A Live Case Study

8/3/2019 A Live Case Study

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Background to the Study

Textiles and engineering goods constitute very importantcategories of Indias export basket, together accountingfor over 35% of Indias total exports (in dollar terms) in2007-08

The aggregate share of these two sectors has come downfrom 39.5% in 2003-04 to 35.1% in 2007-08.

Share of textiles export has come down steeply from20.0% in 2003-04 to 12.0% in 2007-08

Share of engineering goods has increased from 19.4%to 23.1% over the same period.


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Background to the Study

Export performance of engineering goods and thatof textiles and clothing sector has been analysed indetails first on 2 digit level and then on 6 digit levelfor select items.

Analysis of data in selected categories indicates

Consistently good performance of engineeringgoods export and the fluctuating and mostly poorperformance of the textile exports hint at

exchange rate neutrality and influence of otherfactors on exports.

Therefore, the study also examines the non-pricefactors affecting the export of these commodities.


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Objective of the Study The broad objective of the study is to analyse the export

performance of the Textiles and the Engineering goods sector inIndia with a view to suggest policy for improving performance. Thisbroad objective can be divided into three sub-objectives:

1) To determine the determinants of exports in these sectors

2) To determine the major problems faced by the exporters in thesectors

3) Based on (1) and (2) Suggest policy measures for improvingexport performance

Objective 1 has been further divided into the following parts:

To review the policy changes affecting the Textile & Engineeringexports with a focus on exchange rate policies.

To examine the criticality of exchange rate in affecting thecompetitiveness of textile & engineering goods exports. (Pricevs. Non-price factors)


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Sample Survey

Samples are designed based on stratified sampling.

The stratification samples are value of exports andNIC codes.

from each NIC codes firms with high and low valuesof export are included.

different NIC codes represent different categories oftextile and clothing and engineering firms.


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FGDs, Locational & Sectoral Distribution

Location Date Jointly With SectorCovered

Questionnaire

Received

Bangalore 30th May VITC & FIEO

(with support from

FKCCI, AEPC,EEPC)

Textile &

Engineering

12 (T)

6 (E)

Chennai 1st June EEPC Engineering 40

Karur 2nd June Karur Textile

Manufacturer &ExportersAssociation.

Textile 19

Tirupur 3rd June Tirupur ExportersAssociation

Textile 10


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Questionnaire

Received

Mumbai 9th June TEXPROCILE Textile 19

Pune 10th June MCCAI & MIT Schoolof Telecom &

Management Studies

Engineering 40

Ahmedabad 11th June Gujarat Chamber ofCommerce and

Industries

Textile &

Engineering

2(T)

3 (E)

Kandla 12th June GandhidhamChamber ofCommerce

Textile &Engineering

5 (T)5 (E)


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Questionnaire

Received

Vadodara 12th June SanjeeveniInternational

Business

Consulatants,Vadodara.

Textile &

Engineering

5

Mumbai 19th June EEPC Engineering 12

Ludhiana June -

July

Regional Jt.

DGFT

Textile &

Engineering

18(T)

30(E)

Kolkata 23rd July Regional Jt.DGFT

Textile &

Engineering

5 (T)

10 (E)


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Clusters & SEZs Covered

The clusters which are covered are

Tirupur Knitwear

Karur Home made linens

Chennai Automobile

SEZs Kandla

Falta


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Research Design

Broadly two categorization:

1) Exchange rate fluctuations and currency hedging

2) Identifying non-price factors affecting exportperformance

Non price factors identified include:

Technological changes

Foreign ownership and cross-border ventures

Effective utilization of human capital

Business Environment and governmentpolicy rules and regulations

Credit Availability

Barriers on Trade, including NTBs

Exim documentation procedures and logistics


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Survey Results Regarding Price-factorsVariables Incorporated Results

Currency in which exports are done

US Dollar 70%

Euro 20%

Pound 5%

Yen ----

Others 5%

Exchange rate affects export performanceYes 95%

No 5%

During April 2007 to March 2008 rupee appreciation has affectedexport performance

Yes 75%

No 25%

Exchange rate appreciation is taken into account while quoting priceYes 60%

No 40%

Price level negotiated every time export deal is stuckYes 30%

No 70%

If rupee appreciates by 5-10% what extent price changes?

0-5% 70%

5-10% 20%

10-20% ----

20-30% ----

>30% ----


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Survey Results Regarding Price-factors

Whether hedging is undertaken?Yes 50%

No 50%

What type of hedging is undertaken?

ForwardHedging 100%

Future Hedging ----

Option

Hedging ----Others ----

Hedging strategy guided by various schemes offered by banks

Yes 20%

No 15%

Dont know 65%

Hedging strategy guided by similar practice in the sector as a wholealthough unaware of the adverse consequences.

Yes 10%

No 10%

Dont know 70%

Has RBI taken enough initiatives to facilitate exporters in adoptingcorrect hedging strategy?

