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India’s Textile Industry Blossoms into Major Player

India is fast emerging as a major textile producer, the beneficiary of a perfect storm of economic factors propelling its rise. And many experts believe India’s robust performance could be sustained for another year’s time.

India’s most impressive success is being reported by its yarn and garment manufacturing companies, which are experiencing revenue growth as high as 53 percent in the last six months. Much of this pace can be attributed to India’s perception as an alternative to China, which continues to become increasingly expensive, and Bangladesh, which remains cheap but politically perilous.

One important factor contributing to India’s recent vigor is the burgeoning demand in China, which imports about 30 percent of its cotton yarn. As a consequence of China’s complex quota system regarding cotton, many of its companies find its importation more attractive than either buying it local or producing it themselves. China’s unusual government regulations, and its swelling demand, redound to the benefit of India, which is well-positioned to take advantage of both factors.

And then there is the story of India’s slumping rupee, which has been a major cause of concern for its central bank but largely a boon to its exporters. Most textile outfits have reported a marked increase in exports, celebrating the extra value they gain for dollar-denominated sales. Ready-made garment exporters also have cause for satisfaction since, after two years of stalled growth, they are finally seeing their exports in the ascendent.

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And most of the reports regarding the ramifications of the rupee’s depreciation have been positive. According to a study issued by Crisil Research, India’s exports have made substantial gains compared with a limp 2012, in which exports to the U.S. and E.U. dipped by 7 percent and 15 percent respectively.

Of course, India is not without its challenges. While it has taken advantage of rebounding E.U. and U.S. economies–which collectively absorb 80 percent of all its exports–the E.U. plans to completely overhaul its trade relationship with India, enacting a shift in its preferential arrangements to lesser developed economies. India’s exports to the E.U. has surpassed a crucial threshold of 14.5% in value of textile imports from all other beneficiary nations, essentially “graduating” India out of the program. An Indian trade official said, “We will take it up with Brussels because for textiles, it is a double whammy. The E.U. has removed Indian textiles exports from GSP, which means higher duty at E.U. borders, and they are in the process of giving textile exports from Pakistan GSP Plus status, which means zero duty.”

Also, not all exporters in India have been able to enjoy the monetary boon, especially given the rapidly rising costs of cotton, which has dealt a major blow to the profitability of small and medium-sized cotton exporters. Saddled with cumbersome input costs, and unable to hedge against price volatility with futures and options contracts, home-based exporters in places like Panipat, India are struggling to survive.

Most major exporters have managed to benefit from the weakening of the rupee against the dollar. Smaller exporters, though, have been crushed by the 15 to 20 percent spike in prices over the last year. And whatever gains have been won by the strength of the U.S. dollar against the rupee have been eroded by cotton’s increasing cost.

Larger exporters protect themselves against the short and medium-term price volatility of cotton through hedging mechanisms. By purchasing cotton futures and options, they can make export revenues more predictable. Another added benefit of hedging is increased flexibility for cotton-related transactions since futures can be sold even when there are no buyers in the physical market. Smaller exporters, however, rarely have access to these financial instruments.

Even more unsettling, India is more vulnerable than most nations to an investors’ strike if the markets freeze since its financing requirements amount to nearly $250 billion. Its current reserves of foreign currency covers this, but barely. For the sake of comparison, consider that Brazil maintains a total reserve more than double its gross financing needs.

Still, India has made great strides of late. It boasts significantly improved stability with regard to output and factory compliance, particularly when compared to fierce, low-cost competitors like Bangladesh. According to the Apparel Export Promotion Council (AEPC), major American and European brands have been gradually shifting more and more of their sourcing to India as a consequence.

Also, the government has been revising its cumbersome oversight rules, erasing a limitation on how much money could be invested in garment factories. On the other side of the coin, their labor laws have become impressively more stringent. India’s exports are expected to leap 30 percent over the next year, coming in close to $44 billion.

In the last six months, India has seen sharp progress toward becoming a major garment manufacturing hub. As the global economy improves, buoying demand for cotton yarn, India is well-positioned to capitalize on new opportunities as they arise.