India’s textile exports have remained stagnant in the past four fiscal years

India’s textile exports have remained stagnant in the past four fiscal years

The pressures weighing on the profitability of India's textile exporters are likely to ease up in the third quarter, as cotton prices improve and increased competition abates.

India's textile exports have remained stagnant in the past four fiscal years, after growing at a compound annual growth rate (CAGR) of around 13% between FY2010 and FY2014 in US dollar terms, according to credit rating agency ICRA. The growth was driven by apparel, home textiles and cotton yarns (accounting for 46%, 16% and 9% of textile exports), growing at a CAGR of 9%, 15% and 30% respectively.

However, a decline in cotton yarn exports and the modest pace of growth in apparel, have contributed to the sector's stagnation in recent years.

The slowdown in the apparel sector is primarily due to subdued demand in the key consuming regions of the US and the European Union (EU). Cotton yarn exports have also been under pressure due to a decline in demand from China, which used to account for more than 40% of the total cotton yarn exports from India until last year. In the first four months of fiscal year 2018, China accounted for only around 17% of India's cotton yarn exports.

Intense competitive pressures from other leading textile exporting nations such as Vietnam and Bangladesh, and the recent revision in duty drawback rates has added to this pressure, the ICRA says.

"While Bangladesh benefits from access to cheaper labour and preferential access (in terms of duties) to the EU, capacity build-up in Vietnam's textile sector in recent years, in anticipation of the Trans-Pacific Partnership (TPP), has supported its growth", the report explains. "Accordingly, these countries have been able to garner a larger piece of the US$27bn market released by global-leader China (6% of the global apparel market) over the past two years."

Besides the demand-side pressures, Indian exporters have faced additional headwinds in the form of currency trends and input prices, particularly given India's textile exports are predominantly cotton-based.

According to ICRA, last year domestic prices of cotton fibre increased significantly from a level of around INR90-92/kg at the beginning of fiscal 2017 to a peak of around INR140/kg in July 2016, driven by the tight stock position in the domestic market. With crop output in the previous cotton season being lower than initial expectations, cotton prices remained firm at INR120/ kg.

Cotton prices are, however, expected to ease and pressures on textile exporters' profit are likely to subside from the third quarter of this financial year, ICRA says. This means the industry will be able to focus on "sweating the existing assets" and undertaking limited debt-funded capacity additions.

Further, the ICRA believes China's reducing focus on apparel exports presents a significant market opportunity for Indian exporters, leaving the long-term prospects for the segment favourable. Furthermore, it suggests the scrapping of the Trans-Pacific Partnership (TPP) trade deal augurs well for India, as the risk of increased competition from Vietnam has abated for now.