Dutch disease strikes
Indian textiles By Indrajit
Basu
KOLKATA - Three years back it
was thought to be one of the best things that
could happen to India's export-oriented textiles
and apparels industry, keen to swamp global
markets under a restriction-free trade regime.
Today, however, as world trade enters its
fourth year since the abolition of a
four-decade-old textile quota system, the
country's textile and apparel exports are reeling
from declining revenues and
lost
opportunities. Industry players say they were
perhaps better off under a system that offered
them something they miss now; protection from
global competition.
Stung by declining
orders and increasing costs, India's textiles and
apparels exports industry, with 2006-07 revenues
worth US$19 billion, has been struggling to make
ends meet for the past two years. The sharp
depreciation of the dollar this year has further
dented margins severely, and desperate companies
are resorting to mass retrenchments and closures.
More than half a million textile workers
have been laid off this year, according to
industry figures. Almost all plants are working at
50% to 60% of capacity and ''if the trend
continues the textiles industry could lose 1
million jobs in this fiscal year (April 2007 to
March 2008)", Union Minister of Textiles
Shankersingh Vaghela said last week.
''The
industry has been hit by the Dutch disease,'' said
A Shaktivel, president of the Tirupur Exporters
Association (TEA), a garments exporters lobby in
the city of Tirupur, in Tamil Nadu. ''Times in
recent years have never been as tough as it is now
for the country's garments and textiles
exporters.'' Dutch disease, an economic concept
coined by The Economist magazine, refers to the
loss of competitive advantage a country's
manufacturing sectors experience when its currency
goes through sudden and sharp appreciation.
Tirupur, with an estimated US$2.75 billion
in revenues, accounts for 90% of the country's
cotton knitwear exports, serving marquee global
names such as Wal-Mart, GAP, Tesco, Tommy Hilfiger
and Liz Claiborne. ''But this year [from April] we
are already running behind last year's revenues by
about 10% and have lost about 10,000 jobs,'' said
Saktivel. Its 6,000-odd exporting units could end
up losing 50,000 jobs in the next six months if
''the situation continues''.
If exporters
in Tirupur say that they are in dire straits, it's
even worse for hundreds of others in far to the
north in Gurgaon, near Delhi. The two largest
companies there, Orient Craft and House of Pearl
Fashions, announced cuts of 4,000 and 1,000 jobs
respectively in the past four months. While others
are not yet ready to talk about their own losses,
the 350-odd textile factories in Gurgaon have cut
about 200 jobs each, totaling 70,000 jobs, in the
last few months, according to industry sources.
''We realized that over the years we had collected
quite a bit of dead wood, and faced with
contracting margins we had to let the workers
go,'' said Orient Craft chairman and managing
director Sudhir Dhingra. ''The layoffs have also
helped us to improve margins by a couple of
points.''
The strength of the rupee has
not just hit orders from the overseas market; it
has made India less competitive against low-cost
competitors in neighboring countries. ''An added
problem is that the Indian currency has
appreciated much more than our Asian competitors
like Bangladesh, Pakistan and China,'' said a
spokesperson of the Confederation of Indian
Textile Industry, a lobby group. Since textiles
and garments have almost been commoditized, orders
are migrating to cheaper destinations, which is
why, according to Saktivel, many smaller exporters
in Tirupur say were better off in pre-quota days.
As long as the world's garment and
textiles trade was governed by a quota system -
albeit one designed to protect the United States,
the members of the European Union and others from
cheap imports - these developed countries had to
buy a set amount of textiles and garments from
developing countries. That meant India could live
easy on costs.
So even if India had higher
production costs compared to rivals, it was
assured of some minimum business. The only
competition for its exporters came from players
within the country. The removal under the World
Trade Organisation of the quota system from
January 1, 2005, ushered in a ''free and fair
trade environment'', and overseas buyers became
free to shop at the lowest price anywhere.
The impact of the quota removal wasn't
immediately negative - exports grew by around 35%
in the first few months. Cracks began to show when
the rupee started to rise (primarily because the
dollar started sliding) from the beginning of
2006. The US currency fell about 14% that year,
and less than 10 months later textile and apparel
exports were down by almost 22% in rupee terms and
about 12% in dollar terms. Exports to the US, the
dominant market for Indian textile manufacturers,
witnessed a steep decline in growth, with
shipments gaining only 1.5% between January and
September 2007 compared with 12.5% in the whole of
last year.
''It is true that the dollar
has weakened against all other Asian countries as
well,'' said Saktivel, ''but the dollar's
depreciation against the rupee has been
particularly sharp - 12% since January this year -
and that has made India one of the most expensive
countries in the region. Many of India's clients
therefore are migrating to cheaper destinations
like Bangladesh and China.'' What's more, Indian
exporters have not been able to offset their
dollar earnings with an increase in business in
other currency markets, he said, because the rupee
has appreciated against the euro by 4.2%, the
British pound (5.4%) and the yen (8%), hurting
sales in the other major markets for Indian
textiles.
The future for the industry, the
country's second-largest employer after
agriculture, looks grim under the present
circumstances, and faced with bleak prospects a
growing number of apparel exporters are eyeing the
local market. Orient Craft, solely an exporter
since it was founded 35 years ago, is crafting a
local sales and expansion drive that includes a
distinct strategy. The company is shipping its
products to Germany, getting them branded, then
bringing them back to India to sell locally
through a joint venture with the German brand
owner. ''With exports hurting like never before,
we had to devise a new way of tapping the domestic
market,'' said Sudhir Dhingra. As part of the
drive, the company is reportedly expanding its
India network to 120 stores from 21.
Orients' peer, House of Pearls, has
similarly ambitious expansion plans that include
300 new stores to ''swamp'' local markets with its
recently launched brands. Analysts said it makes
sense because the rising affluence of Indian
consumers has increased spending on clothes,
evident from 20% annual growth in demand for
international branded clotheswear.
Going
domestic is not an option for all. ''How many
small exporters can afford to open a retail store?
The government has to formulate newer polices to
help us to survive,'' said Saktivel. The response
from the government to such concerns has been
''positive''.
Demand in the local market
makes it rash to predict a doomsday for India's
textiles and apparel exports, but surviving the
continuing meltdown will be anything but easy, for
workers and employers alike.
Indrajit Basu is a Kolkata-based
journalist.
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