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Economics Analysis of Managerial

Applications
Impact of Rupee Appreciation and Inflation on
Indian
Textile and Garment Industry
Submitted to:
Ms. Gulnar Sharma

Submitted by:

Bhavik Gandhi (M/FMS/08/10)

National Institute of Fashion Technology, Mumbai.

A Stronger Rupee Tests the Fabric of


India's Textile Exporters
These are troubled times for India's textile industry. As the rupee appreciates against the
U.S. dollar, more and more small and medium-size firms are laying off workers or closing
down. Industry experts say that in the southern textile hubs of Tirupur and Bangalore, a
factory closes every week. Premal Udani, chairman of the Clothing Manufacturers
Association of India, estimates that 500,000 to 600,000 jobs are at risk. As exporters struggle
to secure profitable orders, the Ministry of Textiles' $25.06 billion export target for the fiscal
year seems well beyond reach.
While the rupee has appreciated more than 15% compared with the dollar over the last year
and a half, competing countries' currencies have not appreciated correspondingly. "Our
currency is destined to appreciate," said Anees Noorani, vice chairman and managing
director of Zodiac Clothing, one of India's leading brands in men's shirts and ties. "But does
the appreciation have to be as sudden or sharp as from 47 rupees to 39 rupees between
July 2006 and now?"
The troubles come amid slackened demand from the Western consumer. With U.S.
economic growth slowing, U.S. retailers have offered deep discounts. That has left India's
exporters squeezed by customers who want more for less and by a currency whose
appreciation provides less when they do make sales. "Our competitiveness for the time
being has gone away," said P.D. Patodia, chairman of the Confederation of Indian Textile
Industry. The association estimates that for every 1% fall in the value of
the dollar compared with the rupee, profit falls by 1.2%. "Some exporters will
be permanently damaged and not all will survive," said Subir Gokarn, chief economist for
Standard & Poor's Asia-Pacific. This isn't the first time prices have shrunk. Free on board
prices fell two years ago when quotas imposed by the Multifiber Arrangement were lifted.
India's ready-made garment exporters, who contributed 3% of the global clothing trade,
responded by boosting export values 30%. Ready-made garments now account for 43% of
India's textile exports. "Exporters were helped in reducing costs by the disappearance of the
quota premium expense," Udani said. "This time around the dollar is in a free fall, so
exporters can't plan anything." The United States is the largest buyer of Indian textiles and
apparel, at 19% and 33%, respectively. That helps explain the degree of pain the dollar's fall
has inflicted. Apparel and textiles together contribute more than 30% of India's net export
earnings.
Supplier Consolidation

The currency-driven troubles come at an already-challenging time. Retailers are using a


