Next two quarters crucial for processors

IN FOCUS/ COTTON

International cotton prices have been ruling at six year highs as supplies have been low, but the Indian cotton crop has risen following good rains in 2003-04.

Thus, profits of cotton yarn manufacturers have risen while cotton fabrics and other value-added textile manufacturers with products are under the quota regime have seen lower profits.

In the next two quarters, the prices of cotton in both the domestic and the international market would be highly crucial for financial performance of cotton textile manufacturers, credit rating agency ICRA said in a report.

Thus, the agricultural production in India along with its main counterparts in international market, namely China and the US, would be key to financial performance in the next two quarters.

Beyond January 1, 2005, when the quotas get deregulated, the Indian cotton textile producers were likely to witness increased opportunities, the report added.

But this would come with higher competition which could significantly impact both toplines and bottomlines.

The MFA (multi fibre agreement), which has been the framework for international trade in textiles and clothing from 1974 to 1994, has been replaced with the Agreement on Textile and Clothing (ATC).

The ATC envisaged complete integration of the entire textile sector into the multilateral framework of the World Trade Organisation (WTO) at the end of the 10-year transition period, ICRA pointed out.

Thus, the quota system in the textile sector was expected to disappear with effect from January 1, 2005, and international trade in textile and clothing will then be conducted on a non-discriminatory basis.

Although this will result in the market increasing for the developing nations including India, the guarantee of quota will not be there, ICRA cautioned.

But competition would increase and regional bloc agreements would assume greater importance.

China was highly competitive in textiles and clothing and large exporter of clothing with existing share of more than 20 per cent already, and so it was likely to acquire a substantial share of the increase in market for developing countries, ICRA warned.

The ability of the other developing countries (including India) in competing with China would be crucial for growth in exports from developing countries.

The increased competition will not only affect India in the export markets but also threaten domestic producers with imports especially in the high end premium fabrics and apparel, ICRA said.

Because of the accession of world textile and apparel trade to WTO framework, India's textile producers all faced the challenge of raising productivity through gains in efficiency to compete with imports, and to expand abroad in the face of higher cotton prices resulting from conformance with WTO rules and demand pressures.

The new textile policy was expected to lead to modernised facilities with the technology upgradation fund scheme providing soft loans for the purpose.

The extent of improvement in the level of modernisation would be the key determinant of long-term performance of the largest sector of Indian industry and its exports.

Sadly, the potential of the Indian textile industry was considerable but the performance of the organised sector had declined, ICRA said, owing to past government policy of promoting small scale and decentralised producers.

The preference and protection accorded to the small sector was being removed now.

The new policy was therefore expected to help integrated organised sector producers to modernise and improve the quality of weaving.

A favourable government policy coupled with changes in the international textile trade environment would lead to emergence of efficient integrated players in the industry, the report said.