Textile sector recovery to be short-lived, say experts; high interest rates, DEPB end cloud prospects.
In a clear sign of revival in the textile industry, albeit for a short period, the registration for cotton yarn exports surged 70 per cent in August. The textile commissionerate under the ministry of textiles recorded renewed interest from yarn exporters and registered 97.7 million kg of orders in August, against 57.2 kg in July.
The response from yarn exporters was encouraging purely because of two factors, said Premal Udani, chairman of the Apparel Export Promotion Council. First, the government restored the Duty Entitlement Passbook (DEPB) scheme until September 30. DEPB was withdrawn from yarn exports halfway last year. The restoration brought exporters on track. Second, the depreciating rupee.
In the first four months of the current financial year, the response from yarn exporters was subdued. The overall registration for yarn exports, said textile commissioner A B Joshi, showed “very poor response”. Looking at the poor demand from the industry, yarn manufacturers reduced production capacity, resulting in drying up of pipeline inventory. Buyers, globally, were abstaining from fresh purchases due to a global economic slowdown, especially in Europe and the US.
Last year, the government had kept a cap of 720 million kg of cotton yarn exports, which traders apparently executed in less than eight months. During the remaining four months, there was almost no export, which resulted in oversupply in the domestic market. Although the government has opened exports since April, the demand continued to be lower due to uncertainty in the global economy.
“The industry has started hedging extensively against the dollar to maintain profitability,” said Udani. Demand from foreign markets has revived, a good sign for the overall industry. How sustainable the revival is would be known only by November-end.
Faced with many problems among export-oriented industries in general and the textile sector in particular, Harshad Bhayani, president of the Indian Exporters Forum had urged the commerce ministry to extend DEPB, to provide a breather until the Goods & Services Tax was introduced. DEPB, the scheme most preferred by exporters, comes to an end on September 30.
Another problem the industry faced in the first quarter, to continue in the next two, is the rising interest rate, which banks have raised by to 12.5 per cent from seven per cent in the past couple of months.
According to D K Nair, secretary general of Confederation of Indian Textile Industry, spinning mills have invested Rs 40,000 crore during the past 10 years in capacity building and modernisation, which would mean that about Rs 5,000 crore per annum will have to repaid to banks. The interest payment on these loans would amount to another Rs 2,000 crore. Thus Rs 7,000 crore will have to be paid by the spinning mills to banks during the current year. The other segments in the value chain also have huge repayment commitments. A rise in the interest rate means their repayment amount would increase, weakening textile mills’ financial health. The highly leveraged capital structure, plus rising interest rates, exposes the industry to a higher risk of defaults.
After hitting a record of Rs 62 a kg late last year, the benchmark Shankar-6 variety of cotton plunged to Rs 32 a kg early this financial year. The commodity has now stabilised at Rs 39-40 a kg. Hence, the increase in fibre price is gradually moving to yarn, said Nair.
As a consequence, yarn prices have started recovering, to trade currently at Rs 180 a kg (30’s count) from around Rs 140-150 a kg in early June. Udani, however, feels the outlook for cotton and the textile industry is “nervous”, with the end of the DEPB scheme on September 30.