smaller number of vendors, bypassing traditional buying houses to source directly from a few
chosen manufacturers.
Committing large sums for expansion requires nerves of steel. "Unfortunately, interest rates
overall in India, too, have moved up, from 7.5%-8% to 12%-13% per annum," said Rakesh
Valecha, director of corporate ratings at Fitch Ratings India. So after a federal government
interest subsidy for upgrading certain machinery, "the effective cost for exporters has gone
up from 2%-3% per annum to 7%-8% per annum." India is not well-suited for high-volume,
low-margin production, Zodiac Clothing's Noorani said. "We have not built the kind of scale
that Vietnam or China has. Nor do we have the productivity to compete with the best. I
therefore feel that India has missed the bus with respect to this part of the textile outsourcing
business. You can see that vendors of Wal-Mart and the like are now in distress and we
have a crisis."
As recently as 2006, India, among the top five apparel exporters, seemed to be making rapid
strides. The new outlook is a sea change from industry projections of exports doubling every
year. "Today we are nowhere on that trajectory and are in fact selling at prices which are
lower than what we sold at even five years ago," Udani said. Many small firms operate at net
profit margins between 3% and 8%. "Thanks to low gross margins, any production loss
quickly turns into a net loss as well," the Textile Industry Confederation's Patodia said.
The industry's woes have led some prominent participants to leave or scale back. In August,
the Hinduja family, who controlled 70.1% of Gokaldas Exports, sold a 50.1% stake to the
Blackstone Group, the private equity firm. Captain C.P. Krishnan Nair, chairman of the
Bombay Stock Exchange-listed Hotel Leela Venture, sold his family firm Leela Scottish Lace.
The textile firm had helped keep him afloat when the hotel industry and Hotel Leela's
fortunes in particular were in the dumps several years ago. The company that made 12
million pieces annually with revenue of 4 billion rupees was sold to Bombay Rayon Fashions
for 1.55 billion rupees in July.
Seeking Political Patronage
The apparel and textile sector is India's largest employer after agriculture, with an estimated
workforce of more than six million. So job losses are a political hot potato. The industry is
looking for government help while it adjusts to the rupee's appreciation.
"We need a global level playing field with comparable infrastructure, interest rates, power
costs and labor laws," Udani said. It costs more to ship a container from Tirupur to the
western port city of Mumbai than it does to ship one from Chennai, in southern India, to Hong
Kong, he said. Responding to industry demands, Shankersinh Vaghela, the minister of
textiles, announced in November a 10% reduction on export credit guarantee premiums, a
10% to 40% increase in prevailing duty drawback rates, and a 2 percentage point reduction
in pre-shipment and post-shipment credit interest rates. The government also released about
six billion rupees to clear all arrears of terminal excise duties and central sales tax
reimbursements. To spur the sector's modernization, the government also offers a credit-
linked capital subsidy, covering about 10% of eligible capital investments, in addition to a five
percentage point interest cost reimbursement on loans taken to invest in specified advanced
machinery and equipment. S&P's Gokarn says the fiscal measures are inadequate.
"Exporters are holding the dollar price line but are getting hit on the rupee margins, and that
has banks scared to fund them," he said.
Recent news media reports suggest that banks are less willing to extend foreign currency
loans as they get swept up in a global flight to safety. Textile exporters are demanding more
from the government, which they believe has not paid sufficient attention to their interests
when negotiating free trade agreements. India doesn't have bilateral agreements with the
United States or the European Union, its largest markets, to help bring down import duties on
its most prominent items, Udani said. "On the other hand, several countries in Africa and
even neighbors such as Bangladesh have such agreements in place. Instead, the free trade
agreements that we have signed so far are with Far Eastern countries that get beneficial
access to our large domestic market for textiles." Noorani said, though, that the government
had recognized the urgency in starting discussions with the European Union for a bilateral
agreement. In the interim, the industry wants the government to allow hiring on a contract
basis so it can expand or downsize operations based on market government to allow hiring
on a contract basis so it can expand or downsize operations based on market conditions.
Reengineering to Survive
Textile exporters are employing a range of management strategies to survive. After
purchasing Leela Lace, Bombay Rayon Fashions plans to expand its garment capacity
almost threefold in the coming years. "Larger companies can use scale to invest in newer
machinery which has better quality, higher productivity and finds increased acceptability with
consumers," Fitch Ratings' Valecha said. "Such equipment also needs less manpower.
Scale advantages can also be realized with respect to freight and logistics and the purchase
of key raw materials such as cotton." Udani estimates that scale economies can help
companies lower costs by 5% to 10%. A bigger scale of operations also helps as producers
woo customers looking to consolidate their relationships from hundreds of suppliers to just a
dozen or so with global capabilities. Companies are also seeking to integrate across the
value chain. Firms such as Alok Industries which once were known as process houses now
not only process fabric but also produce finished bed linen, quilts and bed covers, and shirts
and trousers too. "If you are at the lower end of the value chain, then your ability to get price
hikes is severely limited," Valecha said. Companies are also trying to add niche value-added
material to their product mix. "If you want to sell plain blue shirts, then you need to give your
buyer an offer that's comparable to other country suppliers, and that's getting difficult," said
Saurabh Kumar Tayal, chairman of KSL & Industries. "On the other hand, if you are selling
shirts with beading and embroidery, embedded with Swarovski crystals, then you can
command some value, and the EBITDA margins can be as high as 50%." To do this,
however, requires a complement of good merchandisers, the ability to supply a range of
colors and a large roster of customers. "Creating a buyer takes time. It could even be years,"
said Patodia, who in addition to his role as chairman of the Textile Industry Confederation is
