The risks to global growth are higher for 2023 because advanced countries are expected to slow down sharply. How does this impact India? India’s growth cycles have become fairly well synchronized with advanced countries as trade and financial sector linkages have increased over the years. This implies India cannot avoid the short-term pain of a sharp slowdown in advanced countries.
Recent data release has brought some cheer to Indian economy. Industrial activity picked up in September and inflation nudged down in October. The support to industrial activity is largely coming from government led capex. Also opening of services is triggering demand in associated sectors as well.
High commodity prices owing to Russia Ukraine war increased India’s goods trade deficit in the first quarter of the current fiscal. The rupee depreciated in October as the dollar gained strength amid expectations of the US Federal Reserve (US Fed) maintaining its rate hike cycle. Currencies of many emerging as well as advanced economies also depreciated because of rising dollar
CSB Bank, a leading private sector lender, offers wide range of products and services with particular focus on SME, Retail and NRI customers. The bank is committed to provide adequate and timely credit, deposit and transaction banking solutions to the SMEs. In a bid to empower SMEs to grow, the bank is continuously working towards creating enables. One of the initiative is partnership with CRISIL to arrange knowledge series for SMEs covering various potential sectors.
In this first edition of newsletter, the focus is on Textile sector. The Textile industry is one of the largest employment generating sector in India and contributes ~3% to the country’s GDP, The sector is on course to weave revenue growth this fiscal owing to a revival in consumer spending in sync with the improving economy. However, the ongoing global headwinds will restrict overall exports of both cotton yarn and readymade garments next fiscal.
Merchandise trade
(y-o-y growth %) Aug-22 Sep-22 Oct-22
Exports 1.6 4.9 -16.7
Imports 37.3 8.7 5.7
Trade balance -139.2 25.7 -26.9
GDP (y-o-y %) Q3FY22 Q4FY22 Q1FY23 Private consumption 6.8 2.3 25.9 Government consumption 3.0 4.8 1.3
Fixed investment 2.1 5.1 20.1
GDP 5.4 4.1 13.5
FPI/FII net investments Aug-22 Sep-22 Oct-22 Rs billion 565.2 -39.5 -38.5
Exchange rate Aug-22 Sep-22 Oct-22
Rs/$ 79.6 80.3 82.3
Inflation
(y-o-y %) Aug-22 Sep-
22 Oct-22
CPI 7.0 7.4 6.8
WPI 12.4 10.7 8.4
Industrial output
(y-o-y %) Jul-22 Aug-22 Sep-22
Industrial (IIP) 2.2 -0.8 3.1
Foreword
Macro monitor
Crude Oil Natural gas
In October 2022, Crude oil price (Dated Brent) increased ~3.3% m-o-m. This was primarily due to major production cuts by OPEC+, leading to sharp curtailment of global supply.
Average spot LNG prices in India decreased m-o-m basis in October owing to weak gas demand in China
combined with healthy LNG stocks in Japan.
Gold Cotton
Gold prices increased marginally in October owing to festive rush and rise in demand.
Cotton prices remained in the high range with marginal dip in October. This was mainly on account of limited availability of cotton.
84 81 74
86 96
116
106112120 109
99
90 93
0 20 40 60 80 100 120 140
Oct-21 Nov-21 Dec-21 Jan-22 Feb-22 Mar-22 Apr-22 May-22 June-22 Jul-22 Aug-22 Sep-22 Oct-22
$/barrel
Dated Brent: International prices
13.2%
0.0%
-6.7%
-1.8%1.8%
7.1%
-23.3%
-8.7%
28.6%
29.6%
8.6%
13.2%
-23.3%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
Oct-21 Nov-21 Dec-21 Jan-22 Feb-22 Mar-22 Apr-22 May-22 June-22 July-22 Aug-22 Sep-22 Oct-22
On-month
Spot LNG
1.3%
2.1%
-0.6%
0.2%
2.7%
4.9%
0.6%
-2.2%
-0.1%
-0.1%
1.6%
-3.1%
1.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
Oct-21 Nov-21 Dec-21 Jan-22 Feb-22 Mar-22 Apr-22 May-22 June-22 July-22 Aug-22 Sep-22 Oct-22
On-month
Domestic gold price
10.0%
0.2%
11.9%
5.3%
4.6%
14.4%
7.1%
-2.4%
-8.9%
8.0%
-0.5%
-1.0%
10.9%
-1.9%
10.0%
2.9%
-4.9%
8.7% 9.2%
-6.3%
-8.7%
1.4%
-0.9%
-7.5%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
Nov-21 Dec-21 Jan-22 Feb-22 Mar-22 Apr-22 May-22 June-22 July-22 Aug-22 Sep'22 Oct-22
On-month
Cotton prices Yarn prices
Movement in prices of key commodities
US
Third quarter US data shows weakening consumption demand
UK
UK economy contracts in September
• After shrinking in the first half of the year, the US economy bounced back to register growth in the third quarter (July- September), but there are indications that private consumption, one of the largest components of the economy, is starting to soften.
