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Anniversary Special | October 2015

Impact of recession on textile sector in India

The 2008 recession was another defining moment in the life of Indian textile industry, and a study by Rajan Nagpal & Ronak Agarwal reveals the effect of the slowdown on the return on equity % and the profit margin % of the major textile firms following that period.
Recession is the decrease in the GDP of a country for more than two consecutive quarters in a year. It occurs because a growing economy tends to slow down its growth as part of its normal economic cycle. Recession usually has the following implications - rising unemployment, rising government borrowing, falling share prices, lower inflation and falling investment.

The US suffered from one of its biggest recessions in 2008. The sub-prime mortgages (home loan) have led to this major crisis. Sub-prime refers to a high risk debt offered to people with unstable income. The US economic slowdown was a real bad news for India. Majority of the big Indian firm had outsourcing deals with US. The profit margins of these big ticket firms shrank. The GDP of the Indian economy fall by 2 per cent. Some significant implication of the recession of 2008 on India are as follows:

On exports
The growth in merchandise export was robust until 2007-2008. However in 2008, export saw a sharp dip and then turned to negative value in October 2008. Though the Indian economy is domestically driven, still the decline in export has significant effect on GDP. The contribution of export of goods to GDP had risen significantly in the past ´ from 10 per cent in 2002 to 17 per cent in 2007. Nearly 50 per cent of the export in India comes from textile, garment, leather and jewelry industry. All these industries are labour-intensive industries and declining export could imply loss in jobs in these sectors.

Employment is worst affected during any financial crisis. This recession has adversely affected the service industry of Indian mainly the BPOs, KPOs, IT companies, etc. According to a sample survey by the Commerce Ministry, 1,09,513 people have lost their jobs between August and October 2008, in export-related companies in several sectors primarily textiles, leather, engineering, gems and jewelry, handicraft and food processing. How to tackle recession?

´Our economy is shrinking, unemployment rolls are growing, businesses and families can´t get credit and small businesses can´t secure the loans they need to create jobs and get their products to market,´ Barack Obama said.

The following measures can be adopted to tackle the recession:
Tax cuts are generally the first step any government takes during slump.
The government should hike its spending to create more jobs and boost the manufacturing sectors in the country.
The government should try to increase the export against the initial export.
The falling rupees against the dollar will bring a boost in the export industry. Though the buyers in the west might become scarce.

On Indian textile industry
Historically, textiles have played a crucial role in the domestic and international economy of the Indian civilisation. As per March 2006 estimates, the textiles and apparel sector directly employs 33.17 million people. Its contributions of 4 per cent to the GDP and 14 percent to industrial production make it the largest industrial sector of the country .The textile economy generates 16.63 per cent of the total export earnings. India´s percentage share in global textiles and clothing trade was 4.3 per cent in textiles, and 3.3 per cent in clothing during 2006.

The recession in 2008, is another defining moment in the life of Indian textile industry. This study aims to use three step DuPont model to study the effect of the slowdown on the return on equity % and the profit margin % of the major textile firms. It also uses export turnover and employment turnover ra

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