Budget 2011: Textile

FY11 so far has been reasonably good for the Indian textile industry as the export demand from the US and Europe have shown an uptick and realizations have been better for the larger players due to vendor consolidation. However, the forex losses due to the volatility in the rupee against the US dollar as well as higher interest costs going forward are key risks to the sector. The Clothing Manufacturers Association of India (CMAI) estimates that 500,000 to 600,000 jobs are at risk. As exporters struggle to secure profitable orders, the Ministry of Textiles' US$ 28 bn export target for the fiscal year seems well beyond reach. Companies are also trying to add niche value-added material to their product mix to stabilise their margins. Some firms that have ventured into retail chains are finding rising commercial real estate prices an impediment to their ability to roll out with the speed necessary to attain critical mass. Union Budget 2011-12 offered very little scope to the textile sector to improve its profitability. Non extension of discounted interest rates offered to the sector for its capacity addition will mean even higher interest costs for the companies that do not complete their capex borrowing by the due date.

Budget expectations

	Considering the fact that this decade would witness highest ever investment by the textile industry, estimated to the tune of US$ 70 bn, players in the sector are expecting the subsidized TUF (technology upgradation fund) scheme to be extended till 2020.
	Reduction of excise duty on polyester fibre from 10% to 4% .
	Considering the rising interest cost scenario and in order to make Indian textile exports competitive in international markets, interest subvention of 2% is expected to be extended until the end of March 2012.

Budget Measures

	Rs 30 bn funding to NABARD to provide support to financially unviable handloom weavers with huge debt burdens.
	Optional tax levy at 10% made mandatory on branded garments and made ups.
	Surcharge on domestic companies reduced to 5% from 7.5%.
	Basic customs duty on nylon yarn and nylon fibre reduced from 10% to 7.5%.
	Lower rate of central excise duty increased from 4% to 5%.
	Rate of Minimum Alternative Tax (MAT) proposed to be increased from 18% to 18.5% of book profits.

Budget Impact

	Companies that do not complete their capex related borrowing by the due date of March 31, 2012 will have to incur higher borrowing cost as the interest subvention under the Technology Upgradation Fund (TUF) will expire by that date.
	The financial support from NABARD could help the revival of unorganized players in the handloom industry and evade mass unemployment in the sector.
	Higher taxes on branded garments and madeups will eat into the profits of the sector.
	The lower surcharge could have a positive impact, albeit nominal, on the profits of the smaller players in the sector. Company Impact Companies like Raymond, Arvind and Alok Industries that have presence in branded garments, madeups and textile retailing will be impacted by the higher tax levy. Most companies in the sector are highly leveraged and may have to cap their capex plans until FY12.