India's National Magazine
From the publishers of THE HINDU

Vol. 16 :: No. 05 :: Feb. 27 - Mar. 12, 1999

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INDUSTRY & LABOUR

MILLS IN CRISIS

A severe demand recession in India and abroad, coupled with other factors, has pushed the textile industry in southern India, which is centred in Coimbatore, into a crisis.

V. SRIDHAR
in Coimbatore and Tirupur

THE textile industry in Coimbatore, which accounts for a predominant part of the industry in southern India, is facing a crisis. A substantial part of the capacity of the spinning mills in and around the city, which manufacture yarn, remains idle. Thousands of mill workers have not received their wages for months. They face the even more serious prospect of losing their jobs as the danger of several units closing down in the immediate future appears to be real.

For three years now, the industry has been reeling under the impact of a demand recession in the domestic market and a steep fall in yarn exports, particularly since the start of the South-East Asian economic crisis in 1996. Ironically, the turmoil in the industry is blamed on economic liberalisation, which was widely believed to have contributed to Coimbatore's success in the last decade. The textile industry is the engine of Coimbatore's economy, and the slowdown has meant that Coimbatore's image as a boom town, earned in the 1980s and early 1990s, is now considerably faded.

The Union Government's failure to provide relief to the industry has raised doubts whether it is inclined to relieve the industry of "excess capacity", which some sections of the industry believe is at the root of the crisis. These apprehensions are heightened by the Government's decision not to extend to the spinning industry the benefits of the Rs.25,000-crore Technology Upgradation Fund (TUF), which was announced recently.

Some of the pioneers of the industry in the area, who have coped with many ups and downs of the industry, say that they cannot recall a more prolonged and pronounced downswing. Industry sources say that over the past three years the crisis has deepened and spread to almost all segments.

The small units are the worst affected. However, the larger mills have not been spared. The mills are burdened by mounting stocks of unsold yarn, and their working capital base has been eroded. Moreover, many mills are in danger of defaulting on the repayment of term loans from banks and financial institutions. Mill owners complain that matters have been made worse by the "mismatch" between cotton and yarn prices and by the 15 per cent increase in power charges, which was effected in Tamil Nadu in July 1998.

Industry sources said that owing to cash flow problems, mill managements had defaulted on payments to workers and to the Government. Only a few mills that supply yarn to niche markets have managed to stay afloat. Among these are some of the bigger mills which supply yarn to markets in Europe and the United States, which have so far escaped the effects of the global recession.

Many mills in Coimbatore have closed down, but the official figures in respect of closures do not adequately reflect this fact. Many more are running at reduced capacities, working fewer shifts. Workers have been retrenched or laid off. Trade union and management sources admit that a substantial portion of the capacity has remained idle for several months. Trade unions claim that 46 mills in the private, public and cooperative sectors have closed down in the last two years.

R. Shyam Sundar, managing director of Akshaya Textiles, said that at least 10 big mills had closed down since October 1997. In his reckoning, mills with a capacity of 25,000 spindles each, which are typical of the spinning industry in Coimbatore, made losses throughout 1998. Moreover, he said, at least 50 per cent of the mills were running at reduced capacities. Cash flow problems were so acute that many mills were forced to keep up production even though profitability had been severely affected, he added. "This crisis just does not seem to be going away," said Shyam Sundar.

THE spinning mills in Tamil Nadu account for about 35 per cent of the country's installed capacity and produce about 40 per cent of India's yarn, mainly cotton yarn. Coimbatore district alone accounts for about 13 per cent of the spindlage in the country. Of about 1,500 spinning mills in the organised sector in India, nearly 800 are in Tamil Nadu; of these, nearly 300 are in Coimbatore. Yarn from Tamil Nadu is supplied to the powerlooms in Tamil Nadu, which have grown rapidly in number in the last two decades, and those elsewhere in the country.

The sharp increase in spindlage, a consequence of the policy of economic liberalisation pursued by successive governments at the Centre since 1991, is now being blamed for the build-up of "excess capacity" in the industry. The recessions in the domestic and overseas markets have magnified the problem of excess capacity.

