With seven lakh textiles industry workers already losing their jobs and another five lakh expected to in the next few months, it’s clear the crash in textiles exports represents perhaps the most serious part of India’s exports slowdown. This is especially so in terms of the magnitude of job losses. At one level, there is little anyone can do about it – between January and August this year, total imports of textiles by the US fell three per cent. With consumer spending falling even more after that as the intensity of the crisis became apparent, textiles imports could only have fallen further. In which case, till the American consumer starts buying again, there’s little the Government of India can do to revive demand. That exports are faring so badly despite the rupee depreciating tells its own story. But what’s worth keeping in mind is the negative role played by government policy.
If it wasn’t bad enough that demand was falling globally, the government increased the minimum support price for cotton, taking it to levels around a fifth more than those prevailing globally. Apart from what it does to the mills’ profitability (with cotton usage averaging at around 30 per cent in the industry, this alone means a 6 per cent increase in costs), it will play havoc with the farmers as well. With cash-strapped mills not able to lift anywhere as much cotton as they did last year, the government will likely have to buy 100-150 lakh bales of cotton in the coming few months compared to the under-10 lakh bales it normally buys. While the Cotton Corporation of India (CCI) is confident of being able to meet all contingencies, it is certain to be more than an uphill task.
Worse, at a time when industry is desperate to find funds, the government has failed to disburse Rs 2,000 crore of funds it owes the industry under the Technology Upgradation Fund Scheme (TUFS). No disbursements have been made since September 2007, though companies have borrowed money to upgrade technology. This was based on a commitment that the government would reimburse industry for part of the capital spent at an interest rate of 5 per cent. At a time when industry was getting hit, competitor countries like China reacted by increasing drawback rates and introducing other forms of assistance. Pakistan reintroduced an R&D assistance of 6 per cent and brought in other interest subventions. India, on the other hand, reduced drawback rates, apart from increasing cotton prices and not releasing TUFS funds. This, when the mills (a third of all textiles capacity is based in Tamil Nadu) have already lost a lot of output thanks to 40-50 per cent levels of power cuts in Tamil Nadu.
Clearly, the government needs to do something about the sector, indeed for all export sectors. The suggestions, which range from lowering interest rates (even interest-free loans to cover the undisbursed TUFS) to higher working capital limits, are well known. The commerce ministry is probably working overtime in coming up with a coordinated wish list for the finance ministry. While doing this, it is important to keep in mind that many of the concessions being asked for are really making up for distortions introduced by poor government policy in the past.