Rising cotton prices have been a major bug bear for the textiles and garments industry in India. However, in the last two months, prices have gone down by almost 30 per cent. It came down from `64,000 a candy to `45,000 in May 2011. But the fall in cotton prices has not really affected garment prices, which have gone up by almost 35 per cent in the past few months.
As Rahul Mehta, President, CMAI, says "So far there has been no decrease in the prices of fabrics for garments. Though cotton prices have reduced, the price of yarn has not gone down yet. Before garments prices come down, fabric prices have to come down as well. Currently, readymade garments have reached retailers and booking for autumn/winter is over. So any reduction in garment prices will be witnessed in the month of November/December." The overall increase in the prices of garments is estimated to be around 35 per cent, out of which 25 per cent is devoted to the rise in prices of raw material, yarn and cotton alone. The other 10 per cent rise is due to the excise duty. Mehta feels in spite of this sweeping expenditure a lot of manufacturers could not pass on the entire cost to the end consumer. "Following the 30 per cent decrease in cotton prices, there would be hardly a 5 to 10 per cent decrease in garment prices," he says.
Agrees Harminder Sahni, Founder & MD of Wazir Advisors "The decrease in cotton prices will not impact garment prices. There are so many other costs which have gone up, it's not just cotton prices that have risen. The industry has taken this opportunity to reset prices, and I don't think the lowered cotton prices will have an impact on garment prices," he explains. In fact, it's not as if the burden has been passed on to the consumer. Manufacturers have absorbed some of the increase as well, he explains.
Indeed, cotton prices are hard to predict but Sahni feels even though cotton prices will go down further by at least 50 per cent "they will still be 1.5 times higher than the normal prices. That's why I don't think prices of garments will come down dramatically. We have already got the hit by the cotton prices. So we are waiting, because we don't know when the prices of the cotton will start going up again."
Indeed, raw material costs have been the biggest concerns for apparel makers since August as cotton prices increased over 50 per cent due to a global production shortfall. Raw materials account for around 80 per cent of the garment production cost. The apparel industry also faces a time lag of seven months from sourcing yarn for fabric to production and retail sale. Apparel buyers are likely to shell out 35 per cent more when they begin their festival shopping this October. Garment prices have risen 20 per cent since last Diwali and a further 15 per cent rise is expected after July.
For consumers, the choice of brands will cost them more than what it did in the last festival season. Besides, the apparel industry has been directed to pay 10.3 per cent excise duty under the Union Budget this year. National retail chains say by July they will know clearly whether high prices have made an impact on consumer purchase. Smaller players are already seeing a drop in demand after the retail price rise. Ashish Dhir, Associate Vice President, Technopak, says, "The prices of cotton had gone up by 70 to 80 per cent and now they are down by roughly 30 per cent. But it's still high in comparison to the last 12 months. Initially, the cost was absorbed by some garment manufacturers while some of them passed it on to consumers. Now, I don't think anybody will reduce prices unless their competitor reduces prices to such an extent that one is forced to follow suit. The major impact is of excise duty. The garment prices will depend on the market, how yarn prices and cotton prices move."
However, Sunil O Khandelwal, Group Chief Financial Officer, Alok Industries, has a different take. He says, "If prices of cotton have come down, the benefit has to be passed on to the consumer. So to that extent prices have to come down," In the domestic market, there is the excise duty also which the government has imposed, which many have not been able to pass on. To that extent probably domestic prices may not come down. "Domestically prices of cotton may decrease by 5 to 10 per cent in the coming months. However, when the new inventory starts coming in, it will take 2-3 months to pass it on to the consumer," Khandelwal argues.
Originally published in The Stitch Times, July 2011