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Will Falling Rupee Lift India’s Fortunes?

Economists seem conflicted over the impact the sharp fall the rupee is going to have over the future prospects of India’s textile companies. Most textile outfits have reported a marked increase in exports, celebrating the extra value they gain for dollar-denominated sales. Readymade garment exporters also have cause for satisfaction since, after two years of stalled growth, they are finally seeing their exports in the ascendent.

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 US and EU dipped by 7 and 15 percent respectively.

India has also benefitted from significantly improved stability with regards their 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.

However, not all exporters in India have been able to enjoy the monetary boon, especially given the rapidly rising costs of cotton. The rising cost of cotton 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.

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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 few months. And whatever gains have been won by the strength of the US 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 exports 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.

And there seems to be no end in sight to the uptick in cotton prices. Disastrous harvests in both the US and China and increased global demand have generated what many see as a long term impact on not just cotton but apparel in general. According to Allen Terhaar, executive director of Cotton Council International: “The consumer should not expect to depend on deflation in clothing as we have seen for many years.”

He attributed the swelling demand for apparel to the rapid growth of the middle classes in India, China, and Brazil. Mr. Terhaar said, “The real generators of added demand are the emerging markets. Between now and 2025, we will have 20 million tons of added fibre demand, of which the US is expected to add just 0.5 million tons — whereas China and India are expected to add 14 to 15 million tons combined. This is through the combination of population and economic growth.”

The mounting costs of fuel and transportation, increased foreign competition, and the allure of low wage exporters in countries like Bangladesh have also squeezed smaller exporters in India.

Even some major retailers have experienced disappearing margins as the result of the bump in the cost of cotton. H&M attributed its 18 percent fall in pre-tax profit for the last fiscal quarter to ballooning cotton prices and wage inflation in Asia.

And the plummeting rupee has generated consequences for global brands previously looking for an entry into India’s market.  Take H&M and Uniqlo as exemplars of the way the depreciated rupee has made foreign investment in India, at least temporarily, cost prohibitive. Since neither retailer relies upon Indian exports as heavily as Zara or Gap, Inc., they have both decided to defer their plans to move into India until after next year’s general elections.

Still, India finds itself uniquely positioned to become a major sourcing destination. Blessed with a enormous workforce of young, deeply discounted and currently underemployed labor, India has unlimited promise. However, it has historically struggled to keep apace with China and Bangladesh, the region’s dominant players. For a nation of its dizzying size, its $32 billion worth of textile exports last year is an underachieving number. It can’t yet hope to reach China’s $260 billion yet, but comparatively tiny Bangladesh took in $21 billion in the same period.

For India to draw business from China, it has to improve its often underdeveloped infrastructure and unwieldy labor regulations. As it stands today, India isn’t large enough to absorb the capacity of China or cheap enough to lure away bargain hunters from Bangladesh. But it does have a large enough population, and a skilled enough workforce, to become one of the world’s top exporters.

And India seems intent on selling itself as an emerging industry leader in social compliance. Dr. Arumugam Sakthivel, Chairman of the AEPC, has touted  India’s increasingly aggressive attempts to combine an emphasis on social compliance with social and economic remediation. To this end, he promoted the strenuous efforts of the Development Initiative for Self-reliance and Human Advancement (DISHA), an agency that describes itself as a “secular, social, apolitical, non-profit and a non-government organization.” Inaugurated in 2004 as a public, charitable trust, the organization helps promote and oversee social compliance, particularly among textile and garment factories in India. It is also charged with an unusually expansive laundry list of other diverse responsibilities including economic inequality, education, discrimination and the alleviation of poverty.

Sakthivel made the case that one component of India’s export industry that recommends it is its laser-like focus on labor conditions and factory safety, paramount issues following the Rana Plaza tragedy in Bangladesh last April. While India might not be as price competitive as some of its rivals, it claims to be well ahead of the curve when it comes to regulatory compliance and general bureaucratic competence. Sakthivel said, “India is already asserting itself as an industry leader in safety and compliance.”

And there are other portents of future success. India’s exports are expected to leap 30 percent over the next year, coming in close to $44 billion. 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.

While some of India’s smaller exporters have struggled to turn a devalued rupee into increased profitability, most of its textile industry has received a jolt of additional growth. Still, India’s monetary policy can’t sustain the entirety of its textile industry into perpetuity. Eventually, deep regulatory revisions and pervasive renovations of its third-world infrastructure need to be effected. India’s currency advantages today will become tomorrow’s cautionary tale if they fail to transform themselves into a true global competitor.