The rupee strengthening more than 15 per cent in last few months against the dollar have severely eroded the margins of exporters and competitive advantages. What can be done to cut the costs to shore up the bottom lines of the exporting companies? After all, a company can survive and grow only if it makes money.
Manufacturing is the most affected sector. The worst hit are export-intensive businesses like textiles, leather, handicrafts and engineering. And the companies are now resorting to drastic measures, like retrenchment drives, to stay competitive. The estimated job losses run into several millions. According to the Federation of Indian Export Organisations (FIEO), the apex export body, almost 8 million jobs are likely to be lost this financial year. And the problem may get worse if the rupee continues to appreciate as in recent time.
Most textile companies are opting to downsize to cope with a loss of export income. But the option is certainly anti-people in a country where job loss leads to a miserable life with almost no alternative job opportunity for the workforce retrenched. The textile and apparel exporters seem worse hit by the dollar’s depreciation. The reason is obvious. More than 80 per cent of India’s textile exports are dollar-denominated. According to the Confederation of Indian Textile Industry, almost 500,000 jobs are likely to be lost this year. FIEO puts the expected number of jobs lost at 600,000. According to the Tirupur Exporters Association, almost 10,000 direct jobs have been lost in the region and by the end of the year; the number could soar to 50,000. The products of textile companies are highly price sensitive. Most garment and apparel companies supply to the intensely competitive retail market in the US and Europe, where sharp price hikes is difficult. The exporters have consciously moved up the value chain to hand embroidered and denim products. But 60-70 per cent of the market is still with the low-end garment exporters who work on thin margins.
Another sector reeling under the rupee’s rise is leather. More than 90 per cent of exporters have a turnover less than $5 million (Rs 20 crore) and account for half of the country’s leather exports are in the small and medium sector working on wafer-thin margins. The large units with more than $15 million in revenues account for only a fifth of the total exports. The sector employs 2.5 million workers. And all of them face the risk of job loss.
The rupee appreciation has also affected the handicrafts industry badly. As reported, the exports of handicrafts have been growing consistently at an average rate of 16-17 per cent over the previous years. Since June, exports have shrunk. The Export Promotion Council of Handicrafts (EPCH) estimates that export of handicrafts during the current year may decrease by 15 per cent in comparison to 2006-07. According to EPCH, almost 800,000 artisans are already jobless. However, many a times it seems the bogey of retrenchment is only to get the government attention and subsidies or other financial assistances.
According to commerce ministry estimates, exports dipped 56 per cent in handicrafts, between 6 and 22 per cent in textile-related sectors, and 6 per cent in leather in April to October 2007 over the same period last year.
How can the companies face the fallouts of rupee appreciation that is not under the control of the country? India can’t become China or Hong Kong that have a fixed exchange rate with dollars for many years. But should it not be a matter for discussion at WTO level? The parity among the currencies of different countries must be a necessity for globalization.
But then how can these manufacturing sectors survive and flourish? I personally feel that the trade associations take a very short-term view of the competition. It talks of relief from the government: refund of all local levies (State and municipal), reduced interest rates on pre- and post-shipment credit, withdrawal of service tax applicable to all export related activities; and moratorium on the return of principal loan amount. And under the political pressure and lobbying, the government yields. Chidambaram on Thursday announced additional relief measures for the exporters in his third such package since July. However, it has neither satisfied exporters’ nor the commerce ministry. The highlight of today’s measures include a two per cent subvention in export credit (essentially a reduction for which the government bears the burden), exemption of service tax for three more services that exporters use (storage and warehousing, specialized cleaning services and business exhibitions) and lower customs duty on raw materials for textiles.
It is unfortunate that they hardly talk of productivity improvement, technological innovation, making the products more acceptable by improving the quality through continuous dialogues with the employees.
Why should they jump to one point solution by retrenchment? How much is the labour cost today in manufacturing? Why can’t they take the workforce in confidence to accept a cut in the compensation for the troubled period, if they are honest? Why can’t the trade associations and the government agencies assist in looking into cost reduction of various elements?
With abundance of cotton and rawhide in the country, the cost of the major input is certainly low unless the intermediaries are jacking that up. The manufacturers are paying much less to the shop floor workers than the other Asian countries pay. For instance, in the handicraft sector the price depends on the attractiveness of the products that comes from the skill of the craftsmen. Traders pay the minimal compensations to them. Many a manufacturers, particularly the traders are unscrupulous. The subject requires an in-depth study of various aspects.
What are the high costing elements in production processes and administration? Why can’t that be reduced instead of retrenching the workmen, raising alarm and crying for alms from the government? Perhaps the whole lot of the people of the country at all levels prefers to live an easy life with subsidies and doles instead of finding technical solution to face competition.