LAST week, ET reported that the rise of rupee against the US dollar is forcing textile companies to cut jobs. In fact, the fear of likely large-scale loss of jobs comes on the heels of a recent industry estimate which saw a major drop (1.22 lakh) in incremental employment generation due to textile export trade in 2006-07 compared to the previous year. This drop was due to the decline in export growth from 16.6% in 2005-06 to just over 9% in 2006-07. A working group of the Planning Commission had projected that exports would grow during 11th Plan at about 22% a year. If that were the case, the additional jobs in the current fiscal year would have been 5.8 lakh and total jobs, over 32 lakh. Alas, that was not to be. Instead, the export growth has turned negative and even the existing jobs are being cut.
The spinning industry usually makes good profits — operating profits (earnings before interest, taxes, depreciation and amortisation) have been 16-20% by industry’s own admission. Insiders say things were actually much more sanguine, till the strong rupee hit exports. In contrast, low price realisation is not new to the unorganised weaving and processing units. (Even lower gains for actual weavers who are not capitalists, but labourers). But the current crisis has caused even spinning units to be slightly jittery. “Spinning margins are under tremendous pressure. Production is going to decline,” said S P Oswal, chairman of Vardhman Group, a leading integrated textile producer and exporter of yarn. Nominally, the export price (denominated in dollar) is just the same as last year’s. But the over 13.5% appreciation of rupee against the dollar in the last one year has hit profits. The situation is more precarious because India’s major competitors in export markets like China, Pakistan, Vietnam and Cambodia are not hit by exchange rate difficulties as much as India.
The crisis in the textile industry has had serious impact on the allied industries too. The domestic textile machinery is particularly hit. The cotton segment — traders and farmers — is also facing some difficulties, although the high demand for cotton from foreign countries is proving to be a saving grace. “Traders who have promised to buy cotton are facing problems in selling them to Indian mills that have turned cautious. But export of cotton this year (October-September 2007-08) could be a record 7 million bales,” says a cotton industry analyst. He added that despite the last couple of weeks’ upward trend, cotton prices in India are ruling significantly lower than in July-August 07. For Shankar 6 variety, the prices have dipped from July figure of Rs 21,000/candy to Rs 19,500 now. Cotton production this year, in keeping with the upward trend in recent years that saw productivity increasing fast, is estimated to be 31 million bales. Clearly, if the domestic industry continues to be in doldrums throughout the year, cotton prices would become subdued.
It may be noted that area under cotton this year is the highest. The textile industry’s buoyant mode from 2005 onwards had helped cotton prices to increase significantly during the last two years. This encouraged more farmers to shift to this crop to earn more. But with the current decline in the industry, cotton consumption seems headed southwards and so are cotton prices. “The impact (of textile export decline) on cotton prices is not fully evident yet because cotton traders have significant export commitments and have been buying a lot of cotton for exports. It is estimated that over 20 lakh bales have been bought for exports during the last few weeks. Once export purchases are over, the impact of declining consumption is bound to reflect on cotton prices,” says D K Nair, secretary-general, Confederation of Indian Textile Industry. According to Mr Nair, surge in cotton export from India, which has the second largest textile industry in the world, is a cause for concern in itself. “Last cotton year (October-September) saw 20% of India’s cotton production being exported as raw cotton. This year, this is expected to increase to 25%. Export markets are susceptible to fluctuation and, therefore, our cotton farmers can look forward to sustained income only if domestic consumption improves,” he says. Ofcourse, the industry’s eagerness to get required varieties of cotton at reasonable process and not to expose the domestic cotton trade hugely to the export markets might be one reason for this cautionary statement, but it nevertheless holds true. Consider the industry’s huge potential to expand, which is confirmed by many expert groups and consultancy firms and the staggering investments being projected which appeared to be turning real with a marked increase in the use of the Technology Upgradation Fund Scheme till the crisis hit the industry this year — Rs 35,000 crore TUFS-supported investment in 2006-07; double the previous year’s.
The domestic textile machinery industry, which is under-developed and largely a preserve of SMEs, has started feeling the pinch too. As for synthetic machinery, weaving and allied machinery & processing machinery sectors, the growth this year has been negative i.e. - 11%, -34% and -37%, respectively.