The apparel export industry is not overly happy as the rupee gains in strength against the
US dollar. It is estimated that the Earnings and EBITDA margins of textile and apparel
exporters will be affected in the near term following the rupee’s appreciation against the
dollar in early 2017 and weak apparel import from traditional markets like the US and
the UK. According to India Ratings and Research (Ind-Ra), a stronger rupee is likely to have an
adverse impact on export trade volumes and earnings since fresh orders will have reduced
competitiveness. It is also predicted that realisation will shrink by around 3-5% and impact profitability
of companies across the textile value chain. It expects the EBITDA margin to erode by around 150
basis points year-on-year in the fourth quarter that ended March 2017.
Garment exporters and the Apparel Export Promotion Council believe that the sudden change in rupee will offset some of the gains which will accrue from the government’s export stimulus package, GST implementation and the US’ exit from the Trans Pacific Partnership. The ongoing strength of the Indian rupee (INR) versus USD as reflected in the 3-month USD-INR futures trading at around 65.19 constrains the price competitiveness of the Indian textile exporters. However, things can be brought under control− to an extent− for exporters who deal in value-added garments and have hedged their business against currency and foreign exchange exposure. Along with this hedging, liquidity will support the overall business and financial risk profile.
Over 70% of India’s textile and apparel exports are dollar denominated. While domestic demand has recovered from the negative impact of demonetisation, strong cotton prices coupled with increased price competitiveness of imported yarn and fabric will pressurise margins. Despite government’s intentions and support to the industry, exports are hardly picking up. The primary reason as already diagnosed is a strong rupee; one now has to factor in the depreciation of currencies of competing countries like China, Bangladesh and Vietnam. The Chinese Yuan depreciated by 13%, Bangladesh Taka by 6% and Vietnam Dong by 7%, whereas India’s rupee hardened by almost 6% over the last 3-5 months against all major currencies.
It is interesting to track the journey of Indian rupee from 2008 to 2014. The level of our currency depends on many factors but the two most critical factors are Fiscal Deficit and Current Account Deficit. Fiscal Deficit is the difference between what your Government earns and what it spends. It has been noted that the Indian Government spends more than what it earns. During 2008 to 2014, the Government spent huge sums of money on populist measures like farm waiver loans, social schemes like NREGA, subsidies on LPG, kerosene, oil and fertilizers, etc. However, Government’s earnings did not grow at a proportionate pace. As such, the Government borrowed a lot of money from the domestic market to fund its expenditures. It is easy to understand that when one borrows a lot, the credit profile, as the outside world sees it, goes down.
Current Account Deficit is the difference between a country’s exports and imports in absolute terms. For many years, India has been spending a lot of money to import crude oil, gold & coal and imports have always been higher than exports resulting in high demand for US dollars. The impact of high fiscal deficit and high current account deficit resulted in high demand for US dollars and kept the Indian rupee under pressure. It is expected that the Rupee will get stronger vis-à-vis the US$ in the ` 60 − 65 range in the next five years as the aforementioned problems are resolved. The current government has been taking requisite steps, the major one being demonetisation. India’s fiscal deficit problem has been solved to an extent as it has reduced by ` 1,50,000 crore over the last two years. The current Government is spending less and earning more. So far we have not seen many major policies or schemes; instead, it is working on existing schemes towards making them better and more meaningful. India today enjoys a strong economic position. Taking some concrete steps like giving kerosene only to the poor on the basis of the Aadhaar Card has helped in transferring such benefits directly to them instead of a clique of unauthorised and ineligible people misusing subsidies. The demand for kerosene has seen a drop of 90% and Government has managed to save close to ` 500 crore in kerosene subsidy in just one city. Other subsidies on kerosene, LPG and oil have also reduced. On the revenue front, India’s tax collections grew at 18% in FY 2017, the highest in seven years.
Solving the current account deficit problem, India imported huge quantities of oil, gold and coal. The Government of India systematically abolished the craving of holding physical gold by offering products like gold bonds and ETFs. As such, India’s import bill has reduced by ` 4,00,000 crore or US$61 bn. India thus needs less US dollars than two years back. It is only natural that the Indian rupee would get stronger if it stays on this path. Trade gurus predict that no matter what the situation is, INDIA WILL REMAIN AN ISLAND OF STABILITY for the next five years. Foreign investors are queuing up for Indian stocks because of India’s stability, growth potential and improving transparency on the back of reforms like GST and demonetisation.
