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Garments, Fashion & Retail
  Impact of global economic crisis on Tirupur textile industry

Tirupur, the name of which, is synonymous with knitted garment particularly T-shirts, has been reeling under crisis including dyeing imbroglio and steep rise in yarn prices. Then came the global crisis from the western countries, leading to drying up of orders. But the never-say-die attitude of the industry aided by some light at the end of tunel on the power front and debt restructuring are giving new hopes, says G Buvaneswari.

India's Economic Planning since 1951 - 1952 led the country to adopt LPG (Liberalisation, Privatisation, and Globalisation) Policy in 1991 and achieve a GDP of 9% in 2007 - 08. In 2007, economic crisis gripped the US and by late 2009, it hit European countries too. Due to this, India's GDP growth rate declined to 6.5% in 2011 - 12.

The Indian textile industry is one of the largest textile industries in the world and India earns around 27% of the foreign exchange from exports of textiles and related products. The textiles and garment industry is the second-largest employer in India after agriculture. India exports about 50 per cent of the total production of textiles and garment of which, 60 per cent is exported to the US and the European Union countries.

Unfortunately, India is unlikely to meet the export target for textiles ($40.59 billion) for the fiscal year 2012 - 2013, despite the rupee depreciation and export concessions announced in the foreign trade policy, as key markets of US & Europe face slowdown in demand. The country had exported textile products worth $34 billion in 2011 - 12, up 26% from a year before, despite the global macro-economic crisis, partly due to a 15% depreciation of the rupee against the dollar.

AEPC estimates that more than 125 cotton and man-made fibre textile mills have closed down in the last three years. Moreover, the existing textile companies are facing a huge setback in exports owing to slowdown in the US and Europe. This has forced the Indian textiles sector to bear high cost of credit and increase in raw material prices.

Impact of global economic crisis and other factors in Tirupur textile industries

TIRUPUR, the well-known textile hub of India, has more than 5,000 garment manufacturing and job work units in the district. Tirupur is the biggest centre for exports of knitwear in India and seen as one of the most dynamic garment clusters in the “developing” world. Nearly 6 lakh people of Tirupur are dependent for livelihood on garment manufacturing and related industries. In fact, when the textile industry was booming, Tirupur was portrayed as 'Dollar City' and 'Little Japan' by media. From Tirupur 55% to 60% of exports are targeted at the European market and 30% at US market.

The following Table shows the year-wise export data from Tirupur.

Up to 2006 - 07, the growth registered at an average of 10 - 12 per cent year-on-year basis. In 2006 - 07, Tirupur had earned around Rs 11,000 crore in foreign exchange. But in 2007 - 08, it declined to Rs 9,950 crore. For the last three years the growth has remained at around Rs 11,500 - 12,500 crore. While it should have reached about Rs 17,000 crore in FY 2011 - 12, this stagnation brought on by a combination of global and local issues have shaken the foundation of the industry.

In 2007, economic crisis hit the United States of America and in late 2009 it spread to European countries. The growth of Tirupur textiles did not continue for long time due to growing global economic crisis and with the rising cotton prices, Tirupur faced many serious troubles. Just some time before the global financial crisis began, Tirupur garment export business was hit by the appreciation of rupee value against US dollar. Then they were hit by the global financial crisis.

While the Central Government was deciding to take out cotton from the list of essential commodities, it was open for speculation by the online trading companies. Its price, per candy, consequently went up from Rs 28,400 to Rs 65,000, directly affecting the yarn price (the major raw material for garment). The cotton yarn price jumped from Rs 110 to Rs 200 and has been increasing since then. As a result of all this, the industry lost around Rs 1,500 crore.

Apart from global economic crisis, the following factors affected the exporters:

  • The raw material (Cotton) price has increased by 70% to 100% in the last one and half year.
  • All dyeing units were closed on January 2011 as directed by High Court due to pollution problem. Hence the exporter started dyeing of cloth at Ludhiana, Chandigarh, Mumbai & other parts of India. It increased the production cost.
  • Labour cost increased up to 60% in last two years.
  • Severe power failure problem has been hurting the industry for the last three years. This year 60% power failure problems were faced by Tirupur textile industry. During power failure time, they are running the unit by captive power, which is almost 2.5 to 3 times costlier than regular TNEB grid power cost.
  • India's bank interest rates are higher compared to China and Bangladesh. For example Bangladesh has an interest rate of around 7 - 8 per cent, but the Indian textile industries are paying 13 - 14 per cent.
  • Transportation charge increased due to increase in fuel cost.

In general, the production cost of garment soared to a very high and it has become very difficult to compete with other countries. Due to economics crisis in US & Europe, the buyers are asking for discount in the garment price. With increases in cost of raw material, power, labour, dyeing, fuel etc, it has become very difficult to get orders from buyers. Also, internal problems like high interest rates threaten to derail growth of Tirupur garment export. In volume terms, business is down 15 per cent. But in real terms, if you see with price hikes and dollar rate hikes over the past one year, business is down by over 30 per cent for a city that does exports worth Rs 12,500 crore.

Tirupur garment industries reveal that the capacity utilisation by the industry is not more than 50 - 60 per cent for bigger exporters and 30 per cent for medium and small exporters. Around 10 per cent exporters without work for more than six months, many of whom are on the verge of closure. Thousands of workers lost jobs and are in severe distress. According to Tirupur Exporters Association, more than 20,000 workers lost their jobs in just one year. Most of those employed are actually on contract basis and are easier to get rid of when required.

