Economic Headwinds Take Toll On Domestic Textile Scenario

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The domestic textile sector is distinctly faced with the challenges arising out of demand slowdown. The consumption of textiles is showing a subdued trend following weaker macro and micro economic factors. In fact, the global demand is also adversely impacted in the wake of number of unfavourable factors saddling the global economy. Experts are of the view that both global as well as domestic economic factors will continue to be in the unfavourable zone in coming quarters as well. On the domestic front, the ongoing liquidity squeeze has only worsened the overall industry scenario.

“There is a distinct slowdown in the consumption level. Currently, the overall sentiment is very subdued and consumers are holding back and treading cautiously in the wake of a series of economic uncertainties. The indicators are not favourable at all for the industry in general. Moreover, the government will have to be proactive in addressing the issue of liquidity squeeze, which has halted the investment process altogether,” says Sanjay Jain, Chairman, Confederation of Indian Textile Industry (CITI).

Suyash Choudhary, head, fixed income, IDFC Asset Management Co states that global manufacturing and trade are experiencing a sharp slowdown. The risk being contemplated is whether this starts percolating into services. In India, apart from the manufacturing slowdown, there is an additional problem of the slowing consumer. Thus, consumption was being supported by rising leverage over the past few years as income and savings growth slowed. This may now be turning, on the back of the local financing squeeze for some entities.

“There is possibly a behavioral component at work as well, as the consumer intentionally slows seeing lower fall-back savings and an uncertain economic outlook. Additionally, ability of fiscal policy to backstop growth is constrained owing to around 0.7% GDP shortfalls in key revenue items like GST and personal income tax,” adds Choudhary.

The global demand slowdown has taken its toll on the cotton yarn exports from the country. The cotton yarn exports between April and June this year was 33% lower compared to the same period last year. The Cotton Textiles Export Promotion Council (Texprocil) has pointed out that cotton yarn exports from April to June 2019 was 226 million kg as against 338 million kg during the same period last year. In June, the exports were just 59 million kg, which is 50.74% less compared to June 2018. China is the main market for Indian cotton yarn exports. But, exports to China have dropped nearly 50%. Besides, exports to Bangladesh, Vietnam, and Columbia have also declined. India which used to export 32% of its cotton yarn production three years ago, is now exporting 27% of production.

Experts are of the view that the large scale investment in the spinning sector in recent years has resulted in huge capacity build-up. However, sluggish demand in the export and domestic market has forced the industry to cut production in a big way and the situation is only going to aggravate in coming months with the present trend unlikely to reverse soon.

“The removal of export benefits since 2014 has adversely impacted the cotton yarn exports from the country. We have lost our main market, China to Vietnam as it enjoys duty-free access. To make things worse, the domestic industry has failed to reap the benefits of raw material as our cotton prices are the highest in the world. The 28% hike in MSP has distorted the cotton market,” says Jain who is of the view that the spinning (as also fabrics) industry desperately needs ROSCTL on urgent basis.  The government has extended ROSCTL to garment and made-ups leaving the spinning & fabrics high and dry. As per a recent report by Edelweiss Securities, the Indian economy is in the throes of a broad-based slowdown – sharp contraction in auto sales, slowing investments and subdued exports. The problem is accentuated by high risk aversion prevailing in the financial sector. In this backdrop, there is need for some form of a stimulus to kickstart the economy. The recent budget focused on fiscal consolidationand hence the entire responsibility of reviving the economy now rests onthe RBI’s handling of monetary policy.

“A 25-bps rate cut looks more probable. This coupled with maintenance of surplus liquidity in the system can aid transmission and thereby provide respite to the ailing domestic economy. However, we strongly think more is needed and, with global central banks turning dovish, domestic rate cuts are unlikely to hurt macroeconomic stability,” adds the report.

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