❝ I foresee that the situation will continue for some time and hence realise the pressing need for greater prudence and planning of our hedging and interest strategies. Exporters should optimise their exchange margins; go for regular MIS reporting and tracking and systematic policy of bookings. I would consider use of a consistent and dynamic hedging and interest strategy as per my business requirements and look for alternatives for hedging like Cross Currency Hedging. ❞
The apparel industry was very
hopeful after the special package
presented to it in June 2016, where
significant financial and investment
incentives were offered, besides critical
labour flexibility, aiming to generate
100.3 lakh additional jobs and US$
30.04 billion additional exports.
However, seeing the current situation
wherein cotton prices have increased by
24.7% across all categories in the last
one year and hike of up to 35% in some
categories combined with rupee
appreciation has effectively nullified the
impact of the package announced. “I
request government to fast track the
rollout of the special package with full
reimbursements of the reimbursement
of state levies (ROSL) claims and implementation of the optional PF
provision provided in the package,” said
Ashok Rajani, Chairman, AEPC.
India’s readymade garment (RMG) exports were to the tune of US$ 1.60 billion in February 2017 with a growth of 5.05% against the corresponding month of February 2016 which was US$ 1.52 billion. In rupee terms, exports stood at ` 10,764.56 crore in February as against ` 10,424.28 crore in the corresponding month of 2016. The country’s RMG exports during April- February were to the tune of US$ 15.544 billion, increasing by 0.57% compared to the same period of the previous financial year. The government has set a target of US$ 30 billion for garment exports by March 2019.
India’s apparel industry provides jobs to 10.5 crore persons, directly and indirectly. Each ` 100 crore of apparel production generates ` 30 crore of labour income. Exporters are not able to book orders due to over-valued rupee as apparel exports are highly price sensitive. It calls for a carefully considered strategy and more pragmatic approach to arrest the rise of Rupee in the overall interest of export endeavour and boosting employment in our country. According to Ind-Ra, export-oriented apparel manufacturers with unhedged receivable positions will be hurt the most, due to their geographically concentrated (US and Europe) earnings profile, low market share and restricted bargaining power with their global clients. Export margins in apparels tend to be two or four per cent in dollar terms and the rupee appreciation has almost washed these away. Exporters in the knitwear hub of Tirupur in Tamil Nadu fear they may lose orders to neighbouring countries since they are at a 10 to 12% price disadvantage. With the rupee appreciating, this gap has widened by another 4 or 5%. GST is expected to have a further impact on exports as duty drawbacks will be curtailed, adding more pressure on the textile industry.
❝As of now, the situation is very tough; margins have been squeezed at the moment and the Government regulation for PF/ESI has added to the cost. Raw material cost is also on the higher side, increasing by almost 20% to 25% due to cotton holding without excess demand. It is a well-known fact that garment sector is the highest employed after agriculture but still we do not obtain the merited priority and it is difficult to understand how the trade and people involved in it will sustain. The US dollar is also affecting business. The package of Rs 6,000 crore announced by the Government is not going to help now as no one wants to expand the business due to these factors.❞
❝Rupee appreciation is affecting the export business and most export units have been hit. The dollar realisation has reduced to the 10% level. We are not able to match prices being asked by buyers and we cannot ask them for an increase either, as no other country has hiked prices. The rupee appreciation is surely affecting export business and India may lose orders to our competitors. It is a difficult time for the industry and export units will find sustenance difficult in the ongoing scenario. This may also affect employment in the industry. We are very much affected by Brexit also as the Pound has reduced by 20% and is still sailing at the same level. It is becoming difficult for us to obtain British orders in the same mould. Above all, the fluctuating yarn prices and increasing cost of raw material have all added to our woes. ❞
❝ Rupee appreciation is affecting the export business and most export units have been hit. The dollar realisation has reduced to the 10% level. We are not able to match prices being asked by buyers and we cannot ask them for an increase either, as no other country has hiked prices. The rupee appreciation is surely affecting export business and India may lose orders to our competitors. It is a difficult time for the industry and export units will find sustenance difficult in the ongoing scenario. This may also affect employment in the industry. We are very much affected by Brexit also as the Pound has reduced by 20% and is still sailing at the same level. It is becoming difficult for us to obtain British orders in the same mould. Above all, the fluctuating yarn prices and increasing cost of raw material have all added to our woes.❞
❝ We see a fall in trade deficit and this can lead to rupee becoming even stronger. This should have been taken in a positive manner as this will spur innovation and exporters will have to upgrade themselves counter this challenge. The Rupee becoming stronger can be worked on at two levels; the exporter and by association such as AEPC. However, most of the efforts have to be done by exporter themselves. Keeping this in mind, we are carefully evaluating our strategy for the long- term. We will continue to focus on efficient production techniques, value added products by using a wide variety of fabrics. The AEPC has also worked with the Government in making imports of fabrics from China easier. This has to be leveraged. In the long term, exporters need to move to states like Andhra Pradesh where cost of manufacturing can be as low as Bangladesh. However, skill has to be developed in such Sates. We are also considering setting up factories in states such as Andra Pradesh for our orders that are more basic and have higher volumes.❞
