Lankan, Chinese Constraints To Drive Strong Revenue Growth For Indian Ready-Made Garment Makers

India’s textile industry has rarely had it so good. Amid apparel exports registering more than 30 per cent growth during fiscal year 2021-22 (April–March) with accumulative ready-made garment (RMG) shipments for the period at $16018.3 million, strong export demand aided by Sri Lanka-China constraints alongwith robust domestic demand are set to drive revenue growth of RMG makers by 16-18 per cent this fiscal.

The main markets for Indian textiles and apparel export are the USA, European Union, parts of Asia and Middle East. Amongst these markets, USA holds the maximum share of 26.3 per cent for knitted garments, followed by UAE 14.5 per cent and UK 9.6 per cent.

The size of the current global market of Man Made Fibre (MMF) garments and made ups is to the tune of $200 billion with India’s share of $1.6 billion accounting for merely 0.8 per cent of the total global market of MMF, latest data of the Apparel Export Promotion Council shows.

On the external side, factors like the depreciation of the rupee and continuation of export-linked incentive schemes will offer added advantages for export players in the road ahead, leading to the revenue growth of RMG makers, shows an analysis of 140 such makers -- with aggregate revenue of Rs 20,000 crore -- by CRISIL Ratings.

“Export demand is expected to grow at least by 12-15 per cent, despite the higher base of last fiscal, as overseas players continue to diversify their supplier base in light of the economic crisis in Sri Lanka and the fresh Covid wave in China, which has disrupted supply-chains,” says Anuj Sethi, Senior Director, CRISIL Ratings.

The depreciation of the rupee and continuation of export-linked incentive schemes are added advantages for export players in the road ahead, as per an analysis of 140 RMG makers with aggregate revenue of Rs 20,000 crore, by Crisil. Nomura expects China’s export growth in dollar terms to slump "due to the severe disruptions in factory operations, road transport and port congestion as a result of the worst COVID-19 wave and the most severe lockdowns since spring 2020.

India’s economic recovery has also supported normalisation of discretionary spends which, together with improving realisations amidst the surge in raw material prices, is expected to push domestic demand. This demand within the country which accounts for three-fourths of that of the overall RMG, is expected to grow over 20 per cent, points out Sethi.

The operating margin of RMG makers will improve by 75-100 basis points on-year to 7.5-8.0 per cent in fiscal 2022-23 -- still lower than the pre-pandemic levels of 8-9 per cent. While key raw materials such as cotton yarn and man-made fibre are 15-20 per cent dearer, RMG makers should be able to partially pass on input price hikes on demand rebound, and improved operating leverage, which will support overall profitability.

India traditionally competes with Sri Lanka in the world market. However, unlike India, Sri Lanka depends on imports for its raw materials and its imports of textiles and textile products grew by 32.4 per cent to $2.206 billion during January-September 2021. India is placed well on the raw material front.

“The largest raw material availability of cotton, jute, silk and wool in the world supported by world’s second largest spinning and weaving capacity has provided the industry an opportunity for a 95 per cent domestic value addition,” says Narendra Goenka, Chairman AEPC.

Another enabler for the RMG industry’s robust financials would be the reduction in the customs duty on raw cotton from 10 per cent to nil which will push India’s exports of apparel and made-ups sectors significantly by softening the prices of yarn and fabrics as well, says president of the Federation Indian Exporters’ Organisation, A Sakthivel.

Moreover, India has increased its market share in apparel exports in the US and many countries recently and the signing of CEPA with UAE and Australia will further accelerate it. Indeed, Australia has become a prominent export market for the Indian garment industry. Its textile and and apparel imports have registered a growth of 2 per cent over the last five years and have reached $6.3 billion in 2020.

India is amongst the top three suppliers of T and A products to Australia with its share in total Australia’s textile and apparel imports of around 5.5 per cent. With the recently signed Economic Co-operation and Trade Agreement (ECTA) between India and Australia, the Indian garment industry is all poised to grow further.

Canada too as one of the leading apparel importers offers a prominent export market for the Indian garment Industry. India is Canada’s eleventh largest export market and twelfth largest trading partner.

India’s textile industry has seen positive developments such as dominance in home textiles and favourable geopolitical undercurrents encouraging the China Plus One sourcing strategy, which promises a better future. Favorable geopolitical undercurrents as COVID-19 has revealed the fragility of global supply chains and has accentuated the need for global diversification, such as the China Plus One strategy.

A CII-Kearney study calls for targeting a $16 billion increase by riding the China Plus One sentiment. With Bangladesh and Vietnam expected to get saturated given their limited geographic size, the situation places India in a favourable position to build necessary capabilities and infrastructure and emerge as China’s alternative.

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