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When will it cotton on to modernisation?
Infrastructural and financial bottlenecks are proving serious burdens on a sector that is in crying need for government incentives and cash infusion to be able to break out of its current crisis
Issue Date - 15/09/2011
If bread is the staff of life, cotton is the stuff of life! Unfortunately, the aphorism falls flat if one looks at the crisis-ridden cotton and textiles industry in India. The sector, worth $62 billion today, has seen a steep fall in the prices of its raw materials – cotton and cotton yarn – since March 2010, besides also facing a low demand for products. Between April and July last year, the price of Shankar-6, the standard variety of Indian cotton, fell to Rs.30,000 per candy from Rs.60,000 per candy in April (one candy is equal to 356 kg.) The sudden and sharp drop in the price of cotton yarn was the result of the government’s decision to cap exports, which left companies holding on to high-cost inventory. Cotton yarn exports in FY 2010-11 were capped at 720 million/kg against the industry’s demand for 1,100 million/kg. The step was taken, the government says, to free up availability of cotton yarn in the domestic market.

However, industry veterans maintain that the government shouldn’t have interfered in the matter at all. If at all any intervention was called for, the government should have come up with a productive and long-term strategy to boost the sector, they say. And instead of capping exports, the government should have allowed exports to continue unfettered in accordance with the dictates of the market. In fact, the government’s meddling in the matter appears to have hit more of the wrong notes than the right ones. Its decision to regulate cotton exports did yield the desired short-term goal to curb rising prices. But what followed in the aftermath was even more deleterious. Prices dipped precipitously with the result that cotton trading companies were left holding on to high-cost inventory. Unsold stock squeezed the liquidity of spinners, which in turn affected cotton purchases by mills and had a cascading effect on already tumbling cotton prices.

On April 1 this year, the government lifted the restriction on cotton yarn exports and exporters heaved a sigh of relief. Over 20% of cotton yarn production in India is exported and the government measure to lift the export cap was hailed as a positive development for the industry. Unfortunately, the measure came too late to save the day for the textiles industry in the country. It did not benefit Indian spinners as expected because overseas customers had started sourcing cotton yarn from alternate global suppliers when the ban was enforced. After the export ban was lifted, the prices in the export market crashed within a month, recording the sharpest fall of 33% due to significant additional supply on account of accumulated stock and weak demand. As per industry sources, the capacity utilisation of most of the spinning mills dropped by up to one-third of optimal utilisation of 93-97% due to slowdown in demand and large finished goods inventory.

The fallout has been that spinners today are loaded with high-cost cotton procured during the last season and a large stock of finished yarn that is waiting to be picked-up, which is likely to squeeze their profitability over the last two-to-three quarters of FY 2011-12. Rising interest rates in the domestic markets are likely to aggravate the situation further. The highly leveraged capital structure along with rising interest rates exposes the industry to higher risk of defaults. According to ICRA, a leading information services and data solutions provider, the operating profit margin of spinners is expected to remain depressed in 2011-12 and spinners may find it difficult to recover their cost, as the yarn would be produced utilising high priced cotton procured from October 2010 to March 2011. Hence, the prevailing market price may not be sufficient to recover the cost of production. As a result, the second quarter results of most of the textile mills are expected to be very bad because of the huge losses they have suffered on account of high cost of raw material and unsold goods in stock.

The industry’s predicament sums up all that is amiss in the cotton and textiles sector in India. Policies formulated by the government have failed to factor in a rational prediction of the future. The textile machinery in use today is derived from the failed technology of the West and the government has failed to offer incentives for modernistaion of the industry. Experts agree that the government and the industry should work together to evolve and find a new direction for Indian textile technology that is relevant to today’s circumstances, with the least environmental, energy and social costs. Doing this would possibly regain for the country the prime position that Indian textiles held for millennia, and one that has now been lost – India’s textile exports today account for just 3% of world textile trade.

That’s quite a dramatic climbdown from the unassailable perch that Indian textiles continued to command for centuries in the past. For millennia, Indian cotton textiles enjoyed worldwide fame and flourished peacefully, employing millions and making huge varieties of cotton fabrics. Tome Pires, a Portuguese traveller wrote in 1515 describing ships that came from Gujarat and the Coromandel coast as “worth eighty to ninety thousand cruzados, carrying cloth of thirty different sorts”. Exports are documented from India to the Roman Empire as early as in the first century BC, so much so that the Roman historian Pliny is said to have complained that India was draining Rome of her gold. Indian cotton fabrics clothed “everyone, from the Cape of Good Hope to China, man and woman, from head to foot”.

In contrast, most of the textile export from India today consists of the cheapest cotton ‘grey sheeting’ made on powerlooms and is typically targeted at the lower quality end of the international market. A few modern integrated textile units are now focusing on exports of finer count yarns, fabric, and branded garments for the upper segment of the world market.“The lack of value-added products in textile exports do not augur well for India in a non-MFA world,” says V. S. Velayutham, Chairman of Cotton and Textile Export Promotion Council. However, climbing the value and quality chain looks highly unlikely in the near term considering that most powerloom-and-hosiery centres such as Bhiwandi, Ichalkaranji, and Malegaon in Maharashtra, Sircilla in Andhra & Tirupur in Tamil Nadu are notorious for the inhuman working & living conditions of the workers, poor infrastructure and rampant industrial pollution.


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