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The author is a practising chartered accountant and an independent director on many large public companies whose views and ideas have been instrumental in framing policyMore From The Author >>
Covid 19 Impact On Textile Exports
To support the sector, the government should extend tax compliances, interest rate reductions and announce special packages to mitigate the crisis faced by the capital- and labour-intensive industry.
Photo Credit : Umesh Goswami
Being one of the oldest established industry, India’s textile and apparel industry contributes 2.3% of the total GDP and is the second largest employer encompassing 45 million people. This sector is highly diversified and caters to a wide array of segments ranging from traditional handloom products to cotton, wool and silk products.
In terms of world export, India is the third largest exporter of textiles & apparel and contributes to 12% of the export earnings.
Due to availability of raw materials such as cotton, wool, silk and jute, India has a competitive advantage. This has led the Government, under the Scheme for Integrated Textile Parks(SITP) and Technology upgradation fund scheme (TUFS) to make huge investments, which is going to attract more private equity ,training workforce and make it technology intensive.
By the above means the government had taken a proactive measures alongside announcing special packages to boost exports, create job opportunities and attract investments. The recent policies allowed 100% Foreign direct investment and free trade with ASEAN to increase the exports.
To further the policy support, the ministry of textile was expected to release New Textile policy 2020.
Before the impact of Covid 19 the expected CAGR for the sector was 28% and leading to 10 million more jobs by end of 2020.
The onset of the Covid19 pandemic has severely damaged the Indian exports market. The nationwide lockdown has led to a closure of factories and lay-offs have already begun among low wage workers. The pandemic has affected the majority of India’s export market (the US and EU together constitute for approximately, 60% of the total apparel exports from India), causing order cancellations and deferrals leading to build-up of unsold inventory and expectation of slower realization of export receivables leading to higher working capital requirements. Due to the same, India’s apparel industry stands to lose shipments worth more than $3 billion as of the moment. Further, in March 2020, exports fell 32.2% compared with the same period last year. Apparel exports, which were about $16.1 billion in 2018-19, fell almost 4% to $15.4 billion, with the March exports alone dropping almost 35% compared with the same month last year. The potential loss in revenues is estimated to amount US $8-10 billion.
At present, the companies are grappled with muted growth, sharp decline in yarn exports, unavailability of cheaper imports, profitability issues, currency fluctuations, order cancellations, deferring shipments, inventory piles, increase in working capital and wage payments. Global economy is itself under pressure and the global lockdowns, as much as needed, worsens the situation. Deep discounts are not affecting the consumers, spending on storages and payments of interest on inventory pile are making the promotors desperate forcing them to take drastic measures such as closures. The overseas customers voided their existing contractual obligations by invoking force majeure, leading to cancellations or at best, postponement. Despite forwards contracts, the contracts have become unenforceable, leading the exporter textile houses in an unchartered territory.
To support the sector, the government should extend tax compliances, interest rate reductions and announce special packages to mitigate the crisis faced by the capital- and labour-intensive industry. Initiatives like direct subsidies based on past sales and subsidies for maintaining employment can help to avoid severe disruptions. The banking industry should support the exporters by relaxing and extending the credit payment schedules. Additional financing at lower rates should be provided in order to procure raw materials.
Guaranteeing exchange rate at a marginal premium can be made available to avert a crisis. Government and RBI are required to step in the similar manner to the 2008 crisis, a capitalistic economy turns socialist in approach by absorbing losses and infusing capital. To protect this sector from both liquidity and solvency risk, Government intervention is the need of the hour, as the pace of recovery post lockdown will depend on these policies.