Garment industry braces for tough times as cotton price rockets, demand for export ban is nixed

In its latest assessment this month, the Cotton Association of India (CAI) reduced its production estimate for the 2021-22 season to 323.63 lakh bales of 170 kg each from its previous estimate of 335.13 lakh bales. Production last year was over 352 lakh bales.

India’s garment industry expects tough times ahead in the financial year 2023 despite Textile Minister Piyush Goyal’s remarks that only surplus cotton should be exported after the needs of local traders and spinning mills are met.

The minister made the comment at a meeting with the industry stakeholders on May 17. With cotton prices more than doubling in a year, the garment industry wanted a short-term ban on the export of cotton and yarn, a declaration of cotton as an essential commodity, and removal of the material from trading at commodity exchanges.

The minister did not accept the demand for a ban on exports but provided some relief by extending the import duty exemption for bills of lading until September 20, 2022. He formed the Cotton Council of India comprising various stakeholders to discuss the problems of the sector. It will hold its first meeting on May 28.

The problem started with a shortfall in the cotton crop due to irregular rains and a decrease in the cultivation area in the major cotton-producing states of Maharashtra and Gujarat.

“There has been a reduction of around 10 lakh hectares in the cotton year (October-September) of 2021-22 from 132 lakh hectares of the previous year (with farmers) discouraged by the lower prices. Irregular rains further contributed to the drop in production,’’ said Sanjay Kumar Panigrahi, chief general manager of Cotton Corporation of India.

Production estimate cut

In its latest assessment this month, the Cotton Association of India (CAI) reduced its production estimate for the 2021-22 season to 323.63 lakh bales of 170 kg each from its previous estimate of 335.13 lakh bales. Production last year was over 352 lakh bales.

The CAI has cut its consumption estimate for the current crop year to 320 lakh bales as against its previous consumption estimate of 340 lakh bales. The previous year’s consumption estimate was 335 lakh bales. It has also slashed its cotton export estimate to 40 lakh bales from its previous estimate of 45 lakh bales although at one time it looked like going much above that.

The crop decline along with increased demand by local mills and for exports has sent the prices skyrocketing by over 100%. From Rs 48,000 per candy of 356 kg, the prices have escalated to around Rs 100,000 per candy. The prices of yarn spun out of cotton have jumped by over Rs 100 from last October to reach around Rs 425 to 450 per kg.

Export impact

Exports of yarn and cotton have further worsened the situation by curtailing the supply for domestic producers.

“Cotton yarn export was around $5 billion in FY22 compared to $2 billion in the previous year. Much of it goes to our competing countries such as Bangladesh and Vietnam. There is also a fair amount of hoarding taking place in the yarn sector for better prices,’’ said A Sakthivel, southern region chairman of the Apparel Export Promotion Council.

Readymade garment exports increased by 30% to $16 billion in FY22 over the previous year following the revival of the market after COVID-19. The year 2020-21 had seen exports plunge by 21% to $12.28 billion due to the pandemic’s impact. But FY22 performance was better than the $15.5 billion shipped out in 2019-20, according to the Apparel Export Promotion Council.

Higher exports did not benefit the industry much because of the spiralling prices of inputs. “There was a 30 to 40 % increase in the prices of inputs including yarn and dyes and chemicals. Even the carton boxes used to ship the garments became expensive by over 150%,” said Raja Shanmugham, a leading exporter and chairman of Tiruppur Exporters Association.

More relief sought

Tiruppur, one of the largest knitwear garments exporting clusters in the country, shipped materials worth Rs 34,000 crore in FY 22 compared to Rs 24,500 crore a year ago. “But our margin was hit because of a rise in raw material prices. The current year is not much different with high prices continuing. Since this sector is labour-intensive, we have requested additional 20% export credit facilities apart from the 30% given after the outbreak of COVID-19. The hospitality and medical sectors have been given 50% additional credit,’’ Shanmugham said.

Given the situation, the industry is thinking in terms of requesting an extension of the import duty exemption. “The exemption may have to be extended till December so as to give further relief to the industry,” said Ajay K Singla, secretary general of the Garment Exporters and Manufacturers Association.

Competing countries like Bangladesh and Vietnam are in an advantageous position because they have a free trade agreement with the European Union while India has to pay a duty of 9.6%. Besides, they employ cheap labour and have lower compliance with environmental stipulations.

“Around 45% of our export goes to EU while the US absorbs 35%,’’ Shanmugham said.