Cotton yarn: Threadbare

Reshma Krishnan

THE TEXTILE industry is in tatters. Over-capacity, policy problems and ills of various kinds have been crying for attention, especially with `WTO 2005' not very far off. Unless urgent action is taken, textile industry might go into a recession, never to recover.

The year 1999-2000 actually provided the industry some relief. Many companies were back in the black and there seemed a glimmer of hope. However, recovery seems to be threatened by slowed exports this year and the supply of raw cotton -- a major raw material -- which has dropped to all-time lows.

In tandem there was a free fall of share prices. The share prices of companies such as Mahavir Spinning Mills, Vardhman Spinning, Ambika Cotton, Malwa Cotton and GTN Textiles have fallen since January 2000. Though the industry seems to be waking up, and the spinning sector had had a decent 1999-2000, it is debatable if a turnaround has happened.

Industry restructuring

The industry is in a restructuring phase. In 1999-2000, 240 spinning mills and 109 composite mills were closed. The widespread perception is that this is not enough to get the industry back on its feet. The problem, at least on the spinning side, according to industry watchers, began with the de-licensing a few years ago. A number of mills were set up with little attention paid to what the market could handle. There was surge in spindle capacity between 1991 and 1996. The old textile mills not modernising had its own problems.

The 2000 performance

Despite the overcapacity, 1999-2000 seemed to herald a revival. Cotton yarn production increased by about 9 per cent to 2,204 million kg in 1999-2000 from 2,022 million kg in 1998-99. Supply exceeded demand, including the stock from the previous year.

After three years, the over-supply situation has declined, suggesting a rise in consumption. Another reason is the steady increase in exports. It grew 13.96 per cent to 555 million kg in 1999-2000 from 487 million kg in 1998-99. Exports as a percentage of production also rose, marginally, to 25.18 in 1999-2000 from 24 the previous year.

But the demand-supply imbalance did not affect cotton yarn prices, which have been quite steady, averaging Rs 102.16 per kg. The raw cotton demand has also been steady tough and prices have been softening. Capacity utilisation in the spinning sector with a spindle capacity is 37.02 million spindles, has increased to 83 per cent from 79 per cent.

The prognosis for most of 2000-01 (figures available up to November) is that the year would be mediocre for the industry. Though exports were relatively high in the initial months, the growth margin has almost been wiped out due to the deceleration since July. The major issue now is the high raw cotton prices that are affecting yarn production. To understand the significance of raw cotton on the yarn industry, it is important to look at the industry's cost structure.

Global competitiveness

If the domestic market in is in a state of saturation, then growth is only viable in the international market. The world trade in textiles increased from $9 billion in 1963 to $332 billion in 1997. With the impending dismantling of the MFA (Multi-Fibre Agreement), the world textile trade may go up by another $1200 billion. In fact, according to research done by NITMA (Northern India Textile Mills Association), the growth rate is estimated at about 7 per cent, assuming that the global textile trade in 2005 might cross $500 billion. Considering that the domestic consumption is stagnating, the only chance for the revival of the Indian textile industry is to provide a greater thrust to the export market, with the WTO regulations to come in force in 2005.

At first sight we seem to be equipped for this challenge. India is the largest exporter of yarn; the third largest producer of cotton, and ranks second in terms of spindleage. But in terms of market share: India had a 2 per cent share compared to China's 4 per cent in 1980. Now India has 3 per cent, while China's share is 13 per cent.

Any industry that wishes to make a presence felt in the international market needs to have a solid domestic foundation. This is missing for the textile sector.

Need for restructuring

There has been no integration of the textile industry and hence no economies of scale. There are 2,290 players in the organised sector, 278 composite mills and thousands of small weaving units. There is no co-ordination among, or a defined market, for the producers.

The disintegration is evident in the industry. Fabric production is important as it is the final market for cotton yarn. The share of the mill sector in fabric production has fallen from around 70 per cent in the 1950s to 5 per cent now.

This has happened due to inefficiencies in the composite sector and the many policies that had the effect of raising costs for the organised sector; the powerlooms but flourished. Thus, the organised sector moved away from weaving and processing.

The unorganised sector was left behind as it could not keep up with the technological advances, and hence the quality of the cloth has been declining. India's competitive edge in labour and resources have been blunted and is being overtaken China, Indonesia and Hong Kong.

The government's attitude towards any industry is crucial to the success of that industry. But New Delhi has not been very understanding of what the industry needs to become globally competitive. It insists that 50 per cent of what the spinning mills produce has to be in the form of hank yarn, though there is little market for it. Also, policies that protect the SSI have worked against the organised sector. For example, tax exemptions of up to Rs 1 crore for SSI spinning units. This gives an advantage of around 15 per cent over the organised sector. If an industry is to operate in a free market environment, which the Government chose to do when it signed the WTO agreement, then protectionism should be kept to the minimum. Constant subsidies will only suffocate the industry.

Another important issue is the direct export market for yarn. Issues such as contaminated cotton and poor ginning facilities affect our ability to compete. Thus, good quality raw cotton needs to be imported to be able to manufacture international quality yarn. But the high import duty on cotton, makes producing yarn for the export market an expensive proposition.

Costs have increased dramatically over the last few years. Power, wages and interest rates are higher compared to China. Power here is priced at 11 cents compared to 6 cents in China. After accounting for the rupee-dollar depreciation, the interest rates are still three per cent higher than elsewhere in the world. Under such a tough cost regime, competing globally is impossible.