The Hindu Business Line : Textile industry: Tied up in knots

The textile industry has been reeling under the impact of multiple headwinds – an appreciating rupee, bruising competition at the export market, firm trends in raw material prices, overcapacity in certain segments. To top it all, the prospect of slowing US demand looms ever larger. With a litany of woes, the industry is hoping for a helping hand from the Budget.

Pro textile budgets

The textile sector has, in fact, been a key beneficiary in the last several budgets, as the industry prepared to become the supplier of choice for global apparel retailers. Almost every Budget since 2004 has had a little something for the industry.

The cotton textile industry was given the option to escape the excise net entirely or alternatively to pay a 4 per cent excise duty with Cenvat credit on inputs. The synthetic chain, which has for long been clamouring for a level-playing field with the cotton textile industry, has also seen a rationalisation of excise duties in recent budgets. As a result of these measures, most prominent textile companies are now out of the excise net or pay marginal excise duty.

On the inputs front, import duties on fibre intermediates such as PTA and DMT have also been reduced gradually. To facilitate expansion, there have also been increasing allocations to the Technology Upgradation Fund Scheme (TUFS), which offers textile companies a five per cent interest rate subsidy. The TUF scheme was extended by an additional five years to 2012 in the last Budget.

While the measures announced in previous budgets were intended to give a boost to the textile sector and render it competitive in the export market, the thrust this time is likely to be on offering relief to the industry. The sector has been going through difficult times.

In the first nine months of the current fiscal, textile companies have undergone a sea change in performance.

Revenue growth continues to be in double-digits, with fresh capacity coming on stream. However, realisations have taken a pounding on the back of a rising rupee. There have also been significant pressures on pricing in the export market, thanks to intensifying competition from Bangladesh and margins have dropped across-the-board.

Spinning companies have taken the deepest hit, with overcapacity resulting in depressed yarn prices in the domestic market. Increasing exports of cotton have also resulted in a firm trend in cotton prices.

Interest rates, too, have been on the rise. In our sample study of about 35 prominent textile companies, more than 60 per cent witnessed a decline in profits.

Textile companies aggressively tapped the public for funds in 2005 and 2006. The slackening of pace on the IPO (initial public offer) front since then also points to a slowdown in expansion plans as textile companies grapple with these multiple challenges.

The Government announced relief packages for exporters in July and October 2007 to enable them to absorb the impact of the sharp rise in the rupee. In November 2007, a special package was announced for textiles and three other export industries, considering their lower share in the import basket. Relief was in the form of additional two per cent interest subvention in pre- and post- shipment credit (in addition to two per cent announced earlier). Customs duty on fibre intermediates PSF and PFY were further reduced from 7.5 per cent to 5 per cent and on all other man-made fibres from 10 per cent to 5 per cent.

Excise duty front

Considering that some action has already been taken ahead of the Budget, there may not be too many measures announced in the forthcoming Budget. On the excise duty front, the synthetic industry is expecting a further rationalisation of duty to 4 per cent to bring it on par with cotton textiles.

This would benefit players such as Century Enka, Indo Rama Synthetics and JBF industries. The industry expects further relief in duty drawback rates and other export incentives. Companies that receive relatively large export incentives include House of Pearl, Zodiac Clothing, Gokaldas Exports, Welspun India, Alok Industries and Raymond.

Further duty cuts on import of textile machinery, while welcome, may not be seen as the need of the hour.

However, these measures may only offer temporary relief and the industry continues to look forward to greater flexibility in labour laws and a stable exchange rate to help them tide over their troubles.