The Indian rupee has been witnessing a continuous rise inits value against the US dollar. An increase of approximately 13.5 % has beenwitnessed in the last one year.
This appreciation in rupee value is proving to be dangerousfor certain industries, of which the textile industry is the worst affectedindustry.
Industrialists and experts, particularly exporters, seemworried over losses due to rupee appreciation. Exporters are experiencing a significantamount of reduction in exports, specifically in garment exports. Adding totheir difficulties, there is little or no rise in the currencies of their closecompetitors like China, Bangladesh, Indonesia and Pakistan. For example, China's Yuan has gained only 4.72% in thelast year as compared to the Indian rupee. The following chart shows changes indifferent currencies against the US Dollar.
To get in-depth idea about "Effectof Rupee Appreciation on Indian Textile Machinery Industry"Fibre2fashion.com had carried a survey of industry leaders. Through thisarticle we have tried to highlight and summarize their views on effect ofstronger rupee, expectations from government and current strategy of theircompany.
Mr. Sridhar Varadaraj - Chairman,Textile Machinery Manufacturers Association (I)
There has been a decline in exportgrowth from 16.6 % in 2005-06 to 9% in 2006-07 Large-scale loss of jobs isclose on the heels of this export growth decline. The amount is approximately Rs. 1.22 lakh.
Data provided by the nodal agency of the Government of India and the Directorate General of Commercial Intelligence & Statistics (DGCI&S) indicates that exports during the first quarter of the current financial year declined by 22% in terms of the Indian rupee and 14% in terms of US dollars, the reason being appreciation of rupee value against the dollar. Due to dollar depreciation, textile exports have dropped up to 7 billion dollars. Mr. Pratap Sarma- Vice President Marketing, of Trumac India states, Rupee strengthening impacts companies who export their machinery, like us, to USD currency areas. The price becomes higher without any increase in our price. This makes things unfavorable against manufacturers from China, who are very aggressive and cheaper anyways. This situation widens the gap. This is a direct impact. The indirect impact is that our spinning mill customers are suffering on the export front with their yarn businesses. This in turn affects us because if the health of the spinning industry suffers, we, as a spinning machinery manufacturer, also suffer.
The Machinery Industry
The domestic textile machinery industry has started feeling the pinch as they are under-developed and preserve of SMEs. According to independent sources, in the current year, the growth of most of the machinery companies is negative. For instance, for synthetic machinery -11%, weaving and allied machinery -34% and processing machinery -37%. Compared to other industries, the spinning industry makes good operating profits. So the situation of the spinning machinery manufacturers is a bit better. In spite of this, growth has decreased to 26%, which was earlier 45%.
In the year 2006-07, the growth in production of textile machinery was 24%, which is expected to be only 8-9% in the current year, i.e. 2007-08. There is more than 50% decline in orders for new machinery. Mr. Michael Enderle - Chairman and Member of the Executive Team of Division Textile Systems, Reiter India, states, The Indian rupee has appreciated by around 15% in recent months. This has a negative influence on the export prices of Indian textiles and profit margins of producers have been significantly eroded. With the decline in margins and lower off-take, production capacities remain unutilized and huge worker layoffs have already been reported. In such an atmosphere, the investment sentiment for textile machinery has been adversely affected - at least in the short term. Shri Sridhar Varadaraj - Chairman, Textile Machinery Manufacturers Association (I) states, Considering the current scenario, the orders for textile machinery from the domestic textile industry has been affected substantially during the current year, and if this situation continues, it may create serious problems for TEI. Besides, the export of textile machinery has been hit due to the appreciation of the rupee against the US dollar. The export realization has come down. It is expected that the exports will fall from the previously estimated level of Rs.500 crores in 2006-2007 to below Rs.400 crores during 2007-2008.
As per observations by FICCI, exports of machinery and handicraft items could fall up to 50%. The export price of Indian machinery is uncompetitive by 15% due to dollar depreciation and rupee appreciation. Moreover, due to Increase in interest rates, the production cost of Indian machinery has increased by 5%.
The sector is witnessing a loss of 9.7 % due to rupee appreciation and as per Mr. Gurudas Aras President, Textile Engineering Group, A.T.E. Enterprises Pvt. Ltd. The appreciating rupee to the extent of 14% in the last one year had a very bad effect on the textile sector, as overall margins for the industry are below 10%. As many sectors like textile machinery, accessories and chemicals and auxiliaries also depend on the textile sector, they too have been severely affected. The textile machinery manufacturers have augmented their capacities in the last couple of years expecting demand to grow; however, there has been a sudden decline in the demand since the last more than 6 months, which has created a serious situation for them.
