Subcontinent textile industry feels strain
Plummeting western demand, cost of cotton hit textile,
apparel exports from India, Pakistan and Sri Lanka.
By Eric Johnson
When one of India's largest outsourcing corporations hit the headlines recently for an Enron-style accounting scandal, it made news around the world.
The company, Satyam, provides back-office operations for one-third of the world's Fortune 500 companies. It also employs 53,000 people in an industry for which India is famous worldwide.
Less noticeable, but more problematic for the Indian government, has been the slow trickle of job losses in one of India's true core industries – textile manufacturing. The country's textile industry is its second-largest earner of foreign exchange, a vital cog in India's export engine.
But that cog is under intense strain.
'The textile industry is dying and it requires increased help from banks,' said Ram Krishna Mundra, president of Mahendra Tora, an Indian conglomerate that owns spinning mills. Mundra spoke in November at an Indian economic forum as India's textile and apparel industry grappled with a growing global economic crisis.
This was about the same time that the Indian government admitted job losses in the textile industry may reach 500,000 by April of this year.
The industry employs about 38 million workers in India and accounts for 8 percent of its GDP – both far and away surpassing the true impact of the country's information technology and outsourcing industries for which it is more renowned.
A Wall Street Journal report in December said the textile industry accounts for 4 percent of India's GDP, but that job losses were even steeper than first forecasted, with 700,000 out of work by the end of 2008 and 1.2 million to be jobless by spring.
A Bloomberg report in November said India's overseas shipments of textiles fell 12.8 percent in October, but things only got worse from there. India's apparel and textile export associations put the number for the last two months of 2008 at closer to 20 percent.
India's government recognizes the problem, to an extent. In December it promised a nearly $300 million stimulus package intended to help textile manufacturers upgrade their machinery and said more stimulus would be given as needed.
The government also reduced the duty rate on exported textiles from 4 percent to zero, and reduced interest rates on pre- and post-shipment export credit by 2 percent.
But exporters are more worried about the price of raw materials than anything else, knowing that demand won't rebound quickly enough to overcome the high cost of cotton.
Cotton prices in India in the fall were 20 percent higher than the international average, despite the price of cotton falling along with every other commodity in the second half of 2008. According to India's Ministry of Textiles, at the end of the year, the inflation rate for raw materials in the textile industry was nearly twice as high as for all other commodities – 10.9 percent versus 5.9 percent. Inflation for raw cotton stood at 21.5 percent on Dec. 27.
In truth, it's been a rough couple of years for India's textile manufacturers. In 2007, before the credit crunch and demand slowdown, India's currency, the rupee, strengthened significantly against the dollar, going from more than 44 rupees to the dollar to less than 39 per dollar in eight months. That 12 percent difference made the country an ineffective place for global retailers to source low-margin apparel and textile goods.
And just as the dollar strengthened back against the rupee, to a high of 50 rupees to the dollar in the fall, inflation drove up raw material prices and demand dropped.
'Plummeting demand and rising input costs had hammered us badly during the year,' Premal Udani, president of the Clothing Manufacturer Association of India, told the Economic Times in December. 'Since April this year, exports fell by about 30 percent and production shrank 20 to 30 percent. And this led to closure of units in major hubs at Tirupur, Bangalore and Delhi which left thousands jobless.'
Another CMAI official said that while the weakened rupee theoretically benefits producers in India, what they really desire is currency stability.
'The actual fluctuation in the rupee is so wild, that it is difficult to pinpoint what rate to cost a product at,' CMAI Chairman Rahul Mehta said in December.
As big a problem as the currency fluctuation has been, nothing has been more traumatic than the simple fall in demand brought on by the economic woes in the West.
According to press reports in India, exporters' purchase orders dipped 15 percent to 20 percent in the last three months of 2008. Roughly half of India's textile production is exported to North America and Europe, and many towns in the southern state of Tamil Nadu, like Tirupur, rely heavily on exports.
'From the tea shop to the big store or theaters, Tirupur lives on exports,' A. Sakthivel, president of the Tirupur Exporters' Association, told the Wall Street Journal, adding that the slowdown 'will affect us from top to bottom.'
Things are hardly better for some of India's neighbors in the Subcontinent. Pakistan and Sri Lanka don't have the economic diversity on which India can fall back, and rely even more heavily on textiles.
Pakistan's global textile exports have fallen 14 percent in the current fiscal year, which starts July 1. Aside from dwindling demand and high cotton prices, Pakistan producers also have to deal with an increasingly unstable political climate that has driven importers to more peaceful sourcing locations in Asia.
According to trade data from the U.S. Office of Textiles and Apparel, in the first 10 months of 2008 textile and apparel imports from India to the United States declined 0.3 percent to $4.3 billion, but from Pakistan it declined 3.8 percent to $2.6 billion, and from Sri Lanka it fell 8 percent to $1.3 billion. The numbers are likely to be even worse in the last two months of the year.
Bangladesh, meanwhile, saw a 10 percent increase in exports to the United States to $3 billion. India's eastern neighbor has profited from a designation in the region as a least developed nation, meaning it enjoys duty-free exports to the United States and European Union. The country predominantly exports low-value garments and knitwear – in other words, non-luxury products that are less likely to be affected by the economic downturn.
All the textile industries in the region saw demand decline almost as soon as the subprime mortgage crisis hit in the United States. A drop in housing demand turned into a drop in demand for decorative products, like carpets and sheets. Bangladesh wasn't as affected by the non-apparel decline in exports because about 97 percent of its exports are apparel items, versus a 60-40 split for India and a near 50-50 split for Pakistan.
The drop in apparel demand hit in the second half of 2008. While India's overall textile and apparel exports to the United States stayed fairly even, its apparel imports dipped 3.7 percent in the first 10 months of 2008 to $2.6 billion.
India's Apparel Export Promotion Council reported in January that global apparel exports from the country were down 11.3 percent in November and that India will fall 24 percent short of its goal of exporting $11 billion worth of apparel in the current fiscal year beginning April 1. The council said manufacturing houses were having to lay off 20 percent to 80 percent of their staff and that 84 percent of exporters in the New Delhi region saw a decline in orders in December.
Comparing the Subcontinent to other parts of Asia, China has suffered a similar stagnation in demand as India. While cotton prices in China fell dramatically in fall, those savings were offset by rising costs for labor, power and real estate, or higher logistics costs for factories in the country's interior.
China's textile and apparel exports to the United States through the first 10 months of 2008 were stagnant, increasing 0.7 percent to $27 billion. Vietnam saw textile and apparel exports increase significantly, by 21.5 percent to $4.6 billion.