❝ The situation is going from bad to worse by the day as we are adversely affected by the rupee getting stronger. This strong rupee is going to affect economy in a lot of ways; firstly, imports will get cheaper and this will lead to dumping of materials into the country. The fiscal deficit would also increase this way. Secondly, as far as the Rs 6000 cr package that was announced by the Government last year is concerned− where the funds were to be used for betterment of the industry− it has also not benefited. There are too many complications, and processes involved to leverage those funds; moreover, the systems and teams to tackle the everyday enquiries related to the package are not in place and an exporter is only confused as to what should be done in the situation. The RBI has to intervene in this aspect and come to the rescue of exporters, otherwise all running units will fall sick and it will be difficult to survive. The Government should also work on increasing the drawback rates so that there is some respite in this situation. Overall, the rupee getting stronger will affect the economy of India.❞
❝ Honestly, it does not make a difference. The appreciation of rupee in form of figures is quite manageable for manufacturers like us who have their own manufacturing facility. We should actually focus on reducing the cost by innovative methods of manufacturing. Continuous skill development by training women and youth who are not from garment industry and using methods such as just in time are all long term solutions for this short term problem.❞
❝ Rupee has appreciated considerably against Dollar and has even breached the 64 levels today. This appreciation has already created a lot of jitters in the mind of apparel exporters, who are struggling with rise in input cost arising from high cotton prices and labour costs. I expect rupee to strengthen further from the current levels and further create pressure on exporter’s margins. Even the Government seems to be favouring a stronger rupee stance and as the FII flows increase in the equity markets RBI doesn’t seem to be actively sucking in dollars which has continued to put pressure on rupee. Till now our strategy has been to book simple forward contracts to hedge our Foreign exchange exposures through innovative FX hedging techniques like Par forwards/ Range forwards. Firms also need to look at a hedge ratio of around 50 to 60% for their FX exposures in order to safeguard their profits from sudden exchange rate movement. Also, we can propose a special drawback package for exporters from the government. This needs to followed up with a lot of media coverage and continuous discussions with the policy makers..❞
❝ The sudden and unexpected appreciation of the Rupee has dampened what could have been the beginning of a golden period for the Indian apparel export industry. The impetus given by the government in the form of TUFS/ROSL/ PMRPY schemes, has tremendously boosted the confidence of exporters, and this upturn was reflected in the 20% growth of RMG exports of March 2017 when compared to exports in March 2016. The problem of Rupee appreciation has been further exacerbated by the currency devaluation of competitor countries such as Bangladesh, China and Vietnam. While short term losses for unhedged exporters is a concern, the major issue is losing long term business due to non-competitive pricing, a direct result of the Rupee’s appreciation. Personally, our strategy has always been to hedge a significant portion of our business, and eliminate any fluctuations and unknowns on the cost/price front. However, for future orders, it remains to be seen how accommodating customers are willing to be on increase in costs.
The Government/RBI so far seems to have taken a wait and watch stance, which hopefully will not continue for too long. The rupee is definitely overvalued, and this will hurt all exporters, not just apparel exporters alone. Even if there is an intervention by the Government/RBI to soften the blow, an expected upgrade in India’s sovereign credit rating in the near future will only further appreciate the Rupee. Therefore, it seems that the higher valuation of the Rupee is here to stay, at least for the near to medium term, and the only way for exporters to beat this will be to enhance their own efficiency to remain competitive.❞
It definitely has an adverse
impact on apparel export and
nearly 7-8% drop will be seen. To
nullify the effect of same there are
various instruments which can
cover against the falling dollar like
hedging and can be utilised. If we
talk about INR vs USD future looks
really uncertain. There has been
inflow of foreign investments
which has caused this appreciation.
There is a very strong possibility
that the rupee could touch 60 in
the next 3-6 months.
The fluctuation in the exchange rates is part and parcel of business. It is of
course a challenge to meet price points. One has to be very careful in allocating
his/her resources effectively and keep a tight leash on costs. In my opinion, it is
very important to take a long- term perspective in mind instead of focusing on
short term gains/losses. The relationships built with your customers are
immensely valuable. So even if it means, that you have to take a short term hit, it
is important to cater to their requirements as there always will be an opportunity
to earn it back in the future if a long term relationship maintained. I see the
rupee appreciating even more and stabilising at approximately 60 for the
foreseeable future. Export houses must be prepared for this looming challenge
to find internal methods in order to stay competitive.