The industry is divided on how the Government should respond to the crisis. Those sections that are better equipped to ride out the crisis want the excess and unviable capacity, amounting to about 11 million spindles - almost one-third of the spindlage in India - to be scrapped.

D. Varadarajan, managing director of Sri Varadarajar Textiles Ltd, says that there is chronic over-capacity and there are too many players while the export potential is poor. He calls for curbs on expansion of capacities and says that retrenchment is "a must". He claims that by ploughing back profits into fresh investments in modernisation, his company has been able to cut costs and cope with the crisis.

The more vulnerable small- and medium-size units, which see the collapse in demand as a temporary phenomenon, call for intervention by the State and Union Governments. They demand reliefs from the Union Government, notably in the form of reduced duties. Besides, they want the Government to help them gain easier access to credit from banks and financial institutions on concessional terms in order to facilitate modernisation of the industry. However, banks, although flush with investible funds, fear that in the prevailing situation lending to the industry is risky. There are indications that the banks and financial institutions are interested in funding mergers and acquisitions as the industry goes through a shakeout.

All segments of the industry, including trade unions, have sought governmental intervention. Tamil Nadu Chief Minister M. Karunanidhi organised a tripartite meeting of representatives of the Government, trade unions and mill managements on September 26, 1998. At the meeting, B.K. Krishnaraj Vanavarayar, chairman of the South India Mills' Association (SIMA), which represents the interests of more than 350 textile spinning mills in the organised sector (these mills account for at least one-fourth of the spindlage in the country), wanted the increase in power tariffs withdrawn. He also asked the State Government to defer the sales tax payable by the mills; these could be repaid over a three-year period without interest, he suggested. Subsequently, the State Government expressed its opinion that a recovery of the industry was incumbent upon workers agreeing to a three-year wage freeze.

In August 1998, the Union Ministry of Textiles convened a meeting, which was attended by industry representatives and officials of banks (including the Reserve Bank of India), financial institutions and the Indian Banks' Association (IBA). The meeting was intended principally to discuss the terms on which a financial package may be extended to the industry, but no package has so far been secured. According to industry sources, the RBI team said that individual banks were "free" to lend to units, depending on their financial health. Shyam Sundar says: "We get a patient hearing everywhere, but nobody takes any action."

Krishnaraj Vanavarayar said that if banks did not provide credit to the industry at this stage, the industry's non-performing assets (NPAs) may become "never performing assets".

Varadarajan, however, said that credit availability was not the solution. He asked: "Even if banks provide more funds, will the mills be able to market their products?" He warned that the units' interest liabilities would increase even as unsold stocks accumulate. "The problem," he said, "could then result in the mills' assets not covering the banks' exposure." There is also a fear in some sections that a large-scale bailout by financial institutions and banks would only postpone a full-scale restructuring, without which, in their view, the long-term vitality of the industry would be jeopardised.

THE Tamil Nadu Government's textile policy, announced in March 1998, does not address the systemic problems that affect the industry - cotton exports, yarn prices, excess capacities and so on. For its part, the Centre has constituted a committee headed by S.R. Sathyam, former Secretary in the Union Ministry of Textiles, to gather the views of all sections of the industry to enable itself to take a "holistic view" while drawing up the new national textile policy. (The previous textile policy statement was issued in 1985.) The spinning industry has complained that it is not represented on the committee whereas the powerlooms and the composite mills are represented.

The private textile industry is united in its demand that the 13 mills of the state-owned National Textile Corporation (NTC) in Tamil Nadu, 10 of which are in Coimbatore, be closed down. Private industry reckons that the closure of these mills, which account for a total capacity of 4.55 lakh spindles, would ease the problem of excess capacity.

The trade unions oppose the dismantling of existing mill capacities since the per capita consumption of cloth in India is low. K. Venugopal, an executive committee member of the Coimbatore District Mill Labour Union, which is affiliated to the Centre of Indian Trade Unions (CITU), said: "The demand by sections of the industry to kill excess capacity is like cutting the feet to suit the shoes."

