By: Shramana Ganguly Mehta, Ahmedabad

Capacities May Be FurtherCut By 5-10% by Indian Textile Industry

With global apparel consumption hitting rock bottom andrecession in the domestic market staring at its face, a bleak year awaits theIndian textile sector. However much the Centre might want the textile sector torejoice over the recent sops, the sector is passing through tough times.

With the consumer in no mood to loosen purse strings at the moment, clutteredretail shelves are feared to put brakes on textile and clothing production asthe industry downs capacity by 5-10% in days to come.

With 60% of India's apparel exports meant for the consumption in the US, EU and Japan, the Indian textile sector is badly hit as those nations reel under acute financialcrisis. With practically no demand from those countries and an equal reluctancefrom domestic consumers to pick up apparel, it is impractical for textileplayers to continue production the way they had been all this while.

"It would not be surprising to see Indian textile sector under-utilisingcapacities by 5-10% in six months to one year," points out Chairman ofConfederation of Indian Textile Industry R. K. Dalmia.

While the Apparel Export Promotion Council predicts that India is unlikely toachieve 20% growth target in 2008-09 and might manage to clock $10 billion inthe current fiscal, apparel exporters are in no position to even dump goods inthe domestic market (like they did in mid-2008 to ease the rupee pressure)considering retailers are not picking up stocks from their suppliers. Retailapparel sales have shrunk and large format retail chains, faced with risinginventory, have stopped placing new orders.

"The Indian market is packed and Indian retail chains are not liftingstocks meant for domestic consumption and they would not like to clutter retailshelves by lifting export surplus at this point of time," added sectoranalyst Prashant Agarwal of Technopak Advisors.

Having lost 7 lakh men to volatile cotton prices, power crisis and recessionalready, the sector that is on the brink of losing additional 5 lakh jobs innear future sees little respite from the fiscal package announced by theCentre. Mr. Dalmia pointed out that the government has walked only half thedistance in meeting the urgent requirements of the industry.

"The major benefits given for textile and clothing sector are either byway of releasing withheld benefits or by way of restoring withdrawn benefits.In the case of TUFS and CST/TED payments, reimbursements which had beenwithheld for a long time will now get paid on the basis of the fund allocationprovided in the package. In the case of export credit, subvention of 4% hadbeen withdrawn from October 2008, out of which 2% has been restored now,"he said.

"Restoration of drawback rates which had been steeply reduced fromSeptember 2008 onwards, a moratorium of two years for repayment of principalamounts against term loans in view of the working capital problems of this lossmaking industry, and the restoration of the remaining 2% of subvention forexport credit are the major requirements that need immediate attention.Further, the restored subvention should apply from 1^st October 2008-thedate from which it had been withdrawn earlier. There is a need to dispose thecotton procured by government promptly to Indian mills at international prices,in order to avoid an artificial scarcity of cotton in the market," MrDalmia said adding that incentives will give psychological boost to the sectorprovided the sentiments in the market improve.

For the textile sector in South India that has lost close to 2 lakh people from the spinning sector alone in last 3 months, the incentives are nothing more than "glucose to a critically-ill patient (textile sector), said the secretary general of The South Indian Mills' Association K Selvaraju.

If the government hopes the package to revive the sector from its sickness, it is mistaken, he added. The industry is reeling under unprecedented crisis and allocation of Rs.1, 400 crore to clear TUF arrears will provide working capital to industries. However, in wake of impending problems like cotton and power crisis, our problem is far from over. "Not just lay offs, several mills are feared to declare themselves sick in days to come," he added.

Unimpressed by the package, the subcontinent's apparel exporter Gokaldas Exports Ltd anticipates 15% fall in year-to-year growth in apparel exports. While Bangladesh is expecting a 23% year-to-year growth in apparel exports, India might manage mere $8 billion in 2008-09 against $9.6 billion in 2007-08, said Executive Director of the Company Rajendra Hinduja. "While we were banking on EU market to drive growth, our order position is bleak beyond January-February 2009. The fiscal package gives mere 2% withdrawal on subvention while the hike was 4%. Likewise, we expected the government to take duty drawback to August levels to aid the ailing sector which hasn't come in. Whatever cash flow will happen now is nothing but old payment defaulted by the government all this while," he said.

Written by Shramana Ganguly Mehta in Ahmedabad

Originally published in "The Economic Times" dated December 09, 2008