue as a result of current meltdown and slog to deliver desired results in limited time at their disposal and make adjustments both on margins of their top line and bottom line profitability." The Survey, captioned "Current Business Scenario Causing Stress to CEOs" further adds, "Only a minor lot of 32% of CEOs of domestic business within the given turnover bracket succeed(ed) in countering their resistiveness and fatigue in a bid to achieve their yearly targets in the context of current severe business constraints."

This state of mind of India Inc. is reflective of the seriousness of the impact of the US crisis on Indian scenario. Any exercise to demystify the present tangle, it is necessary to at least know what is generally unknown and is unfathomed. We need to understand the dimensions that await unfolding.

Unfathomed US Crisis Overtakes Europe

I had stated in one of my recent articles that the full ramification of the US sub-prime crisis is unknown and it continues to be so. There are certain broad indicators that point out the future scenario, as it is likely to unfold. I would rather like to confine myself to our domain of interest i.e. US consumers and retailers. The US consumers had, as a culture, relied heavily on what were unsecured credit-worthy instruments to maintain their lifestyles. The banks secured their interests by collateral security of whatever any consumer offered and they financed heavily and aggressively even on the basis of sub-prime properties, which they deemed were valuable enough to ensure their financial security, which was not the case. Once the US consumers started defaulting, the banks discovered that the securities they held were certainly not worth the loans, advanced by them. The consumers also did not mind paying higher interest rates on their credit to maintain their lifestyles but that could not continue for long. Once they started defaulting on their re-payments, the turmoil began and the domino effect of US financial crisis took over. This was quickly followed by serious slackness in demand and the discomfort of the US retailers which only exacerbated the crisis.

The crisis was not confined only to the US, it extended beyond the US frontiers and spilled over to the Europe, because of financial linkage that the US and European financial institutions have within themselves. The signs of slowdown appeared fast and picked up soon in Europe too, particularly in so far as the apparel companies are concerned. This could not be brought out better than what Daniel Gates, Managing Director at Moody's Investors Service said, "Spending by overleveraged US consumers was surprisingly resilient until recent months, but we are seeing signs that household consumption is beginning to buckle. Consumers in some European countries, particularly in the UK and Spain, share some of the same vulnerable characteristics as households in the US: high debt burdens, declining home prices, stagnant or falling disposable incomes and rising debt delinquencies."


Impact on Apparel Companies

Globally, 43 per cent of the apparel companies tracked by Moody's had a negative outlook or were under review for a possible downgrade during the third quarter this year, up from 23 per cent from the end of the last year. It is well known that a credit downgrade, particularly if it pushes debt into the non-investment or "junk" category, can even in the best of times make it more expensive to refinance. With the bankruptcy of Lehman Brothers and the rapid fire sales of Wachovia and Merrill Lynch, credit got tightened considerably and the number of banks available to extend credit shrank.

Apparently, some retailers with lower debt ratings and greater need of cash, found the pool of money they could borrow under their credit facilities withering, as the bank loans shrank. Tiffany Co, the debt analyst at Fitch Ratings, said, "For the ones that are not generating the cash flow and they cannot access capital from the outside resource, we could see another spate of bankruptcies. I actually do not think the bankruptcy cycle is anywhere close to the end. It is still ongoing for the rest of this year and probably into next year." He added that in the specialty store sector, apparel was probably the weakest, in part because fashion is more of a discretionary purchased compared with home improvement goods or office supplies."

Retailers often tap several banks that together extend lines of credit that are used to keep their operations chugging along. In addition to the cash flowing through their registers and their bank credit facilities, retailers finance their operations by tapping into the so-called paper markets for short-term loans and by selling bonds. Bonds amount to a loan from the bond-holder to the company, which makes regular payments on the debt and promises to repay the principal amount on a certain date. Companies often issue new bonds to repay the old ones, but firms with fast-approaching maturity dates might not be able to find the public debt markets all that receptive to their needs. This can led to a further break-down.

