Until late January this year, the hosiery town of Tirupur had been in a state of euphoria. Within days, its glee turned into a grimace.
Until late January this year, the hosiery town of Tirupur had been in a state of euphoria. Within days, its glee turned into a grimace. In February, the US dollar depreciated against the Indian rupee. The rupee value of the dollar slipped south from Rs 46 to Rs 44 and then to Rs 42 in June and the Tamil Nadu town’s euphoria evaporated. Ten months down the line, it is grappling with losses.
The performance of the 1,000-odd exporters in Tirupur, supported by 6,000 auxiliary units, including knitting units, dyeing and bleaching, fabric painting, garment-making and embroidery, had been impressive. From Rs 54 crore in 1984, exports had leapfrogged to Rs 11,200 crore in 2007. The Tirupur Exporters’ Association (TEA) gleefully set itself a target of Rs 25,000 crore by 2012, another five years hence–until its complacency was rudely shaken up by the dollar plunge.
Today, the dollar value hovers around Rs 39.50. With exports taking a big hit, and with jobs at risk, state Governments have already started writing to the Centre. They are a worried lot since the rupee’s hardening has begun having implications beyond textiles and handicrafts to aam aadmi sectors such as fisheries, plantations, cotton, jute, leather, plastic and linoleum.
While informing the Centre about the extent of job losses that have already taken place in their regions, Tamil Nadu, Jammu and Kashmir and West Bengal have sought the Union Government’s intervention. Apart from the states, field reports have begun pouring in from other Central ministries and departments dealing with these sectors.
The misery will surely be felt by the 2 to 5 crore people who the Commerce Ministry expects will lose jobs by March 2008. ‘‘We have got letters from a large number of people about shutdowns and job losses. We had asked departments concerned to seek field reports,’’ a senior Ministry official said.
‘‘This is a crisis situation. Exporters never anticipated this. We have to prepare ourselves for it,’’ said A. Sakthivel, President of TEA, which has 600 members. Like him, all exporters are hunkering down for a tough time, devising means to staunch the bleeding.
Saktivel’s Poppys Knit Wear, a Rs 190-crore company that mostly exports its product, is now trying to reduce production cost and minimise the use of raw materials. ‘‘We are also trying to increase production by using skilled engineers and by using computer-aided designs,’’ said Sakthivel. Companies are now hectically negotiating with raw material suppliers and processing units to bring down the costs and make up the profit margins somewhat.
‘‘Industry has to improve its productivity and bring down costs, but the rupee’s appreciation has happened so fast that there’s been little time for adjustment. Contracts can’t be renegotiated overnight, neither can prices be increased unless you have big bargaining power,’’ the Commerce Ministry official pointed out.
The implications of the dollar fall are serious. ‘‘The biggest casualty has been capacity expansion,” said Rajeev Gupta, director of Ludhiana-based Venus Garments. Gupta’s group, owner of brands like Duke and Neva, exports garments worth Rs 180 crore, primarily to the US. “Companies that have a strong domestic presence can still cope with the losses. But the worst hit are standalone garment units executing bulk orders to buyers based in different parts of the world. When I say that capacity expansion has taken a hit, it means that a lot of jobs that could have been created have been lost.”
The loss hasn’t been restricted only in terms of new jobs. In fact, as the orders have dwindled, the companies haven’t been averse to laying off workers. The most-well known Ludhiana company, Oswal Woollen Mills, with annual exports of Rs 600 crore, has laid off around 500 workers in the past year. Executive Director Sandeep Jain says while software firms are better able to absorb the shock as they have margins of 30 per cent, even the most powerful textile firm cannot boast of margins beyond 10 per cent. This is serious because, unlike in the other sectors, competition is intense in textiles and a slight hike in prices leads the foreign buyer to turn to countries like Bangladesh, Vietnam, Taiwan, China, even Sri Lanka.
In a bid to cut his losses, Tirupur’s R. Sivaram, executive director of Royal Classic Mills, a Rs 225 crore company with exports worth Rs 125 crore, turned to “doubling” his company’s presence in the domestic market. It launched a premier trouser brand for men and increased the number of its showrooms across the country from 30 to 100 this year. A number of other companies, too, are looking at the domestic option and at new markets. Blue Mount Garments of Ludhiana, for instance, is planning outlets in the Middle East, which has a sizeable Indian population.
