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Package for textile industry to offset Re appreciation

Thursday, July 26, 2007

Measures announced

The Ministry of Commerce and Industry has announced an export package comprising enhanced DEPB (Duty Entitlement Pass Book) and Drawback rates to help Indian exporters, who have suffered due to the rising rupee. The package would especially benefit sectors such as textiles, which rely less on imported raw materials, to mitigate the burden of rising currency that has affected the export competitiveness of Indian players.

The package, among others, includes:

1. Increase in DEPB rates by 3% for textiles (including handloom), readymade garments, leather products, handicrafts, engineering products, processed agricultural products, marine products, sports goods, and toys (2% for the rest).

2. Increase in duty drawback rates across product categories.

3. Reduction in pre- and post-shipment credit by 2% and ECGC cover premium by 10 per cent. These benefits would be available with retrospective effect from April 1, 2007 and continue till December 31, 2007.

Need for the package

The rupee has appreciated by around 9 per cent against the dollar, and by around 5 per cent against the euro since the beginning of the year. As a result, India’s export competitiveness has been eroded to that extent. Textile exports have been severely affected by this rise in the currency. Unlike any other industry (which imports part of its requirement, and hence, has a natural hedge against currency appreciation), the textiles industry sources majority of its requirement locally, and therefore, is very vulnerable to such currency shocks. In this report, we have analysed the impact of the said measures on the textile value chain.

Impact on the textiles industry

The textiles industry is severely affected by the rise of the rupee against the dollar, since currencies of most of our competitor countries have either remained stable or have depreciated against the dollar during the said period. As indicated in Annexure 1, Chinese Yuan has appreciated by around 4 per cent, Indonesian Rupiah by around 2.7 per cent, Bangladeshi Taka has remained almost stable and Pakistani Rupee has depreciated by 0.69 per cent. There is intense competition in the export market. Small and medium exporters are unable to pass on their costs in terms of currency appreciation to buyers. The consequent lowering of export proceeds erodes the topline and profit margins of exporters. Yarn and garment exporters have witnessed pressure on their margins due to currency appreciation. Yarn exporters earn 2.5-3.0 per cent net margins, while garment exporters earn 4.5-5.0 per cent. Appreciation in the local currency by 9 per cent would completely knock off their margins and make exports an unprofitable business. The announcement by the Ministry of Commerce would help mitigate the losses, arising due to appreciation of the rupee to a certain extent. Of the total loss due to the 9 per cent appreciation, the declared measures would cover only around 3.5 per cent of the losses for exporters. Therefore, players would be required to find additional ways to overcome the additional loss through operational efficiencies and moving up the value chain to maintain their existing margins.

Key points

* Players can take benefit of either DEPB Scheme or Duty Drawback Scheme.
* The cotton textile value chain has preferred taking benefits under the DEPB Scheme being exempt under the CENVAT rule.

Posted by FR at 5:46 AM  

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Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective.The information contained herein is based on analysis and up on sources that we consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and I am not responsible for any loss incurred based upon it.& take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations given in this blog.