Subdued demand trends in the key importing countries as well as intense competitive pressures from nations such as Bangladesh and Vietnam over the past few years have contained growth and put pressure on the profits of Indian textile exporters, ratings agency ICRA said in a report.
In addition, unfavourable currency movements and high raw material prices in the past six to nine months as well as recent revision in duty drawback rates have only added to their woes. With exports accounting for more than one-third of the Indian textile market, this is a matter of concern, notwithstanding a large domestic market.
The slowdown in apparels segment has mainly been on account of subdued demand conditions in key textile-consuming regions of United States of America (US) and European Union (EU) which account for a majority of exports from India.
This apart, cotton-yarn exports have been under pressure on account of a decline in demand from China, which used to account for more than 40% of total cotton yarn exports from India till last year and accounted for only 17% of India’s cotton yarn exports in the first four months of FY2018.
India appears to be the worst-affected nation amongst cotton-yarn suppliers to China, as is evident in a decline in India’s share in China’s cotton yarn imports to 8% in Q1FY2018 vis-à-vis 20% and 25% in Q1 FY2017 and Q1 FY2016 respectively.
The pressures on textile exporters have become more severe with the strengthening of Indian Rupee against currencies of key competing nations during the current calendar year. This has reduced competitiveness of Indian exporters vis-à-vis their counterparts.
“Notwithstanding the 2% depreciation in the Indian Rupee vis-à-vis USD in the month of September 2017, the Indian Rupee sustained its strong performance against currencies of most of the countries competing in the global textile space during much of the current calendar year,” said Jayanta Roy, ICRA’s Senior Vice-President and Group Head, Corporate Sector Ratings.
Further, ICRA said, higher input prices (primarily cotton) this year vis-a-vis last year added to profitability pressures for exporters during H1 FY2018, given the cotton-dominance of textile exports from India. While cotton prices have corrected to an extent from mid-September 2017 onwards which is expected to provide respite during H2 FY2018, recent revision in duty drawback rates is likely to exert some pressure on margins.
The government has recently notified revised duty drawback rates under the GST regime which are applicable to exporters with effect from October 2017 onwards. There is a downward revision in duty drawback rates for most product categories in the textile sector under the GST regime, when compared with duty drawback rates for exporters claiming Cenvat under the earlier tax regime.
“Considering that GST rates for most product categories in textiles are in line with effective tax rates under the earlier tax regime and the extent of benefit from improved input credit chain post GST implementation remains to be seen. The overall impact of GST and the revised duty drawback rates on the sector is uncertain at present.” Roy added.