Textile: Demand improving but cost escalation a major concern Accord Fintech [Mumbai] 21 Feb 2011.

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Key strengths of the Indian textile industry are large and low-cost labour force, sizable supply of fabric, sufficiency in raw material and spinning capacities.

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India, Feb. 21 -- The textile industry is one of the most important sectors of Indian economy contributing more than 4% to the country's gross domestic product (GDP) and 14% to the overall industrial production. Most sectors of the textile industry are labour intensive and the sector as a whole employs over 40 million people, the second largest number after agriculture. Nearly 40% of the textiles produced in the country are exported and the sector is a major foreign exchange earner accounting for over 12% of India's total exports. It has also been attracting increasing amounts of foreign direct investments (FDI) in recent years and still has a vast untapped potential in this regard. In the broader global context, India contributes 20% to world spindleage capacity, the second highest after China. It contributes 6% to the world's rotor capacity and 62% to the world loomage. Though India's share in high-tech shuttleless looms is only 4.1%, this is now expected to rise in wake of increase in FDI being received by the sector. India produces 12% to the world's textile fibres and yarns and is the largest producer of Jute, second largest producer of silk and cellulose fibre, third largest producer of cotton and fifth largest producer of synthetic fibres. Key strengths of the Indian textile industry are large and lowcost labour force, sizable supply of fabric, sufficiency in raw material and spinning capacities. Due to these factors, India has been able to grow its textile

exports rapidly in the last decade. Going forward, the country is likely to become a major outsourcing hub for foreign manufacturers and retailers, with composite mills and large integrated firms being their preferred partners. Current Scenario The Indian textile industry has recovered strongly in 2010 after hitting a low in 2009 following the global economic recession. Domestic demand was the first to recover and has been providing good support over last one year or so even as exports recovered gradually. However, the cotton textile exporters continue to face another challenging year in wake of sharp increase in cotton yarn prices and strong competition being witnessed from rival exporters from China and Bangladesh. Demand side emerges stronger after the crisis After facing downturn for 13 consecutive months, India's overall export sector started witnessing strong recovery by end of the calendar year 2009 but the recovery in textile exports space was rather gradual and only in FY11 some significant improvement was seen. Textile exports had witnessed very strong growth in the three fiscal preceding the global economic crisis (FY05-FY08), but the growth slowed down sharply in FY09 as the industry struggled with surging commodity prices in the first half of the fiscal and global economic crisis in the second half. The early phase of year 2009 was full of pain for textile players with domestic demand as well as exports declining. While the domestic demand started improving towards the third quarter of the year, export remained weak. For the full fiscal 2009-10, overall textile exports registered a decline of little over 1%. However, in the current fiscal, some consistent though gradual improvement in demand from key export destinations has been seen. The biggest decline that industry faced following the slowdown was from the US, the largest textile export destination for India which declined nearly 5% during over the last fiscal. Nonetheless, some consistent improvement has been seen over the last several months and since April 2010, exports have remained in above the levels seen in both FY09 and FY10. Exports to other destinations including the Euro zone and the UK have also remained in green this fiscal. Going forward, as the low base effect from last year and the continued though gradual recovery in global economy will provide support to India's textile exports. On the domestic front, demand never really went down much despite the crisis and recovered very rapidly in 2009 itself. The year 2010 was a bullish in this sense sales domestically have surged over the year. This is reflected in the fact that total cloth production in the country (mainly for domestic consumption) increased by nearly 9% during FY10 to 57,036 million square meter (msm) compared with 52,402 msm in the previous fiscal. Similarly, production of spinning yarn has increased from 3914 million kg (mkg) in 2008-09 to 4187 mkg in 2009-10. Costs continue to surge Even though demand side for the textile producers seems to be improving, increasing prices of inputs, particularly of cotton, have been keeping the industry in a tight corner. Indian textile industry is heavily biased in favour of cotton compared with the global industry. In this wake, rising cotton prices as global demand-supply fundamentals for the commodity shift in favour of

