India’s textile exporters are finding their competitive edge getting blunt and profit margin thinner, thanks to a weak dollar, demonetisation after-effect and stiff competition from new textile nations. An Exclusive ITJ Report.
Reeling under the demonetisation that hit hard the unorganised sector in 2016, India’s textile industry has been losing its competitive edge slowly in the last few years to stiff competition it faced from countries like Vietnam and Bangladesh. The 2017 saw the meltdown of dollars, wearing out the export margins thinner. Exporters have started walking a tightrope, with even the Government revising downwards the target to $45 billion in 2017-18 from the $48 billion exports set for the last fiscal, which was missed by a huge margin. India’s textile exports have dropped since 2014 and are stagnant at 4 to 5 per cent of global market share.
India’s cost to export itself has been very high at over $1,200 per container against around $500 for countries like Thailand and Indonesia, finds a World Bank Report. “Traditionally, cost of textile and apparel exports from the country has been relatively higher owing to presence of several duties and taxes at various levels. Moreover, lack of a streamlined process to avail of tax credits, among other benefits added to the predicaments of small and medium sized exporters. Besides, cost of capital and the interest rates in the country have been relatively higher when compared to some of the other major exporters,” a report from the Persistence Market Research.
Says GV Aras, Director of A.T.E. Group: “In spite of having all the ingredients from raw materials, skilled labour, managerial capabilities and encouraging business environment India could not succeed much in increasing its share in the global textile trade post WTO era. The opportunities have mainly been grabbed by China not leaving much scope for other countries. In spite of this in the last few years the successes achieved by Bangladesh and Vietnam are remarkable.”
Recently, GST has brought its own confusion and uncertainty, unsettling the exporters’ minds over certain issues. According to Gautam Nair, Chairman of Matrix Clothing: “The GST implementation has brought in serious uncertainty, particularly to exporters. Will we be refunded all the embedded taxes, what about those taxes not covered under GST? …Whereas a bulk of the world market is in synthetics, India competes in cotton and related segments, while China straddles the whole market place. Labour laws are a huge constraint deterring large-scale corporate investment and the sector gets no duty advantages to EU and Canada unlike our competitors like Sri Lanka, Pakistan, Vietnam and Bangladesh”.
Says Jayanta Roy, Senior Vice President and Group Head, Corporate Sector Ratings, ICRA, said: “Amidst the weak and volatile phase in the global apparel trade, India’s apparel exports remain flat and unencouraging, growing by a tepid 1 per cent (in US Dollar terms) for the second consecutive year in FY2017. This trend, however, needs to be looked into in conjunction with the declines in global apparel trade in value terms during the period.”
According to GV Aras, following are the main reasons according to me why India did not succeed much in increasing textile export share vis a vis other countries:
- India has not been very aggressive with free-trade agreements (FTAs) vis-a-vis other countries.
- Duty disadvantage vis-a-vis countries like Bangladesh, Srilanka and Vietnam as far as exports to US and EU are concerned.
- India’s focus mainly on cotton is restricting it from increasing share in exports as synthetics form major part of the global trade.
- Bangladesh production capacities are much more modern than India thus it is strong contender in knits and denims.
- Bangladesh and Vietnam are still much cheaper in labour cost index compared to India which is an advantage for apparel making.
The pace of growth for the other Asian apparel exporters like Bangladesh, Cambodia, and Vietnam has also moderated during the past two years, though they continue to grow at a relatively better pace vis-a-vis India. Nevertheless, scrapping of the proposed Trans Pacific Partnership (TPP) has weakened prospects for Vietnam, which augurs well for India, as the risk of increased competition from Vietnam has abated to an extent for now.
Given the weak trend in global apparel trade, the domestic market-focused apparel manufacturers are expected to perform relatively better than the exporters for the second consecutive year in FY2017. However, given the temporary pressures observed in domestic consumption owing to the demonetisation process, the gap between the growth rates is likely to narrow significantly.
“Overall, growth for apparel manufacturers has been relatively weaker at approximately 8-10 per cent during FY2016 and FY2017 compared to the past few years, wherein the revenues of both apparel exporters and domestic-market focussed players grew at a CAGR of 13 per cent - 14 per cent during 2011-2015,” Roy added.
The subdued off-take by apparel manufacturers, in addition to meager fabric exports, continue to weigh on fabric demand as well. Accordingly, India’s fabric production remained tepid in H1 FY2017 with a modest growth of 2 per cent, following a flat production trend in FY2016. Further, the demonetisation drive increased the challenges faced by this highly fragmented and unorganised segment of the domestic textile industry as is reflected by a 6 per cent de-growth in fabric production during Q3 FY2017. This in turn is expected to constrain the total fabric production and is likely to result in around 1 per cent de-growth in FY2017.
According to Avinash Mayekar, MD & CEO, Suvin Advisors, “the exports have seen a decline during 2013-15, but with recent government initiatives, the exports have shown a steady increase and reached $40.12 billion in 2015-16 against $37.16 billion in 2014-15.”
