Domestic market to lead growth this fiscal

Crisil provides independent research, consulting, risk solutions, and data & analytics. Their informed insights and opinions on the economy, industry, capital markets and companies drive impactful decisions for clients across diverse sectors and geographies. Aniket Dani, Director-Research, Crisil Market Intelligence & Analytics, shares insight on domestic market and factors that will drive growth.

After a year of headwinds for the textile industry in fiscal 2023, what is the outlook for the industry in fiscal 2024? Which factors will drive growth?
After a challenging fiscal 2023, readymade garment (RMG) players in India could see further moderation in revenue growth this fiscal. RMG manufacturers witnessed an easing of revenue growth from 23 per cent in fiscal 2022 to 14 per cent in fiscal 2023. The growth in revenues is expected to moderate further to 8-10 per cent this fiscal. Spinners are expected to record a fall in revenue for the second straight year.
Exports account for about a fourth of the overall textile market value chain, so global developments are significant to the entire industry. In fiscal 2022, pent-up global demand supported revenue and profits. The domestic market also rebounded. It was the industry’s best decadal performance that year.
But the high was short-lived. Crisis unfolded in India’s major ready-made garment (RMG) export markets in fiscal 2023. Countries of the European Union (EU) faced an energy crisis triggered by geopolitical tensions, while the United States (US) wrestled with high inflation. Against this backdrop, domestic cotton prices overshot international prices, on the back of high demand for cotton supported by domestic demand and robust export demand at the tail-end of fiscal 2022. A lower-than-expected cotton crop and import duty on cotton fibre also contributed to the rise in prices. This rendered the downstream industry uncompetitive. RMG export volumes contracted 7% on-year, while cotton yarn exports more than halved in fiscal 2023.
Further slowdown in revenue growth this fiscal will be driven by a moderation in realisations owing to surplus cotton availability and muted demand in the first half that will keep the lid on cotton prices. Domestic market volumes are likely to grow steadily, while exports might perform modestly led by a low base of fiscal 2023 and gradual recovery in the second half of the fiscal.

A fall in discretionary demand impacted exports in fiscal 2023. How do you see exports panning out this fiscal? Are there any new geographies players are exploring?
The latest high-frequency data shows that global demand for textiles is yet to come out of the woods. In value terms, India’s RMG exports were 12 per cent lower on-year in the first quarter of the current fiscal. We expect exports to chart a similar performance in the second quarter as well, with demand slowly returning post October. That would happen for three reasons.
One, discretionary purchases would pick up during the festive season, which commences from end-October in the West. Two, with demand yet to improve, Western retailers are undertaking markdowns on existing stocks to liquidate inventories before the festive season. As a result, restocking of fresh collections is expected after the second quarter. Three, retailers abroad are likely to increase purchases ahead of the spring-summer season.
Besides, India inked a free trade agreement (FTA) with Australia in December 2022. While exports to Australia have grown at a brisk pace of late, Australia currently makes up only 2 per cent in India’s garment exports. This indicates a huge untapped potential. Indian exporters are also likely to venture into newer geographies and lower their dependence on traditional markets where demand is currently weak.

Domestic demand, which contributes to about 70 per cent of revenue, helped the sector last fiscal. What is your view on domestic revenue growth this fiscal?
In fiscal 2023, domestic market growth was driven by pricing, while volumes too grew steadily. Unlike the export market, which is B2B, the domestic market is B2C, giving players more pricing flexibility. Demand across various price bands remained stable and premium brands outperformed. Hence, players were able to pass on the rise in raw material costs in this market.
This fiscal, while cotton prices are likely to be 15-17 per cent lower on-year, prices in the domestic market are unlikely to fall across-the-board. Easing input cost pressures and steady demand will give companies the room to recalibrate pricing of their product portfolios. We expect RMG prices in the lower end to benefit from a pass-through of lower cotton prices, but price-inelastic segments may see a modest rise. For the overall domestic RMG industry, prices may rise 3-5 per cent on-year.

With India-UK and India-EU FTA talks underway, considering the significant share that these markets have in our exports, what kind of contribution will the FTAs make to our exports in the near to medium term?
The US, EU and United Kingdom currently comprise over 60 per cent of India’s RMG exports. But India’s share in imports by these regions remains low; for instance, it is merely 3 per cent in EU’s imports. Moreover, India’s share has remained stagnant over the past five years, despite ample raw material availability.
In comparison, competitors such as Bangladesh and Vietnam have a higher and increasing contribution in US and EU imports. While it is true they have a distinct advantage over India in terms of labour cost and efficiency, respectively, both countries also benefit from duty-free access to key markets. On the other hand, India’s RMG export shipments to EU attract a 9.6 per cent duty. So, yes, FTAs will certainly help improve India’s cost competitiveness in these markets.

The government is considering a second round of the Production-Linked Incentive (PLI) scheme for the textiles industry. How is this likely to support the growth of the industry? Can the PLI scheme lead to capacity creation in the sector?
The scope of PLI 1.0 was limited to technical and manmade textiles and the industry was seeking an extension of the scheme to other segments as well. PLI 2.0 is expected to focus on the natural fibre value chain and downstream products such as home textiles and RMG.
The second round could potentially incentivise new capacities and stimulate employment in the labour-intensive textile sector, but a caveat is in order here. As the incentives depend on incremental revenue generated, players would embark on capital investment only if they are optimistic about a sustained improvement in demand, especially when interest rates are high. That is more likely to take place in the medium term, as the industry mends.