Retail Scene in US

The current retail scene in the US is anything, but happy. Most of the retailers have seen their sales scaling down to new levels. Then there is a spate of announcements for closure of stores by some of the leading players. These include Eddie Bauer, which has already closed 27 shops in the first quarter and plans to close a few more by the end of 2008. Similarly owner of Lane Bryant, Fashion Bug, Catherines Plus Sizes will close about 150 under-performing stores this year. The Talbots group has announced that it would close Talbots Kids and Talbots Mens Concepts. Walt Disney said it has also obtained the right to close about 98 Disney Stores in the US. Gap Inc., whose brands include Old Navy and Banana Republic, has announced plans to close 85 stores as it continues to struggle to attract customers. The list is long and scary.

As was brought out in the last issue of The Stitch Times, even the European Union too has its own share of worries and the European governments coming out in open support of their banking institutions does reflect and confirm that the US crisis has indeed traveled far beyond the US frontiers. This has similarly impacted the retail sales in the European countries, particularly in comparatively bigger European markets like the UK and Germany.


Impact on Indian textile and garment sector

There has been a marked decline in the textile and garment sector, which is further extended to exports. According to Sajjan Jindal, "from the sunrise sector, textile sector is at the verge of slipping back to the stagnant phase. While the Eleventh Five Year Plan targets 22 per cent growth in Indian textile exports, the growth has decelerated from 16.6 per cent in 2005-06 to 13.50 per cent in 2007-08. The orders for textile products from India have come down drastically from the largest importer, the US, (due to) financial crisis." He adds, "The growth rate in the production of cloth by the mill sector decelerated from 4% in 2006-07 (April-March) to 1% in the same period of FY08... The cascading effect is that the textile mills are likely to cut production further by 20-25 per cent, while some units have been closed down with millions getting unemployed."

The performance on garment export front has been even worse. Our total garment exports stood at $9,400 million in 2007-08 as against $8,901 million in the previous year, registering a growth of 5.6%. According to Rakesh Vaid, Chairman, Apparel Export Promotion Council, "Our exports to the US stagnated in 2007-08 and the growth of Indian garment exporters by 5.6% was largely possible because of growth of Indian garment exports to the EU to the extent of almost 11%". He adds on "More recently, India's exports have recorded a decline of about 1.79% in May this year, which is a matter of concern... There is yet another matter of concern i.e. each of the important export products from India to the US like knit and woven shirts for men and women, cotton trousers, cotton dresses, cotton undergarments and baby garments have all registered a negative growth in May, 2008."


Whither Indian garment exports?

Personally, I do not see any improvement in our garment exports in the foreseeable future. I wish I could have agreed with Rakesh Vaid, who had only in July this year said, "I am of the firm opinion that it is only a "cyclical phase" which is bound to be over sooner or maybe later. If you look back, it is not for the first time that such rough patches have occurred, and we have been overcoming these and I see no reason as to why it should be different this time." He was right probably at that point of time, as US crisis had not manifested itself in that proportion and Lehman Brothers and others had not been appeared under Chapter 11. The situation has changed, and changed violently with quick, fast and unimaginable domino effect. Today, the total scenario has changed with rapidity, seriously impacting the psyche of everyone including and particularly India Inc. as referred to above. However, the fact of decline in garment exports remains unaltered with a clear possibility of further decline for the current period, for which information would take quite sometime to arrive at web portals.

Edelweiss Research says that US imports of apparel from India this year (till August) has fallen by 4.8% Yarn imports have also dropped by 7% for the same period. Till August 2008, India's textile exports to the US declined 1.6% year-on-year to $3.5 billion.

According to an established exporter, "Tirupur has over three lakh people dependent on garment exports. With fresh orders difficult to come by, businesses will find it difficult to stay afloat. The Tirupur Exporters Association expects a 5% drop in exports this year." Prem Udani, President, Clothing Manufacturers' Association of India says, "Only Tirupur textile hub will lose 50,000 jobs over the next six months as one-fourth of total textile units are downing shutters."

The Future Contours

Where the Indian garment exporters are heading for?