Mayekar added: “Top textile segments exported from India are apparels, yarns, woven fabric, knitted fabric and fibre. Indian export of apparels is estimated to reach $28.4 billion by 2020 at CAGR of 5 per cent. Woven fabric trade in terms of value is projected to increase at a CAGR of 1 per cent to reach $ 4.9 billion. By 2020, yarn export is expected to grow at a CAGR of 4 per cent to reach $7.1 billion.
Over the years, the US has been the biggest export destination for Indian textiles and apparel. In 2015-16, the export to the US alone accounted for 21 per cent of total textile and apparel exports from India. Other major export destinations are the UK, UAE, Bangladesh, and Germany. Indian exports are relying on US and EU markets.
Speaking on the segments that is faring better and the segments that are non-performers, GV Aras, says, “In the textile value chain the spinning capacities are more than adequate and hence with cotton prices on rise the margins have come under pressure for the spinners. After China has reduced the import of yarns from India the Indian spinning industry is reeling under demand pressure. There is still a large scope for modernization in weaving and processing since both these sectors are weak links. Lot of investments are forthcoming in high speed shuttle less looms and continuous processing capacity building. Government is giving lot of support to the garment sector so that India can increase apparel exports. However this will take time as the capacities are quite small and fragmented unlike in China, Vietnam or Bangladesh wherein large capacities at one place are built. Success story of Tirupur in knits needs to be repeated by investments in synthetic knits at places like Surat.”
There is a large scope for special articles like sportswear and active wear for domestic as well as export markets. Most of the high end fabrics are still imported in large quantities for making such garments. With investments happening in synthetic based circular and warp knitting as well as more importantly in finishing of elastic fabrics, this segment is expected to grow faster.
According to Persistence Market Research Report: “India has, however, witnessed a relatively slower growth in its share in global textiles and garment exports over the recent past. A comparison of the key factors such as labour and energy cost among the three countries points out that the latter is relatively higher in India vis-à- vis other two nations whereas labour cost in the country is higher than that in Bangladesh but is relatively lower than that in Vietnam. However, unlike India, these countries have preferential access to two of the largest garments/ apparel importing markets namely the US and the EU in that the textile and apparels imported from these countries are not subject to duties. This, in an industry characterised by strained margins, makes Bangladesh and Vietnam textile export havens. Besides, factors such as highly fragmented nature of the industry and lower productivity per employee as compared to that in Bangladesh coupled with archaic labour laws governing textiles industry act as an impediment to growth of textile and apparels exports in India.”
The US and the EU are two of the largest importers of textile and apparel in the world. The two markets accounted for nearly 37 per cent share in overall textiles and apparel exports from India in the past year. Economic down turn in the EU and the US in turn has an adverse impact on textiles industry in the country. Accordingly, emphasis has been laid towards developing textiles and apparel exports to countries such as Russia, Iran and some of the Latin American countries over the recent past.
Textile and apparel (T&A) exporters’ earnings and EBITDA margins will be impacted in the near term due to the Indian Rupee’s 5 per cent appreciation against the dollar in 2017 ytd and weak apparel imports from traditional markets such as US and UK, says India Ratings and Research (Ind-Ra). The ongoing strength of the INR vs USD as reflected in the three-month USD-INR futures trading at around Rs 65.19, constrains the price competitiveness of the Indian textile exporters. However Ind-Ra believes that apparel exporters’ value-added garments mix, partially hedged forex exposure, debt-light structure and reasonable liquidity to support the overall business and financial risk profile. Furthermore strong domestic foothold of large spinners and weavers will mitigate any major impact on their business and credit risk profile.
Unabated strengthening of INR vis a vis USD in the current calendar year has added to the challenges of the T&A industry. Ind-Ra had highlighted in the report ‘Stable Input Prices, Fiscal Incentives to Support Textile and Cotton in FY18’ the muted performance in 3QFY17 due to high cotton prices (17 per cent higher prices yoy), demonetisation and slow global trade. The easing of liquidity over February-March 2017 propelled a recovery in production output and export volumes; however Ind-Ra believes export realisations will get dented due to the strong rupee.
GV Aras gave some solutions to push India’s textile exports. The solutions are: Efforts to increase share of synthetics in total production as India is losing in the global trade on account of this factor. Encouraging creation of integrated capacities making cost effective manufacturing. Creating textile export hubs having state of the art facilities to compete the best in the world. Creating larger capacities under one roof in apparel making and also facilitating the skill development of workers. Systematic efforts to move up the value chain in textile by getting into high value fabrics and garments. Investing in ‘Made in India’ brand building in global markets. Encouraging investments in creating finishing capacities for elastic fabrics. India is already strong in textile made ups, now is the time to make apparel as export growth engine. Improving the infrastructure and logistics to create export-enabling environment.