vice chairman and managing director of Prime Textiles. The days when exporters could pack
a couple of samples in suitcases, catch a plane and come back with orders are over. "Today
we are getting orders for value-added garments, but these aggregate to only 30% of our
capacity," said Udani, who runs a midsize garment export unit. He said breakeven levels of
production for the industry's garment units are around 50% to 55% of capacity. To increase
orders, exporters are seeking clients in the European Union. This strategy helps diversify
market and currency risk, but it offers peculiar challenges. "In the EU, every member country
has a different fashion and style, and therefore orders tend to be fragmented," Udani said.
Vendors who already have clients with EU operations are trying to switch the billing currency
for exports from the dollar to the euro, at least for merchandise dispatched to the Eurozone.
The transition from being commodity producers to suppliers of value-added products
requires skilled managers. "There is a huge gap in the availability and requirement of
personnel particularly in the areas of apparel management, merchandising, vendor
management and retail specific to the apparel industry," said Vijay Agarwal, chairman of the
Apparel Export Promotion Council. "It is estimated that at junior, middle and senior level,
there is a dearth of almost 250,000 managers in this sector." Amit Goyal, president of the
Confederation of Indian Apparel Exporters, said that "the entire textile value chain needs to
be strengthened. Setting up fashion hubs in the country, with the latest collection ranging
from textile accessories to the finished products, is required." The Textile Ministry is planning
to create textile "investment regions" that it hopes can help reduce transaction costs and
enhance competitiveness by removing procedural bottlenecks. Most Indian companies are
accustomed to steadily rising costs. This requires continuous process improvements and
more intelligent use of scale. "Firms need to source their raw materials from dollar areas,
control and drive costs down, increase productivity by balancing technology and reduce
expenses by using energy-efficient methods of production," Noorani said. "We have invested
heavily in production systems and deskilling of operations by engineering the product on
machines." Companies are also addressing financial management. "Exporters have become
conscious of the currency risk and are not leaving their books open," Valecha said. "They are
either purchasing a forward cover or building a natural hedge via imports."
Look Inward
Some firms have decided it's time to use the ultimate safety net: a domestic market
estimated to be worth almost $30 billion. This has come not a moment too soon, as several
low-cost countries – including China, Turkey, Vietnam, Pakistan, Sri Lanka and Bangladesh
-- are finding the Indian market more attractive, thanks to the rupee's appreciation. "We
believe low-end export goods could find their way to domestic markets in the current rupee
scenario, and this could dampen prices," said Ashish Jagnani, an analyst with Citigroup.
Fortunately for textile exporters, the Indian consumer is increasingly demanding quality, and
Indian companies are increasingly positioned to deliver. "The quality available in India has
improved so that the average Indian no longer seeks to buy a shirt made overseas," Patodia
said. It is at least as profitable to supply to the domestic market as it is to export, said
Noorani. A problem with catering to the domestic market, however, is the lack of customers
that can place orders as large as Wal-Mart, Gap or JC Penney can. Still, large Indian
retailers such as Shopper's Stop and Pantaloon Retail have set up sourcing operations
around China. Domestic textile firms need to build their franchises and relationships with the
domestic retail chains that in coming years could provide a substantial source of business.
Some large textile firms are even launching their own apparel brands in the Indian market,
following the examples of Raymond and Arvind Mills. Others are going a step further.
Welspun is setting up a chain of home textile stores under the name "Spaces." Alok is setting
up a textile and apparel retail chain branded "H&A." Such retail strategies also present
challenges. Firms planning dedicated retail chains must contend with consumer preference
shifting in favor of multibrand outlets. And attracting customers loyal to their exclusive stores
won't happen overnight. "This is a long gestation business that takes capital," Tayal said.
"The minimum breakeven period for a store is one year." Some firms that have ventured into
retail chains are finding rising commercial real estate prices an impediment to their ability to
roll out with the speed to attain critical mass. Building a brand in an already competitive
market, thanks to the presence of international brands such as Arrow and home-grown
brands such as Zodiac and Provogue, requires perseverance. "It's not easy if all you have
been doing is selling fabric and yarn," Fitch Ratings' Valecha said. "This requires a different
mind-set, expertise and skills sets, and the ability to take additional risks. It could take years
to establish brands." The saving grace is that textile companies may have a better chance of
building a brand that connects with Indian consumers than one
that connects with consumers overseas. Some Indian firms are acquiring companies in the
developed world. These are either retail chains or marketing agents they have traditionally
sold to. The silk yarn and fabrics maker Himatsingka Seide in October bought U.S.-based
DWI Holdings for $30 million. DWI, which has the license for marketing brands including
Calvin Klein, Barbara Barry and Royal Sateen, had revenues of $47 million in fiscal 2007. In
August, Alok Industries, through its wholly owned subsidiary Alok Industries International,
signed an exclusive license agreement with AISLE 5 of New York for its portfolio of lifestyle
brands -- aworld and Cotton + Clay. Under the multiyear license, the company acquired the
manufacturing and distribution rights of bath, sleep, dining and home decor textile products
sold through supermarkets in the United States and Canada. In April, Alok bought 60% of
Czech firm Mileta, which has established relationships with premium customers for its high-
end cotton fabrics. Welspun bought a controlling stake in British home textile firm Christy in
July 2006 to gain a wider presence in the United Kingdom. Home textiles firm GHCL in
February 2007 bought New Jersey-based home textiles manufacturer and distributor Best
Manufacturing Group for $35 million, and in July 2006 acquired Rosebys, a British home
textile retail chain, for $50 million

