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Textiles: Grim reality - Views on News from Equitymaster
 
 
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  • May 23, 2001

    Textiles: Grim reality

    The Indian textiles industry seems to be recovering from the aftermath of the late 1990s. After prolonged slack in demand, yarn prices have moved up significantly. Besides, demand for other key segments like fabrics and denim is also moving up. Is this a sign of things to come?

    Cotton prices in India are basically a function of supply. This is dependent on rainfall and the relative prices of other substitutes like synthetic fibres. Since cotton is a seasonal crop (grown from October to April), production is highly dependent on monsoons. As quality of cotton has been deteriorating, imports have been on the rise in recent years. In fact, it is believed that imports of cotton might cross the previous years level of 2.2 m bales. Yarn prices, on the other hand, had moved up last year (average yarn prices had gone up by 6.6% in the first eleven months of FY01).

    India’s competitive advantage in the textile sector is cheap labour and comparatively lower cotton prices (cheaper by around 25%). But cheap labour has also been one of the biggest problems for this sector. The industry has been suffering from lack of labour reforms, which has pushed productivity to lower limits due to frequent strikes and lockouts (the typical example is National Textiles Corporation). Even if the government decides to privatise the companies, the bloated workforce is definitely a big hindrance. But in the Budget 2002, the government has mooted the amendment of the Industrial Disputes Act for increasing the ceiling on labour retrenchment from 100 to 1,000, which should augur well for the industry.

    Also, the finance ministry in the current year had announced a slew of measures to revive the sector. The withdrawal of excise duty concessions to the small-scale sector and new labour reforms are some of the initiatives towards the right direction. Meanwhile, the government has also increased the depreciation rate from 25% to 50% for the plant and machinery installed under the Technology Upgradation Fund (TUF). Since the domestic textile industry suffers from lack of modernization, the TUF aims at modernizing units across the sector. But the domestic fabric segment continues to suffer to high input costs (like power and interest charges). As a result, the organised segment has been continuously losing market share to the unorganised segment. Though fabric production was higher in the first half of the current year, growth waned towards the end of year, which is apparent from the graph. The total fabric production for April 2000 to February 2001 has risen just by 4% to 36,648 m square meters.

    With WTO (World Trade Organisation) agreement coming into place from April 2001, domestic companies and small-scale players will have to face competition from multinationals. Under the WTO agreement between US and India, India has committed to bind its textiles and tariff lines to allow global players to have greater access to the Indian market. In fact, the quantitative restrictions on 342 textiles were lifted with effect from April 1, 2001. Hence, modernization of existing units is critical to combat imports.

     

     

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