Policy tangle ties up textile sector in knots

Written by Neha Pal | Neha Pal | New Delhi | Updated: Jun 29 2011, 05:49am hrs
A three-month ban on exports of cotton yarn imposed in January this year has precipitated a serious crisis in Indias textile and clothing industry, with units across the value chain spinning mills to garmenting units left saddled with high-cost raw material and inventories. Even as global markets are showing signs of looking up after a spell of depressed demand, Indias scores of yarn producers and thousands of power looms are struggling to revive contacts with overseas buyers that the policy-induced crisis had broken off.

Last December, the Union textile ministry, acting apparently on a complaint of yarn shortage from the Tirupur knitwear industry, had capped cotton yarn exports at 720 million kg. As yarn exports had by then already breached that threshold, there was little export of the commodity during the last three months of the last fiscal. The spinning mills had piled up cotton stocks in the early months of the season (October-September) at very high prices which was partly due to the decision to allow 55 lakh bales of cotton exports at the beginning of the season. Their problems were compounded in April when the lifting of the ban coincided with a global commodity crash, which pulled down yarn prices as well. Large cotton stocks and the inability to dispose of yarn led to a production squeeze, which in the following weeks was transmitted to the higher ends of the value chain including fabric producers and garment units.

The yarn units are now in a dilemma. If they want to resume production, they will have to use cotton procured at the record high price of R62,000 per candy in October-November (the price has since crashed to R38,000). That could make matters worse for these capital-intensive units, which have invested in capacity expansion in recent years, spurred by the textile upgradation fund scheme (TUFS), an interest subsidy scheme. Unlike power looms which enjoy labour flexibility, spinning mills have no option but to suffer losses when costs go up and the market is unattractive. Most spinning mills have large debt servicing commitments too.

The result: Spinners are still trying to dispose of unsold stocks as the demand situation global and domestic is not conducive for using high-cost cotton. In fact, the governments crackdown on the yarn industry had begun in April last year when it withdrew the drawback and DEPB benefits (tax refunds) for them.

J Thulasidharan, chairman, Southern India Mills Association (SIMA) said: Cotton prices are down to R40,000 a candy from R63,000 about three months ago. Despite the fact that the government has increased the limit for cotton exports from 55 lakh bales to 65 lakh bales, demand (for yarn) is still low. He said the government's refusal to reinstate the drawback facility for export of cotton yarn and the duty entitlement passbook scheme benefits which were withdrawn in April last year is making this worse. Thulasidharan said mills are defaulting in making bank payments and adding they should be given a one-year moratorium for loans under TUFS and other loans.

Confederation of Indian Textile Industry (CITI) chairman Shishir Jaipuria said: The crisis in the spinning industry has already spilled over to the fabric sector which is also being forced to carry unsold stock. Most weavers have closed down production for a few weeks to get over this problem. In case of the spinning, even this option is not viable since the industry has huge debt servicing commitments. Added DK Nair, secretary general, CITI: The unexpected suspension of TUFS assistance last year had affected the momentum of investment in the textile sector. The industry needs the extension of TUFS to the Twelfth Plan Period, which is being taken up by the government. The US, UK, Germany, France, Italy and Spain are among key markets for India, accounting for a major share of its $22-billion annual textile and garment exports. Exports to all these countries have reported a negative growth rate in 2010-11. Bangladesh, a major competitor in garment exports, enjoys preferential access to developed markets. Facing cost pressures and slow demand recovery, Indian garment exporters have not been able to increase supplies to its traditionally lucrative markets. SP Oswal, chairman of Vardhman Group of Companies told FE: The number of companies defaulting in making payments to banks has gone up. The ban on cotton yarn wasn't the right step. There has been an erosion in value due to accumulated stock. Said Mukund Choudhary, managing director, Spentex Industries: Spinning mills are suffering huge losses due to lack of demand coupled with the government's flawed policies. The efforts for reviving the markets for textile products have to start with encouraging higher consumption of fibres, for which the working capital position of textile units has to improve substantially in terms of availability and cost. Some adjustments will be necessary on the repayment of term loans by units in all segments of the industry, in order to avoid NPAs, said Nair.