Living with diminishing margins is a prospect that exporters have to bravely face. ‘‘This is the new reality and we have to face it,” said A. Loganathan, who owns Victus Dyeings, a Tirupur-based Rs 85 crore company. ‘‘We are trying to reduce the turnaround time. My company achieved a delivery time of 45 days instead of the usual 75 days. This way, the cost of holding inventories is reduced. In fact, we are trying to reduce cost in all aspects…reducing stock holding periods and getting it right the first time with no quality issues and keeping to the delivery time.”
Devising his own strategy to bring down costs, Raja Shanmugam of the Rs 60 crore Warsaw International in Tirupur decided there would be no wastage henceforth. ‘‘Earlier, we would provide 5 per cent more fabric to provide for wastage and embellishments,” he said, adding that his company was “slowly stepping into hedging”.
Hedging, which many exporters are now using to cover losses, involves forward contracts and option dealing. The TEA has proposed to the Finance Minister that the hedging cost be compensated or that dual exchange rate be considered. The export body has pleaded that for exporters, the value of rupee should be frozen at Rs 42.
The Centre has announced two rounds of incentives, including additional subvention of 2 per cent in pre-shipment and post-shipment credit over and above the 2 per cent extended earlier. This is apart from the extension of the Technology Upgradation Fund Scheme (TUFS) which provides for 4-5 per cent interest reimbursement on investment by textile companies.
The Centre also hiked the duty drawback scheme from 7 per cent to 10 per cent with effect from April 1 to provide some succour. Exporters agree this has helped. ‘‘However, we would like it to go up to 15 per cent,” said Oswal’s Sandeep Jain.
‘‘We can export to countries like Italy and Germany, but there is a lot of competition and they are aware of our desperate situation. Hence they are negotiating very closely from a position of advantage,” says Sanjay Jain, whose company Blue Mount Garments exports shirts and womenwear to US-based retail giant Walmart and fashion major GAP. “In my 17 years in the business, I have never known such insecurity,” he added.
Tirupur’s exports are equally divided between the US and European markets. Unfortunately, however, many of the European companies continue to do their invoicing in dollars. While the US dollar lost 11 per cent value against the rupee in 2007, the euro and pound sterling lost only about 1.45 per cent and 6.9 per cent respectively but with no benefit to the exporters. ‘‘In fact, more European companies now want to do their invoicing in US dollars,” said Sakthivel.
But wouldn’t a decline in dollar also make imports cheaper? Also, isn’t it the right time, therefore, to modernise plants and increase capacity because getting machinery from outside is cheaper than ever before? Sandeep Jain replied, ‘‘Theoretically, these arguments are correct. But you need to get down to brasstacks to know the real situation. Who is interested in getting new machinery when capacity expansion itself is unviable? Why do we need to produce more when our existing goods are struggling to find markets?”
And if export margins have come down, import costs in certain sectors have escalated. Wool from Australia, for example. As Sandeep Jain pointed out, ‘‘The Australian dollar has appreciated. In the past year or so, it has gone up from Rs 32 to Rs 35. So here too our costs have gone up.”
With the dollar drop and the consequent escalation in production costs, the fear has been of losing clients to competitors like Bangladesh, the world’s largest exporter, and others like Indonesia and Turkey. ‘‘The biggest fight for exporters is to retain their clients. If they are not able to keep to time schedules and commitments, the buyers could well turn to our competitors and we will never get them back,” warns D.K. Nair, secretary general of the Delhi-based Confederation of Indian Textile Industry (CITI).
Amid all this chaos, there is a silver lining. ‘‘These are jolts that will make the hitherto somnolent industry into thinking fast on its feet,” said Rajeev Gupta. And for good measure, added, ‘‘You can whine perpetually. The Government is doing its bit. But these are the concomitants of global economy. If on the one hand you are asking for full capital account convertibility, then on the other hand you can’t complaint about declining currencies.”
Perhaps between these realities, exporters will learn to be leaner and meaner earners. That could be the lesson from the dwindling dollar.