DELICENSING, a crucial element of industrial policy in the liberalised era, resulted in substantial additions to capacity. Between 1990-91 and 1997-98, the number of spinning mills, including small units, grew three-fold - from 777 to 2,290. The spindlage increased by 30 per cent, from 27 million to 35 million. During the same period the number of rotors - used in open-end spinning units which adopt a more efficient technique than in the traditional spindles, but which are more suited to the production of coarser varieties of yarn - grew almost five-fold, from 67,000 to 3.17 lakh.

Between 1990-91 and 1997-98, yarn production in India increased by 63 per cent; the increase in the installed capacity of the mills was undertaken largely to cater to overseas markets. Yarn exports increased from 90 million kg to 485 million kg during this period. In value terms, exports increased from $500 million to $1.6 billion between 1993-94 and 1997-98. During this period, the annual average increase in the value of yarn exports in dollar terms was 45 per cent. The magnitude of the collapse in demand in overseas markets can be gauged from the fact that yarn exports increased by only 6 per cent in 1997-98. Moreover, the volume of yarn exports fell by 20 per cent between January and July 1998.

The crisis was accentuated by the fact that over the years the spinning industry became increasingly dependent on export markets. In 1990-91, only 6 per cent of the cotton yarn produced in India was exported; by 1997-98, exports rose to 22 per cent. In addition, yarn supplies to powerlooms that catered principally to export markets also increased. In short, yarn supplies for export markets - whether directly as yarn or as yarn going into textile products - became a crucial factor in the market dynamics in the 1990s. This proved beneficial so long as exports were booming, but the slump in the overseas markets pushed down yarn prices and put huge levels of capacities at risk - as was the case following the outbreak of the crisis in South-East Asia. D. Dorairaj, president of the Indian Chamber of Commerce and Industry, Coimbatore, said: "Yarn meant for export markets was dumped in the local market, depressing yarn prices."

SHYAM SUNDAR said that when the General Agreement on Tariffs and Trade (GATT) was finalised, the Indian Government conveyed an impression that the textile industry would be one of the main beneficiaries of the agreement. The Government "encouraged the industry to expand capacity," he added. His own company, however, did not expand capacity because he felt that the mood between 1991 and 1995 was "too euphoric". Shyam Sundar said that in his opinion "indiscriminate addition to spindlage, backed by substantial institutional and bank financing", had contributed heavily to the problem of excess capacity.

K. ANANTHAN
Yarn being spun on a ring frame at an open-ended spinning mill in Coimbatore. A substantial part of the capacity of the spinning mills in and around Coimbatore remains idle, and there is a real danger of more units closing down.

Indira Doraiswamy, director of the South India Textile Research Association (SITRA), which is sponsored by SIMA, warns against "killing" excess capacity in the industry. The Indian textile industry has "good potential" for growth, she claims. In her opinion, the expiry of the Multi-Fibre Arrangement in 2004 will open up opportunities for the Indian industry. "We should not worry too much about excess capacity," she said.

The delicensing policy enabled units to be established with relative ease. Many new units, mostly small ones, have been established in areas near Dindigul and Udumalaippettai. M. Nanjappan, general secretary of the Coimbatore District Mill Labour Union, says that several small mills are housed in what were formerly cattle sheds or in coconut groves. A few Coimbatore-based companies have also ventured into these areas, taking advantage of the fact that the labour force is unorganised and, consequently, the wages are low. Daily wages in these units range from Rs.20 to Rs.60, compared to about Rs.120 for casual labour in Coimbatore.

According to Indira Doraiswamy, the wage component in the mills in Dindigul and Udumalaippettai accounts for only between 2 and 3 per cent of total costs, compared to about 12 per cent in the Coimbatore mills. The industry in Coimbatore also complains of rampant evasion of excise and other duties by some of the new mills. It also claims that the low-cost operation of these units imposes a drag on modernisation in the spinning industry in general. The overhang of capacity has meant that the older mills' ability to finance modernisation is affected. They fear that the repayment of funds borrowed for modernisation would be impaired by low margins in the face of increased competition.

The Union Govern-ment has indicated that a substantial portion of the TUF will go to the weaving and processing segments of the industry. This means that stand-alone spinning units will be excluded from subsidised funding for modernisation. The TUF is to be implemented by financial institutions and is to start from April 1, 1999, by which time the Government is also to unveil its new textile policy.