India's inflation rate rises marginally to 12.91


percent, prices seen stabilizing
India's wholesale price index (WPI)-based inflation rate rose marginally to a new high of 12.91

percent in the 12 months to July 5, higher than previous week's figure of 11.89 percent, government

data showed on Thursday.


The inflation rate, though the highest since annual numbers in the current series became available in
April 1995, has brought cheer to the people who are optimistic that the inflation rate would be
moderating soon.
According to government figures, primary articles index decreased by 0.1 percent, with
food articles
decreasing by 0.2 percent.
In the primary articles group, out of a total of 98 articles, 13 articles showed a decline in
prices while
prices of 57 articles remained stable.
However, index of fuel, power, light and lubricants rose by 0.5 percent and that of
manufactured
products by 0.3 percent.

In the fuel, power, light and lubricants group, there was a decline in prices of LPG but the prices of

aviation turbine fuel (ATF), furnace oil, light diesel oil and naphtha rose on the back of rising crude oil

prices.
In the manufactured products category, food products showed a decline of 0.5 percent
but textiles
and chemicals & chemical products rose by 0.1 percent and 0.5 percent respectively.

What is most encouraging is that the annual inflation rate for the group of 30 essential commodities

declined to 5.74 percent from 5.98 percent in the week ended June 28. Prices of commodities like food

grains, pulses, edible oils, vegetables, dairy products and some other commodities, including

kerosene, soap and safety matches stabilized.

The WPI is India's most closely watched cost-of-living monitor as unlike the consumer price index

(CPI), which is published monthly, the WPI covers greater number of products in its computation and

is published weekly.
Inflation rate is expected to high in double-digit figure for a few more months before
moderating.
Analysts have blamed India's high inflation on high oil and food prices globally and feel
that
inflationary pressures would continue for some time.

"It is slightly below expectations but it doesn't change the fact that inflation pressures are still strong,

and clearly the trend in revisions still remains worrying. In all, it is encouraging but not something

that gives a lot of comfort," said Vikas Agarwal, research head, JP Morgan Chase, Mumbai.
"You need to see more such trends before one can convincingly say that we have seen
the worse

"Inflation, on a week-on-week basis, has stabilized. M3 (money supply growth) is slowing


down,"
Chidambaram said on Thursday.
However, the finance minister warned that inflationary pressures would continue to
remain for some
more time before moderating.
High inflation has become the bugbear of the ruling coalition government that faces the
risk of
angering the people ahead of a crucial election next year.
Earlier this week, Prime Minister Manmohan Singh confessed curbing inflation and
maintaining
growth momentum was a major challenge for the government as it is "influenced by
global factors."
Singh, however, said the government had taken a number of measures to rein in inflation
and prices
would moderate with time.

