`Time for harsh restructuring' -- Mr Vijay Venkatswamy, Vice-Chairman, SIMA

Reshma Krishnan

Mr Vijay Venkatswamy, Vice-Chairman, SIMA, discusses with Business Line the opportunities and the lack of them in the cotton yarn and textile industries.

Excerpts from the interview:

How has the yarn industry performed in the last few years?

The last four years have been bad for the industry for two reasons. First, oversupply as spinning was de-licensed and capacity increased as a lot of spindles were set up around the country. Second, spindleage around the world has been increasing. This means the export market has also become fairly restricted. Margins are being squeezed because of oversupply. Value-addition in cotton yarn is minimal -- cotton accounts for 58 per cent, wages, power and other overheads account for the rest. This leaves little margin to play around with. Interest rates are also high. Thus, when margins are squeezed, mills that have a low capital base find it hard to survive. Meanwhile, over the last two years, the cost of production has risen almost 30 per cent and the price of power by 20 per cent. Power has overtaken wages as the input material.

What has been the Government's role in all this?

The Government's polices are against the organised sector. There is constant bickering between the different sections of the textiles sector and we are caught in between. On the other hand, if the raw material prices go up, thereby inducing a price increase in yarn, the handlooms could go on strike. The handlooms are a holy cow.

Then there is the 20 per cent hank yarn obligation though there is no consumption at all. The last straw, however, was the exemption given to the small-scale textiles sector. This sector is very different from any other small-scale industry. For example, if in the engineering industry, you supply an intermediary product to a car manufacturer, this is all `MODVAT'ed and there is no excise evasion. What is spent on excise is reimbursed as the SSI does not produce the final product, only an intermediary product -- this is an important aspect.

However, in the textiles sector, the small scale unit also produces yarn. It is a branded item, very cheap and sometimes of bad quality. And as far as we know, most of them are not really SSIs but get the exemptions anyway and compete with the organised sector in the open market. This hinders our growth and may probably be the cause of the organised sector's demise in this industry. Today there are around 1,300 registered small-scale spinning units and a 15-17 per cent advantage. Our margins (organised sector) is hardly anything. This anomaly has to be taken care of.

What does SIMA suggest the Government should do?

We have told the Government that this situation cannot continue forever. The so-called small spinning mills have to be tackled. By our calculations, the SSI should have 1,500 spindles or so. But you will find that most small-scale spinning mills have greater capacity. So, the Government obviously knows about this, but insists on giving them concessions such as the go-ahead to clear goods worth Rs 1 crore of excise duty. I pay 9.2 per cent. They have a 9.2 per cent advantage over me. There is a difference between SSIs in textiles and in other sectors. Here the SSI produces the same yarn as the organised sector. All other SSIs do not produce the final product. This is a big disadvantage for the organised sector.

Has the cotton yarn demand-supply situation evened out? Even if there is oversupply, would it pose as much a problem if there is an export market?

There is still oversupply in the market. If we are to export yarn, we need good cotton. For that, we need to import raw cotton. There is a 5 per cent duty on importing cotton. Apart from that cost, we have a huge power cost of around 11 cents compared to the world average of 6 cents; in Indonesia it is as low as 3 cents. So, where is our export advantage. We have 5 per cent import duty plus 7 per cent power. If we are to compete in the open market, we need a 12.5 per cent rebate. Even then all the international agencies rate our spinning industry as world class. Textiles account for 37 per cent of our exports. This sector is also the largest employer and the government has to realise its important.

Last year there was tremendous growth in readymade garments sector. Do you think this will be translated into increased growth in cotton yarn?

No. The subsidy or duty drawback on readymade garments is 15 per cent. Ultimately that will go in 2004. It is increasing because of the subsidy. Cotton yarn is 2 per cent. We want to import cotton duty-free, and power at a reasonable cost. Else give us diesel at internationally competitive prices.

But would not removing the import duty on raw cotton affect the domestic raw cotton market?

We are saying, `be selective'. This year prices rose sharply, and the duty has been painful. We can place this duty selectively, according to the state of the industry... The farmer no doubt comes first. If the farmer is happy we are happy. We also need to address yield productivity. For example, our production is 300-330 kg a hectare. The world average is 700 kg. In Israel it is 1,800 kg. India, with the largest area under cotton, has perhaps the worst yield in the world. There is urgent need to increase cotton productivity by 70 per cent. The Government has taken note of the problem and is trying to improve yield and seed and yarn management.

Indian cotton is perhaps the worst contaminated. We have to incur costs using it and still compete in the open market. Unfortunately, the Government does not seem to understand that this is a sunrise industry and not a sunset industry.

Has not the textile industry itself made mistakes it needs to address?

Yes, we have made some mistakes, but we also took calculated risks such as expanding on a low capital base. But we have been penalised by regulations and concessions to SSI units competing with us in the local market. The Government does not check the evasion of duty. There is no such mechanism.

Is our machinery of standard?

Yes.

But some powerlooms are around 20 years old and of poor quality. Once the WTO regulations come into force in 2005, materials can be imported for domestic use. Would this not affect your market?

Certainly. There are two ways of looking at it. The machinery is 20 years old and the technology 60. There is a fund to tackle this problem, called the TUFS. However, many of the firms are not registered and cannot avail themselves of the funds.

Will your market disappear from a WTO-induced onslaught?

Not really. We have a huge market in the domestic spinning industry alone. So, I do not believe it will affect us that badly.

Fabric buyers, such as Zodiac, say it is a shame that they can import fabric made from exported Indian yarn. This fabric is, in fact, cheaper...

This could be true. Today we have a 35-40 per cent duty on imported fabric. By 2004 it will be a maximum of 12 per cent.

A few years ago we were on a par with China when it came to a share in the world textile market. Now we have a measly three per cent share, while China has 13 per cent. We have stagnated, while they have grown. Why is that?

Their labour policies and productivity are not of our standards, but they are more disciplined. They have an exit policy for labour. Our biggest problem is labour. What we are saying is that come 2004, we would need a level playing field to be a vibrant industry. The SSI would be wiped out if they do not upgrade technologically.

Do you think that the spinning sector has a bright future?

Spinning does have a future, but not necessarily bright. We require some rationality from the Government. We need to have cotton and power at international prices, and competitive interest rates. We also need good looms where quality yarn can be used, else we will produce junk. India's textile industry will never die. This is a period of harsh restructuring and the restructuring is not over.