With both the textile exports and the domestic consumption slowing down, it seems that India’s textile and clothing (T&C) industry has entered a phase of stress and duress in the face of increasing global competition from peer countries such as Vietnam, Bangladesh, China and Pakistan.
India’s export competitiveness has been further eroded by increasing cotton prices and freefall in the currencies of Turkey and Pakistan versus the US dollar. The current slowdown phase, in fact, started nearly a year and a half year back, with a decline in the productivity of India s T&C sector, for which the key driving and negatively impacting factors are as highlighted below.
Demonetisation
Demonetisation of the Indian currency happened some time back, in November 2016. However, it had far-reaching consequences on the Indian industry and national economy. There was a severe liquidity and cash crunch and the majority of small and medium T&C manufacturing units could not sustain their production capacities or employment. This was due to the shortage of working capital, with no extra support provided by the banks over the period since then, almost up until now. In most of the textile industry hubs, and especially major hubs like Surat, Ludhiana and others, nearly one third of the small and medium-size units closed or saw their capacity utilisation fall to 50%, to manage the ensuing cash shortages. With liquidity and cash dealings withdrawn from the business cycle, the government’s demonetisation move impacted the already tight cashflow of the industry, especially small and medium units.
GST impact
While the export headwinds have been slowing down T&C exports, the government dealt another severe blow by imposing GST from 1 July 2017. The differential tariffs of GST disrupted the sectoral balances and made Indian yarn and fabric products uncompetitive with the imports that have been flooding the Indian markets, especially fabric from China and garments from Sri Lanka and Bangladesh. The falling exports and increasing competition did deliver a wake-up call to the government, and it acted sharply to impose 20% import duty on various categories of woven and knitted textile products, and also on nonwoven and laminated/coated textiles. This has indeed been a timely saviour, protecting the domestic T&C sectors from the onslaught of cheaper imports from SE Asian competitors. The introduction of GST also led to a blockage of working capital due to late re-imbursement of input credits in the manufacturing chain, and it disrupted the balance sheets and cashflow of most textile units.
Global competition
Already, global competition has intensified due to various trade pacts and the formation of trade blocs. For several reasons, India had steered away from becoming a member of major trade blocks like TPP 11. Even with the much talked of FTA pact with the EU, India has not made much headway and is losing out to peers like Bangladesh, Vietnam and even Pakistan, which enjoy duty-free access.
At the same time a new threat is coming from new, fast-emerging T&C countries like Cambodia, Myanmar, Ethiopia and Kenya, and others which export apparels to the USA and EU, with the benefit of much lower industrial wages and nil duty under GSP or AGOA agreements. With no concessions over duty on imports of apparel, India is facing the double whammy, with increasing cotton (and thus yarn/fabric) costs, which make the India’s exports uncompetitive for most international buyers. Here also, government action was a flop: it increased the minimum support price for cotton by almost 30-35%, which makes the cost of essential textile inputs such as yarns and fabrics more expensive, pro rata.
Exporters are finding it challenging to meet the competition and buyers’ prices, in the new scenario of a reduction in export incentives such duty drawback rates. The overall situation in India’s textile and apparel industry is in the melting pot and, indeed, stressful – to which further woes are being added by increasing competition and by the country’s global market share, especially in apparel and denim products, being eaten away by Bangladesh. In fact, apparel exports from Bangladesh registered growth of 9% in the year 2017-18, with a value of nearly US$33bn. Vietnam has also been touching exports of $30bn, while India’s overall textile exports, including apparel, were only $40bn versus the target of $50bn.
The only saving grace and ray of hope for exports is the falling rupee versus the dollar, and the recently imposed 20% duty on imported fabrics and apparels that were being dumped by SE Asian competitors. The time has now come for the government, which is in the last year of its term before new elections in 2019, to support the T&C sector by controlling cotton prices and enhancing export incentives.
