Falling demand, strong price competition pushing textile market into crisis

Since last Saturday, around 1,800 of the total 2,200 spinning mills in Tamil Nadu decided to stop production and sale of yarn. The state is home to more than half the country’s 4,000-odd spinning mills. These companies’ key grievance is the lack of policy support as a result of the demand recession in the United States and the European Union (EU) markets that has made their businesses unviable.

The mills have approached the Indian Bank Association (IBA) seeking relief, including an extension of a one-year moratorium on the payment of the principal on loans that spinning mills took during the Covid-19 period and conversion of three-year loans under the Emergency Credit Line Guarantee Scheme into six-year term loans. 

According to the Tamil Nadu Spinning Mills Association (TASMA), at least 15 per cent of these 1,800 micro small and medium enterprises are falling under the banks' non-performing asset (NPA or bad loan) category and are looking to sell their assets. Some estimates suggest that these closed mills supply around 45 per cent of the yarn requirement for India’s largest garment hub, Tiruppur.

Some choose to see this crisis as impacting a small section of the spinning mills in Tamil Nadu, with 400-odd large companies still intact. But experts indicate that this is just the tip of the iceberg. The list of problems that the textile industry is facing go beyond the demand decline in key western markets to the high import duty on cotton, competition from countries like Bangladesh, and rising borrowing costs.

The demand recession is a key concern. In June, the country’s textile and apparel exports declined 11.3 per cent over the year before following the production shut-down by several textile mills in south India. In June, textile exports stood at $1,624 million, compared with $1,736 million in June 2022, while apparel exports were also down to $1,248 million against $1,501 million last year. During the period, ready-made garment (RMG) exports dipped by 17 per cent.

Meanwhile, exporters from Tiruppur are seeing themselves losing out to rivals such as Bangladesh, Vietnam and Cambodia among others. Tiruppur accounts for 54 per cent of India’s textile exports.

“The price difference between many of these players and us ranges from 15 to 20 per cent,” said Sivaswamy Sakthivel, executive secretary, Tirupur Exporters Association.

Take the case of the EU. Vietnam reaps the benefit of a free trade agreement, which gives its exports a Customs duty advantage of 8-12 per cent depending on the product. Bangladesh, Cambodia, and Myanmar, being least developed countries (LDCs), gain from nil Customs duties. Pakistan and Sri Lanka also attract no Customs duty, being the Generalised Scheme of Preferences Plus (GSP+) category, a benefit that India lost under the Trump administration in 2019.

“All this makes it difficult to compete with these countries,” Sakthivel added.

Compared to the countries above, Indian textile exports face an average tariff of 5.9 per cent in the EU and 6.2 per cent in the US. Being a developing country, India falls under the GSP category in the EU, but gets concessions to the tune of 3-4 per cent. Bangladesh, on the other hand, continues to enjoy the LDC advantage, though its per capita income crossed India’s two years ago.  

Interestingly, though the industry ascribes the demand decline in the EU on the Ukraine war, numbers indicate another trend. According to textile industry association Euratex, the EU’s trade in textiles and clothing exceeded the €200 billion mark for the first time in history in calendar year 2022. In fact, it showed a 37 per cent increase in clothing import value, mainly driven by an increase in imports from China and Bangladesh. In the US too, imports of textiles and apparel were seen up by 16 per cent to $132.201 billion in 2022 compared to $113.938 billion in 2021.

In the first two months of 2023, EU textile imports showed a marginal decline of 2 per cent; its second-largest supplier Bangladesh saw a 5 per cent increase in supply in value terms. On the other hand, US imports of textiles and apparel fell 22.05 per cent to $33.780 billion in the first four months of 2023, compared to $43.333 billion during the same period in 2022. Almost all importers -- China, Cambodia, Pakistan, Vietnam, Indonesia, Bangladesh and India -- had a double-digit dip in imports to the country during this period.

Many believe that two major reasons for erosion of India’s global competitiveness are the 11 per cent import duty levied on cotton and high volatility in cotton prices during the last two years.

“For the past 15 months, Indian cotton has been more expensive than international cotton,” said Sanjay Kumar Jain of Delhi-based textile producer TT Ltd.

First, he pointed out, the government has increased the minimum support price by 8-10 per cent; second it imposed a duty on imported cotton, which cuts import options for textile players. “The government has given farmers double protection without considering the rest of the value chain,” Jain added. 

Adding to the pain may well be the decline in domestic demand too. Take the case of Tiruppur, the region's exports were valued at Rs 34,350 crore in 2022-23 and its domestic intake was around Rs 28,000 crore. “The real surprise is why the domestic market is not picking up. That is also down by 20-25 per cent. All our clients, such as Reliance, Westside, DMart, Max and Jockey are saying that they have a huge stock with them,” Sakthivel pointed out.

The current shutdown of mills may affect cotton procurement by mills. “People in Europe are spending money on food and fuel and inflation is forcing them to stay away from textile goods. Chains such as Walmart are closing their retail outlets in the US and EU. Hence, there is no need to procure cotton and convert it into yarn. There is a reduction of around 55 per cent in cotton procurement itself over last year,” said K Venkatachalam, chief advisor, TASMA.

The industry hopes Diwali will light up demand and producers in Tiruppur are anticipating orders by players like Walmart, H&M, Tommy Hilfiger, and Target. Much, however, depends on the health of the US and European economies.