Yes 30%

No 10%

Dont know 60%

Benefited from rupee depreciation during April 2008 to March 2009

Yes 15%

No 80%


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Survey Results Regarding Price-factors

Importance of exchange rate in a scale 1 to 7 (1 very low, 7very high)

1 ----

2 ----

3 10%

4 20%

5 40%

6 25%

7 5%

Importance of non price factor in a scale 1 to 7 (1 very low, 7very high)

1 ----

2 10%

3 40%

4 30%

5 15%

6 5%

7 ----

Engineering firms reporting exchange rate as >=5 35%

Textile firms reporting exchange rate as >=5 65%


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Exchange Rate & Export

The notion in the field about the exchange rate ismuch stronger.

Among the exporters surveyed, more than 70%

have rated exchange rate as one of the mostimportant factor affecting export performance.

Interestingly, in our survey result 65% of the textilefirms have rated the importance of exchange rate at>=5; while the same for the engineering firms

surveyed is only 35%.


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It appears that since the primary level survey was conducted at atime when the economy was in the throes of depression, some ofthe hardships faced by exporters due to the meltdown added to thewoes due to rupee appreciation.

This is especially true for textile exporters who not only operate with

lower profit margins and hence are more vulnerable to exogenouschanges but also because their exports were more severely affected bythe meltdown than that of engineering exporters.

Further as the gestation period is much shorter for the textile export thanthat of engineering exports, textile export orders are more prone tocancellation than that of engineering sector.


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Currency rates as on 10th ofevery month

Month USD EURO10.1.2007 44.53 57.73

10.2.2007 44.05 57.45

10.3.2007 44.28 58.21

10.4.2007 42.91 57.32

10.5.2007 40.98 55.43

10.6.2007 40.98 54.34

10.7.2007 40.38 54.88

10.8.2007 40.63 55.4

10.9.2007 40.71 55.73

10.10.2007 40.50 55.62

10.11.2007 39.33 57.5

10.12.2007 39.40 57.52

10.1.2008 39.29 57.5

24% Appreciated

Forward Covers Done Here


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Month USD EURO10.2.2008 39.55 57.73

10.3.2008 40.56 57.92

10.4.2008 40.00 62.95

10.5.2008 41.67 64.19

10.6.2008 42.85 66.78

10.7.2008 42.98 67.91

10.8.2008 41.94 62.82

10.9.2008 45.11 63.81

10.10.2008 48.68 65.97

10.11.2008 47.29 60.81

10.12.2008 49.13 63.56

10.1.2009 49.09 66.99

10.2.2009 48.69 62.43

10.3.2009 51.55 64.74

23% Depreciated

US Crisis



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Sudden excessive volatility makes the task of managingexchange rate risk very difficult for exporters who run amulti-currency balance-sheet.

And, in a classic case of a double whammy, suddenly

rupee depreciation was not the only problem facing thesecompanies.

Some organizations had hedged some percentage of theirfuture receivables, based on projections for thebusiness. Unfortunately, the crisis had the effectof causing orders to dry up such that even maintainingthe past year's order levels became difficult, let aloneachieving growth.


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Among interviewed exporters during the survey almost 50 per centundertook forward hedging, but among them 70 per cent didntknow about RBIs initiatives / guidelines on derivative hedging orthought that RBI has not taken enough steps.

During mid - 2007 when rupee started appreciating, many

manufacturers faced difficulties by way of 10 to 15 per cent drop inthe revenue. They could not find any way of compensating this fromthe overseas customers. During this period some foreign bankslured the manufacturer-exporters and entered into derivativecontracts.

Mostly the clients in manufacturing sectors are less informed on the

complex clauses of the contracts. Their sole objective is to protectthe revenue/limit the risks.

RBI has framed guidelines to regulate derivative transaction in orderto protect customers from major risks. The foreign banks oftenoverlook these regulations and make unequal contracts andleverage to their advantage.


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Non Price Factors

The feedback received from exporters indicate that non-pricefactors also affect their export performance adequately.

Among the non-price factors, the importance of the followinghave been highlighted by the exporters

Availability of Credit

Technological Modernization Cross-Border ventures and foreign interest in your firm Training of the workforce Labour Market Regulations and trade unions Export Documentation and Logistics Tariff and Non-Tariff Barriers

At least 70 per cent of the exporters have reported thatavailability of credit is the major non price factor affecting theirexport performance and have rated as more than 5 in the scaleof 1-7. 40 per cent graded logistic as 5 and same for labourmarket.


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Non - Price Factors Affecting Cotton-Textile Sector

The Indian textile industry has been one of the foremost contributors to thecountry's employment, exports, and GDP. Globally, the Indian industry isrecognized for its competitive advantages, especially in the cotton segment.

Currently the textile industry is one of the worst hit sectors in India, asalmost 50 per cent of the industry is dependent on exports.