SIMA has argued that the spinning industry too needs to upgrade its technology: it cites studies conducted by SITRA which indicate that about 40 per cent of the ring frames in the spinning industry are at least 20 years old and an additional 25 per cent are more than 25 years old. SIMA, in its submission to the Sathyam Committee, said that the declining profitability of mills during the 1990s had affected their ability to invest in modernisation. Dorairaj claims that the textile industry in the southern region requires Rs.5,000 crores on concessional terms to upgrade capacity.

Shyam Sundar says that the crisis has not spared even mills that have modernised. In his opinion, mills that modernised before 1995 are better off than those that modernised later. By the time the late modernisers had improved their production techniques, the market had slumped. "Not only could they not access the markets, but they faced difficulties in servicing their borrowings," according to him.

THE Central Government's long-term cotton export policy, which is aimed at maintaining a minimum level of cotton exports every year irrespective of the size of the crop or the demand for cotton from users, has also come in for criticism. The Government claims that the policy is aimed at ensuring that India is seen as a regular and reliable exporter of cotton. The spinning industry says that short supply of cotton, its basic raw material, has made prices unstable. Industry sources say that the Government's announcement of export targets at the beginning of the cotton season (September-October), based on the contested estimates of the Cotton Advisory Board, favours speculators who push up prices. Shyam Sundar alleges that 16 lakh bales of the "cream of Indian cotton" were exported in 1996, creating conditions of shortage for the mills in the country.

The Tamil Nadu Government has criticised the Centre for rejecting its plea that cotton exports be banned. State Minister for Handloom, N.K.K. Periasamy, observed recently that the export policy was influenced by the cotton lobby.

A RECENT survey, conducted by SIMA among 158 member-companies, indicates that as many as 107 companies reported lower production in April-September 1998 compared to the corresponding period in 1997. Yarn production in these mills was nearly 15 per cent lower during this period.

The survey reveals that yarn exports (by mills that reported them) during April-September 1998 was 35 per cent less in quantitative terms compared to exports during the corresponding period in 1997. SIMA estimates that the crisis in the economies of South-East Asia, the destination for half of all Indian yarn exports, contributed in large measure to the slump in exports.

The survey shows that despite the fall in yarn production, the mills are saddled with unsold stocks of yarn. SIMA also claims that in the face of the fall in production and increased stocks, mills face an increase in the prices of cotton, particularly good quality cotton. It claims that in the 1997-98 cotton season, average prices of the better varieties of cotton were nearly 20 per cent higher than those in 1996-97. It attributes the price increase to the dearth of good quality cotton.

The recession is spreading to other textile manufacturing centres in Tamil Nadu. Latest data show that exports from powerlooms, a major part of which originate from the Karur-Erode-Salem belt, and from Tirupur, the major centre of India's hosiery exports, have remained stagnant during the current year.

Although the export of grey fabrics manufactured by powerlooms increased by 44 per cent in January-October 1998 when compared to the corresponding period of 1997, in terms of unit values it has fallen by almost 20 per cent. In contrast, although exports of knitted fabric have fallen by 20 per cent in terms of volume, their unit values have increased by about 10 per cent. The sharp depreciation of the rupee during the current year, particularly under the impact of the sanctions imposed by the United States following the nuclear tests at Pokhran in May 1998, implies that the dollar value of exports of both knitted and grey fabrics has been stagnant during the current year.

The crisis has engulfed other segments of the industry in and around the town. Some of India's leading textile machinery manufacturers, located in Coimbatore, which are already under pressure owing to the import of machinery at lower costs, are now battered by the severe demand recession sweeping the industry. The downturn in the machinery sector has, in turn, hit the foundries in Coimbatore, many of which have been traditional suppliers of spare parts for textile machinery.

The crisis has spread to, or has had some kind of impact on, almost every other segment of business in Coimbatore. A cross-section of businesspersons told Frontline that it had affected the real estate and hotel businesses. At the corporate hospitals in Coimbatore, patients are reportedly postponing medical procedures that they have been advised to undergo. For about a year now the "dull business" was blamed on the bomb blasts in Coimbatore in February 1998. It is now becoming clear that economic processes that are tied to the liberalisation drive are at work, imposing a severe squeeze on the textile industry.