Machinery manufacturers are feeling the heat of rupee appreciation, but the end users are not as much affected because they are importing machineries mainly from China, Japan and European countries. Currency fluctuation in these countries is minimal as compared to the dollar.
According to Mr. R. N. Malu - CFO, Rajasthan Spinning and Weaving Mill, The appreciation of the rupee is 10-12%, which does not have much impact on demand / requirement of machinery in our company. The major textile machinery manufacturers are from China, Japan and European countries. Our company is importing machines from European countries for its good quality as compared to Chinese machinery. So the transaction medium is for us is the Euro. Hence, we are not as much affected by the appreciation of the rupee against the dollar. In case the dollar depreciates further by 10-12% against the current price or there is any depreciation in the Euro, we may consider a change in our current strategy.
Steps Taken to Overcome this Situation
Although Indian machinery manufacturing companies have been affected directly or indirectly due to rupee appreciation, they can not control this aspect on their own. So, they are trying to keep abreast with their overseas competitors by making some changes in their company strategy.
The following are the comments of textile machinery industry biggies when they were asked by www.fibre2fashion.com to summarize their strategy with regards to rupee appreciation:
Gurudas Aras - President, Textile Engineering group, A.T.E. Enterprises Pvt. Ltd.
Like any growing organization, we have to take such external changes in our stride, accept challenges and cope with them. Since we have no control on rupee-dollar rates, we have to concentrate on the factors within our control. These include cost-cutting measures at each stage in manufacturing and marketing, improving the operational efficiency and also looking out constantly for some value additions/innovations in all major processes. Also, we have been placing strong emphasis on Customer Relationship Management (CRM) through various measures. We are also focusing on helping customers in upgrading their equipment with minimum investments in such difficult times.
Pratap Sarma -Vice President Marketing, Trumac India
Our strategy is to try and keep the cost down.
Mr. Michael Enderle -Chairman and Member of the Executive Team of Textile Systems, Reiter India
In the short term, rupee appreciation is beneficial for the import of textile machinery. However, the overall sentiment in the industry needs to be positive to attract further investments. In the medium-to-long-term, our company is poised to enhance its local presence in the Indian market. One of our current challenges is to reduce the delivery times arising out of extraordinary growth of business in certain key Asian markets and some other areas.
Expectations from Government
In the current situation, the Government has taken certain relief steps like increase in duty entitlement pass book and duty drawback rates, exemption of selected services from the service sector, reduction in interest rates of pre-shipment and post-shipment credit and faster clearance of arrears of terminal excise duty and central sales tax.
Industry leaders have expressed their expectations from the Government as under:
Mr. Michael Enderle - Chairman and Member of the Executive Team of Textile Systems, Reiter India
The Government has already extended the TUFS with some modifications. Bailout packages for Duty Drawback rates and pre shipment export credits have also been announced along with a reduction in customs duties on some inputs. The Government has to curtail inflation for political reasons. They may not step in to contain further appreciation of the Indian rupee - which could slow down the economy to some extent. Hence, in the medium term, Indian textile companies will have to find their own solutions to handle the situation rather than expect fiscal support from the Government.
Mr. Gurudas Aras President Textile Engineering Group, A.T.E. Enterprises Pvt. Ltd.
Although the industry is expecting immediate soaps from the Government to release pressure on them, they can be only temporary. As Indian textiles are facing a threat of losing their competitiveness due to the currency factor, there is an absolute limit to which the Government can help. Ultimately the industry must realize that this is not going to help them in the long run. What is probably required is a sincere effort to consolidate the capacities, to improve operational efficiencies and to enter into value-added products where competition is not intense. In the long run, these measures will only help us survive and not the small doses of Government support.
Mr. Pratap Sarma - Vice President Marketing, Trumac India
While the Government takes a view on the macro level, can consider some sect oral sops to circumvent this sudden and difficult situation in the national interest to meet export targets envisaged in the 11th plan.
Shri Sridhar Varadaraj - Chairman, Textile Machinery Manufacturers Association, India
The TEI has urged the Government to reduce the excise duty from 16% to 8%, consider uniform rates of excise duty for complete machinery as well as raw material, parts/components & accessories, to maintain the floor-level customs duty at 7.5% and uniform rate of customs duty on raw material, parts/components & accessories. The Government has been requested to provide a modernization fund and financial support for R&D and machine building as long-term measures to make the TEI a viable and vibrant industry.
As regards rupee appreciation, the Government should take proper steps to maintain the competitiveness of the Indian textile industry in the export market. This is absolutely necessary because the Indian textile industry is export-driven and uncompetitiveness in the export market will lead to sickness in the textile industry and consequent sickness in the TEI. Therefore, the TEI would like to request the Government to initiate all necessary corrective measures for the survival of the textile Industry and the TEI.
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