India has doubled the production of cotton in five years and has sufficientcotton to feed the growth of the industry. India is the second largestproducer today and has also become the second largest exporter of cotton.This means that India has a clear advantage on the cost of cotton.

However, in reality, it is not necessarily true the relative advantage ofIndia vis--vis competing countries like Bangladesh, Pakistan, Vietnam,Indonesia and Thailand has come down, with the gap between Indian cottonprice and that of the other countries reducing over the last five years due tothe acceptance of Indian cotton by other nations and large scale exportsfrom India.


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The most alarming point is that the landed cost of Indian popularcotton Shankar 6 is cheaper or equal for mills near the ports in the fareastern countries and Pakistan and Bangladesh by road as against thesame for the south Indian mills (Tamil Nadu has the maximum numberof spinning mills in India).

Road transport is much more expensive than sea transportation, e.g. it

costs $50 (Rs 2,500) to transport 150 bales from Mumbai to China and itcosts Rs. 75,000 to transport it from the place of production in north andwestern India to Tamil Nadu.

Further, in a falling global market where prices were falling across theboard, the Government hiked the minimum support price (MSP) of rawcotton by 40 per cent, making the raw material expensive for the local

industry, when on the other hand the price of end products werefalling. The industry started experiencing a squeeze both ways.

We have a restriction on labor flexibility, making it very difficult for thegarment industry, which has seasonal loads of work thereby allowingvery limited space for companies to adjust to the changing times andseasonal demands.


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High power tariff and frequent power cut is one of the majorproblems faced by the exporters. Tirupur exporters reportedlyfaced an increase in cost of production by three times due to theuse of generating system

Fuel / energy cost for textiles industry: India 8.87 cents / Kwh

China 6.04 cents / kwh

Indonesia 3.65 cents / Kwh

Bangladesh 3.45 cents / Kwh

In India, the high incidence of taxes on industrial fuels andshortage of power from the grid have pushed up the cost ofproduction costs.


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Problems in Engineering Sector Due to Global Meltdown

The hostility in the global trading environment is nowaffecting engineering sector too which is now facingconsiderable demand problem in global markets and areunder acute distress.

Certain segments of Indian engineering industry such as

hand tools, bicycle and parts, castings, auto components,and similar other low value added engineering units are inno way different from the textile and leather sector, interms of their shrinkage in demand leading to loss ofoutput and employment. However, the Government hasconsciously refrained from supporting the engineeringsector as there is a belief that engineering exports will pull

through.


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Problems in Engineering Sector Due to Global Meltdown

Banks are not issuing letter of credit due to credit non availabilityin various countries. LCs are being restricted to counters ofcertain banks who are overcharging Indian exporters as bankswant to increase their own revenues by way of bank chargeswhich is totally unregulated in India as any bank can charge anything and there is no transparency or restrictions in place.

EU and North America, which so far attracted 40% of Indiasengineering exports but are facing sever crisis at present. Asorders from western markets like the US and Europe shrankdrastically, Indian engineering companies were compelled toreduce their output levels and resort to lay-offs for cutting costs.Consequently, they were compelled to revamp their production

lines and reduce their work hours. Reduced output and decliningsales growth also compelled units to lay off their workers. Largeno. of SMEs are running under capacity resulting in half a millionjob losses in the last few months.


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Policy Recommendations

There is a notion that in the present system, RBI is mandatedwith numerous objectives managing public debt, exchange rate,and finding a balance between growth and inflation. These tasksoften come in conflict with each other.

For example, according to RBI circulation (Dated 13th July,2007), the Government has decided to provide interestsubvention of 2 percentage points p.a. to all scheduledcommercial banks in respect of rupee export credit to thespecified categories of exporters in textile, readymadegarments and engineering sectors among other sectors. Butaccording to the feed back received from exporters, suchcirculars do not often reach them in time and where exportersdo get such circulars there exist some confusions regardingthe implementation.

RBI may ensure that most of the circulars that benefitexporters particularly with regards to credit are adhered to bythe implementing agencies, viz. the commercial banks. Forthis, RBI can make the exporters aware of the existence ofthe banking ombudsmen and the later should also be madeaware of the problems faced by the exporters in this regard.


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Policy Recommendations

Among other issues that have emerged during interaction withindividual exporters:

Exporters have suggested for the creation of special purposevehicle (SPVs), a mechanism through which exporters can sharethe exchange rate risk with the RBI, with a premium which can be

collected from exporters at the time of beneficial exchange rate forthem, i.e. when dollar appreciates.

We, however, strongly believe that such a suggestion is notworkable.

However, RBI can encourage initiation of cross-currency option

trading in a limited way, in line with currency futures trading.This shall facilitate exporters who hedge against foreignexchange risk exposure only through forward hedging (as ourprimary survey results have suggested, 100 per cent exportersin the sample who hedged, used only forward hedging).

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