Due to low demand from US & Europe Union, the exporters are forced to look for new markets like South America, some parts of Africa and Japan though it will take a couple of years to establish their presence in these new markets. Interest rates are the highest in India among its competitor countries. The depreciating rupee against the dollar is not giving much benefit to the exporters as the buyers would always want their suppliers to reduce the price when rupee value depreciates against dollar. Also the input costs have gone up substantially.

Exporters from Tirupur have expressed concern over the duty-free access given to 46 textile items to Bangladeshi garment. The garment imported from Bangladesh are 20 per cent cheaper than the garment produced in India. With this advantage, Bangladeshi products will flood Indian market and domestic players would be “killed”, they fear. The Bangladesh's garment exports were showing higher year-on-year growth rate than India in the global market. In 2010 - 11, when the Bangladesh garment exports had clocked $ 15 billion, India's garment export was $11.16 billion only. The main reason for Bangladesh industry having more exports than India is their low cost of manufacturing due to lower wages. After allowing import of Indian cotton and yarn under duty free & the raw material cost in Bangladesh is cheaper than the yarn sold in India's domestic market. This will increase their export additionally in the global market.

In the Union Budget 2011 - 12, excise duty at 10 per cent was imposed on readymade garment sold under a brand name in the domestic market. The tariff value at 45 per cent of the retail sale price in domestic market attracts this duty and this has made Indian garment costlier. Only the exporters who are having their own spinning mill can survive and it is very difficult to do business for small exporters and even though yarn export has been banned, it is still not available in the market.

Suggestions to tackle the recession and other factors:

TEA (Tirupur Exporters' Association) has suggested the following measures to tackle the situation:

1. They requested for keeping a buffer stock of cotton so that the availability of cotton could be maintained and the speculation in the cotton prices could also be avoided. The Government has giver this assignment to CCI to purchase 10 lakh bales to keep it as buffer stock. They have requested the Cotton Yarn Advisory Board to allow duty free import of cotton.

2. TEA recommended revising the drawback rates for garment made out of cotton to 10.27% blend 11.28% and manmade fibres to 12.53% with effect from April 1st, 2012. They hope the committee would consider their requisition favourably.

3. About 46 textile items have been given duty free access for import from Bangladesh. TEA requested to extend duty free access only for the garment manufactured out of yarn and fabric imported by the Bangladesh industry from India.

4. Free Trade Agreement with EU will place garment exports at par with Bangladesh garment exports, as India will also enjoy the custom free duty in EU like Bangladesh and the advantage gained out of it will be helpful for increasing garment exports to the EU market. If Free Trade Agreements (FTA) is not possible across the board in near future, the Government can take a decision to have sector wise agreement including textiles industry.

5. TEA recommends banks to provide the following measures to tackle the current situation:

  • A moratorium for a period of one year in repayment of term loan and interest.
  • Waiver from payment of interest for one year as a special case.
  • Restructuring of the loans without any additional provision to be done by the banks.

6. Ten per cent excise duty imposed on branded readymade garment should be removed

7. 24-hour uninterrupted power supply required for Tirupur textile units.

Measures taken for improvement of Tirupur textile units

The following measures are achieved by TEA for the improvement of Tirupur textile sectors:

  • 2% interest subvention available only for SME units have been now extended to readymade garment also up to 31st March 2013.
  • Extension of 2% duty credit scrip up to 31st March 2013 for exports made to EU and US.
  • Extension of 4% duty credit scrip for exports made to Latin America and Africa and CIS countries.
  • The inclusion of 7 new markets additionally each in Focus Market Scheme (FMS) and Special Focus Market scheme will be helpful and attractive to explore new markets.
  • Zero Duty EPCG scheme has been extended up to 31st March 2013.
  • The Tamil Nadu Industrial Investment Corporation Limited (TIIC) recently plans to provide 3% interest waiver for the new loans given to Micro, Small, Medium Enterprise (MSME) sector and this positive measure has come at a time when the sector is beleaguered by a host of issues, including high cost of credit.

Conclusion

The Finance Ministry recently announced the debt restructuring deal of Rs 35,000 crore to the industries. The Finance Ministry recommends to the RBI, providing special dispensations in non-performing asset rules not to classify the textile industry loans as bad loans, allow a two year moratorium on the term loan to the industry and convert the eroded working capital into working capital term loan repayable over a period of three to five years.

TEA, which has decided to concentrate on the unexplored and promising market, plans to attend more AEPC buyer-seller meets and participation in trade fairs. In August 2012 exporters from Tirupur participated in the fair conducted in USA and London. Buyer-seller meets have been planned in US, Japan, Israel, Australia, and New Zealand by February 2013. They are also now focusing on different types of garment produced with synthetic blended yarn for winter season.

The TEA President, Mr Sakthivel says that the local issues that impact in industry like energy shortage yarn price uncertainties and ETP crisis are almost over. With the Tamil Nadu Government taking constructive measures to speed up work on three thermal projects -- Vallur, Mettur and North Chennai -- the energy shortage is expected to be under control. In the meanwhile 350 CTPs and 48 individual dyeing units are back in action in Tirupur and the industry hopes that this will bring buyer confidence back. Also cotton prices too have been less volatile in the past four months.

It had been a very difficult two years for Tirupur, but the 'never say die' attitude of the industry has come to the rescue and though most capacities in factories are underutilised today, Mr Sakthivel is positive that the Tirupur industry will bounce back strongly very soon.

G Buvaneswari
Research Scholar
Commerce Department,
Sri Parasakthi College for Women,
Courtallam, Tamil Nadu 627 802.
Email: buvaneswari1977@gmail.com.

published November , 2012
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