Though the US is teethering on the brink of recession and the EU has not been able to quarantine itself, there is bound to considerable reduction in the high-end clothing demand. The Americans and Europeans, to my mind, would not be able to splurge with high-end fashion garments as they have been doing heretofore. Americans would not, however, stop wearing new clothes, but I anticipate that there will be a distinct change in their life-style, (which would cover the clothing, too), with more basic garments being in greater demand. Nirav Shah, who covers textiles at PINC Research says, "The slowdown in the US will affect the purchasing power of consumers, affecting discretionary spending that including spending on clothes." He said that domestic suppliers may see lower orders and also lower margins due to lower prices being offered by US firms. According to estimates, textile and garment exports are likely to touch $24.6 billion in 2008-09, which is short by a wide margin against the Government target figure of $31.17 billion in the current fiscal.

My hunch is the actual achievement could be even lower.


World in turmoil

From the US to Europe, the deepening financial turmoil has seen the fall of big names especially in the banking sector with Lehman Brothers in the lead quickly followed by Merrill Lynch and others. The $700 billion US bail-out of financial system, after initial hiccup, was cleared primarily because of dramatic response of global markets to its earlier rejection by US. US Treasury Secretary Henry Paulson, moving fast and furious, tried to put in place the resources he needed within hours of the legislation being signed into law, as he was particularly alarmed by the bad news coming from fast growing unemployment numbers in the US. What added on was that the infection was quickly catching on in other parts of the world. Replicating the American action, a number of countries that have been infected responded to the situation with similar actions.

Apart from $700 billion package for the US, which many trust is inadequate, Ireland Government has put in around $572 billion as part of guarantee for liabilities of the country's banks, covering retail, commercial and inter-bank deposits and covered bonds, among others. The German Government pumped in $50 billion to shore up the fortunes of mortgage lender Hypo Real Estate, while Belgian Government invested $16 billion in banking and insurance major Fortis. The UK Government provided $32.5 billion to save British lender Bradford & Bingley. And of course, Iceland administration injected 864 million as part of improving the credit position of the countrys leading lender Glitnir.


However, the moot point is whether the world-wide bail-out exercise would perform the job expected of it. In the first instance, the dimensions, particularly under-currents of the crisis are still anybody's guess. According to Daniel Gates, "We expect that the market turmoil will have lasting effects on the availability and germs of credit, on business and consumer confidence, and on global economic growth. This will exacerbate the trends that are causing deterioration in corporate credit quality."

Resuscitation of major financial global institutions is not going to be an easy task, for, the ramifications of the crisis are more far wider than what appeared to be on the day Lehman Brothers collapsed and even what appears now, as the ground realities would keep on changing, depending upon how accurately and how fast we take steps to measure up to the demands of continuously deteriorating and yet fast-spreading infection, never experienced before. On this I quote what Miguel d'Escoto, President of the UN General Assembly said the other day, "The current turmoil in the financial system cannot be solved through piecemeal responses at the nation and regional levels but requires a coordinated effort at the global level."

UN Task Force

Realising the global dimensions of the financial crisis, UN has announced the creation of a task force to review the role of the World Bank and International Monetary Funds (IMF) in the worst global finance meltdown since the Great Depression of 1930s. The task force to be headed by Nobel Laureate Joseph Stiglitz will undertake a "complete review of the international financial system" and suggest steps to be taken by UN members "to secure a more stable global economic order". The Task Force is likely to meet at the end of October and suggest corrective actions, hopefully, at national, regional and global levels.

Till then, each of the countries would keep on fighting fires in their own individual way. Unfortunately, so far, the Government of India had maintained there would be only "limited" impact on India on account global meltdown, and pooh-poohed the serious impact of the global financial crisis. I find that it is only now that an authority no less than the Prime Minister himself has now conceded "India will have to face the challenges of "financial crisis (which) is now likely to be more severe and prolonged and a crisis of this magnitude was bound to affect our economy -and it has."

Of course, he has conceded the facts, but of course, quite late and I do not know as to what "measures" the Government proposes or actually takes to stem the consequences of global melt-down and when ? Much will depend on this.