producers will hit margins of textile companies. Demand-supply scenario of cotton has been shifting in producers' favour in the international market since the start of last season (august-July). The steep rise in cotton prices over the first 4-5 months of the current season, accompanied by high volatility, reflects primarily a combination of low global cotton stocks and continued demand by spinning mills, but has also been reinforced by panic induced by fear of defaults on contracts. Global cotton stocks fell by 25% in 2009-10 to 8.9 million tonne, the smallest in seven seasons, whereas cotton demand rebounded by 5% to 24.6 million tonne. In cotton year 2010-11, rising production and higher mill use are expected to keep global stocks tight. The strengthening of prices over the last few months has been exacerbated by several additional factors: difficulties to source cotton in the transition period between the two seasons, the drop in Pakistan's production estimate due to devastating floods and the smaller-than-expected Chinese production etc. Budget Expectations Although the textile space has seen strong recovery from the impact of global downturn over last 2-3 quarters, a number of issues still remain there and the industry has lined up a series of expectations from the forthcoming Budget for FY12. Increase coverage under Market Linked Focus Product Scheme One of major forces behind recovery in exports has been the Market Linked Focus Product Scheme, under which the export of select products is incentivized at 2% of FOB (freight on board) value of exports under FPS when exported to the Linked Markets (countries). Currently there are 14 markets covered under the scheme. Keeping in mind the success of the scheme, textile industry has been demanding both - widening of the scheme to more countries, and increase in incentives to 3%. Check cotton prices by banning exports As said above, the industry has seen one of the severest cost inflation cycles in last one year. Cotton prices have been increasing rapidly on a tight demand-supply scenario in global markets putting pressure on textile companies' margins. Export market on the other hand has become extremely competitive and much more price sensitive compared to pre-crisis period. This has not only impacted margins but competitiveness of textile players as well. While the cap of 5 million bales of exports is nearly exhausted, the industry wants the government to hike export duty on cotton to lower exports immediately and continue with the same in next season as well. Hike duty drawback rate The industry wants the government to hike duty drawback rates by 5% at least by increasing the scope and coverage of duty drawback scheme so as to ensure full reimbursement of various duties including excise duties, custom duties, service tax, education cess and various state level taxes. The demand is also based on argument that rivals like China and Bangladesh have increased these concessions and in a super-competitive export atmosphere which prevails currently, Indian government should also match the steps. Cheaper working capital The industry wants the government to make the funding easier and at reasonable rates of interest. With the central bank hiking its policy rates seven times in the current fiscal, market interest rates too have been going up,

making the working capital costly for the textile players. The industry wants that at least for the small and medium units the government should ensure cheaper working capital by providing interest subvention. Textile players are also demanding that export loans to be treated at par with the farm loans and therefore made a part of the priority sector lending by the banks. Cut import duty on manmade fibres Another wish of textile players is that government should scrap the Import duty on manmade fibres which will help it source cheaper manmade fabrics. The move will bring the cost of production down and improve the global competitiveness of Indian textile players. Such a move also becomes more important in wake of the surging prices of cotton. However, it has been strongly opposed by the manmade fibre industry and therefore may not make the cut in Budget. Promote captive power production Given the severe shortage of power being faced by the industry, the government has been urged to encourage development of captive power units by textile companies. Towards this end, the government should exempt the diesel used in captive power generation from excise duty and other local levies. Check rupee volatility One of the major problems of the industry has been the high volatility being witnessed in Indian currency. In the current year so far, the Indian currency has seen two very sharp rounds of appreciation, one at the start of the fiscal and another in September last year. Although both time the Indian rupee corrected equally, such sharp volatility increases the uncertainty in the export business and makes it difficult for textile players to have a good revenue visibility. Even hedging becomes difficult in such environment. The industry therefore wants the government to urge the RBI to ensure a more stable currency regime. Outlook After facing a sharp downturn following the global slowdown, the textile industry has posted a strong recovery in last 2-3 quarters. The industry has been actively trying to diversify both, the direction as well as the basket of exports. Riding on the sops provided by the government under the Market Linked Focus Product Scheme the industry has been looking to export into new relatively under tapped markets like Japan and also looking to export new products. This should further help textile producers to increase export numbers going forward. However, if the government increases the sops under these schemes, it will provide further impetus to growth of the industry. The industry nonetheless is also facing a number of concerns. High cotton prices are just one of them. In the increasingly prices sensitive markets, the industry needs to cut down its costs to remain competitive. Towards this end, increase in duty drawback will be most helpful. At least till the goods and services tax (GST) is implemented, when the tax liability of textile players is expected to come down, the industry will needs support from the government to further boost its exports. While the government is unlikely to announce any ban on cotton exports, we expect the industry may get some relief in terms of higher duty drawback, as well as extension and higher allocation under the technological upgradation fund scheme (TUFS). Import duty on manmade fibres while is unlikely to be cut;

government may come up with a streamline method for exporters to get this duty refunded. Overall, the textile industry has a strong outlook as the global economy recover, and some expected announcements in the budget will further boost the sector.

Published by HT Syndication with permission from Accord Fintech.

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Copyright HT Media Ltd. All Rights Reserved. Word count: 1928 Indexing (details) Cite Subject Exports; Textile industry; Economic growth; Recessions; Gross Domestic Product--GDP; Industrial production Title Textile: Demand improving but cost escalation a major concern Publication title Accord Fintech Publication year 2011 Publication date

Feb 21, 2011 Year 2011 Dateline India Publisher HT Media Ltd. Place of publication Mumbai Country of publication Malaysia Journal subject Business And Economics Source type Wire Feeds Language of publication English Document type WIRE FEED ProQuest document ID 853022754 Document URL http://search.proquest.com/docview/853022754?accountid=38609 Copyright Copyright HT Media Ltd. All Rights Reserved. Last updated

2011-06-04 Database ABI/INFORM Complete