To tame inflation, the government has announced a slew of fiscal measures like scrapping import

duty on crude edible oils, banning export of non-basmati rice and pulses, and banning futures

trading in essential commodities like rubber, chana, potato and soya, even as it urged steel and

cement producers not to raise prices.

However, the global investment banker Barclays Capital has warned in a report that India's inflation

could surge to 17 percent by September as the government is likely to hike fuel prices between 10 and

20 percent again within 2-3 months to limit fiscal risks.


Meanwhile, domestic ratings agency Crisil has projected that India's economy would grow
at 7.8
percent in the current fiscal year.

However, think tank Center for Monitoring Indian Economy (CMIE) said in its monthly review on

Thursday that India's economy could grow at 9.5 percent in the current fiscal year, boosted by the

industry and services sector that would grow at 11.4 percent and 10.6 percent respectively.

International Monetary Fund or IMF has also revised its projections, saying, Thursday, that India's

economy would grow at 8 percent in 2008. IMF earlier estimated India's economic growth at 7.9

percent for the current fiscal year.


In 2007, India's economy grew by 9.3 percent.
Inflation spirals to 16-yr high, touches 12.63%
22 Aug, 2008, 0114 hrs IST, ET Bureau

NEW DELHI: Costlier food items, such as fruits, vegetables and milk, pushed the wholesale

price-based inflation to 12.63% for the week-ended August 9, from 12.44% in the previous week.

The inflation stood at 4.24% in the corresponding week of the previous year.

While Masur prices rose 3%, tea, moong and gram prices increased 2% and milk was up 1%

over the last week. Overall index for primary food articles, which has weightage of 22.02% in

the WPI, rose by 0.3% in the week ended August 9. Inflation stood at 12.44% (provisional) a

week ago. Also, in keeping with the trend of final inflation coming higher than provision

estimate, inflation for the week ended June 14, 2008 has been revised to 11.80% from 11.42%.
Economists feel inflation could go up to 13.5% before it starts to come down.
With the rising inflation an interest rate hike of 25 basis points is not being ruled out in the

October monetary policy review. Experts feel that the task of striking a balance between rising

inflation and growth had got much tougher for the central bank.

"Prices of essential commodities, which include food grains, pulses, edible oils, vegetables, dairy

products, kerosene, soap and safety matches, have more or less stabilised," a finance ministry

statement said. It said that in the case of the primary articles group, the annual point-to-point

inflation increased to 11.83% as compared to 11.43 % reported last week.

"However, out of 98 articles, 17 articles have shown a decline in prices as compared to August 2,

2008. These included rice, maize, urad and arhar, sunflower, linseed and niger seed, raw rubber,

cotton, potatoes, eggs, dry chillies and eggs. Another 56 articles have shown no increase in

prices," it said.

"Inflation may have peaked. There is some softening in commodity prices. Rice and wheat

production is expected to be good although pulses may see some pressure. A possibility of rate

hike by 25 bps is not ruled out. But, now the task of balancing between inflation and growth will

be tough...," CRISIL principal economist D K Joshi said.

Index of manufactured products, which has the highest weight of 63.75% in WPI, rose by 0.2%

during the week on account of higher prices of some edible oils, textiles items, paper and rubber

items. The index for manufactured food products group rose by 0.1% due to higher prices of

khandsari and rape & mustard oil, which were up by 1% each.

Prices of other edible oils, however, declined. The textiles sector, however, continues to see

rapid increase. Rise in prices of cotton yarn-cones by 8%, polyester staple fibre by 7%, mixed

fabrics and cotton grey cloth & canvas by 6% each, other cotton yarn by 5% fuelled a rise in

index for textiles group, which rose 1.6% in the week under review. Higher prices of PVC fitting

& accessories, which were up by 13%, as also cement contributed to the rise in prices of

manufactured products.
HDFC Bank chief economist Abheek Barua feels the inflation peak may be in sight.

"The rise in inflation was in line with expectation. It may rise further on account of the base

effect and then come down. However, some surprises because of the failure in catching data on
time could play the spoil sport. Further, monetary tightening is not completely ruled out but

when globally central banks are going in for expansionary stance, it would be difficult to go in

for contradictory policy now," he says.

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