• UK GDP contracted 0.2% sequentially in the third quarter, after growing by the same magnitude in the previous quarter. This marks the first contraction since the first quarter of 2021, when the economy recorded 1.2%
decline.
China
China’ grew faster than anticipated
Japan
Yen falls to record lows
• GDP data underscored the nation’s ongoing growth challenges as reflected in the poor performance of the real estate market and weak retail data. To be sure, China’s official growth target for 2022 was pegged at 5.5%. In contrast, the economy grew 3.0% in the first nine months of the year.
• Domestically, growth in private consumption, a large component of the economy, slowed down to 1.1% in the third quarter from 5.1% in the previous one, reflecting negative impact of inflation on consumption demand.
• It is the first contraction in four quarters, and largely a result of inflated import bill because of 20%+ depreciation in the yen against the US dollar.
EU
Eurozone growth moderated
Impact on India
• The eurozone economy registered a growth of 0.2% on- quarter (in seasonally adjusted terms) in the third quarter vs 0.8% in the previous quarter, confirming that growth momentum is slowing down as the Russia-Ukraine conflict-triggered energy crisis continues to weigh on the economy.
• Rising interest rates, growing European energy insecurity, lingering effects of Covid-19 and the Russia-Ukraine war are creating headwinds to growth globally.
• Economic momentum is increasingly slowing down globally with real household incomes being hit by high inflation. This could impact trade from India to global economies.
Global Snapshot
SME presence high across textile value chain
Snapshot of textile sector
Opportunities for MSMEs in the Textile industry
• Government’s focused emphasis on free trade agreements (FTAs): Central government has increased emphasis on FTAs to boost India’s exports. This is evident from FTAs with Australia and UAE. In addition, FTA with EU is under discussion. Given that India has healthy base of cotton apparel manufacturing, trade agreements with consumption countries can provide significant boost to the overall textile sector over medium to long term.
• Gas crisis in Bangladesh: The output of textile mills has dropped significantly due to shortage of gas supply in Bangladesh.
This could provide opportunity for Indian readymade garments (RMG) exporters.
Threats for MSMEs in the Textile industry
• Continued competition in export market from neighboring countries: India scores low on competitiveness vis-à-vis Bangladesh, Pakistan, and Vietnam, primarily because of free trade agreements (FTAs), which leads to preferential access.
Or petrochemicals,
wool, silk etc Farming (Raw cotton)
Or man-made, wool, silk fibres
Ginning (Ginned Cotton)
Or man-made, wool, silk yarn
Spinning (Yarn)
Weaving, Knitting &
Processing (Fabric)
Garmenting/Stit ching (Ready Made
Garments) Or
Home Furnishings
Textile industry fragmented with high SME share Global headwinds to restrict exports ; price hike and domestic volumes to provide
some support
FY22
SME Revenue Outlook
6650-
6750 72:28 70-75%
Market Size (Rs bn) FY
22E
Domestic : Export share
Share of MSME in industry
12-14% 5-7%
FY23F FY24F
Sector snapshot: Textile
Regulations in textile sector
• Second intervention under Production linked incentive (PLI) scheme; Additional scheme for readymade garments sector: Textile ministry has recently announced that the government is preparing another production-linked incentive scheme for the readymade garments segment. This will be in addition to the already announced PLI scheme for manmade fabrics and technical garments. Over the long term, the scheme will enable higher market share of India in textiles exports.
• Mega Investment Textile Parks (MITRA) scheme: The government has proposed the scheme to enable the textile industry to become globally competitive, attract large investments, boost employment generation and exports. 7 mega textile parks will be launched in three years as part of the scheme. These will have integrated facilities and quick turnaround time for minimizing transportation losses, along with uninterrupted water and power supply, common utilities and research and development labs.
Once developed, these parks will help MSME in reducing setup as well as operational cost on account of shared infra and better economies of scale.
Regulations in cotton yarn sector
• Technology Upgradation Fund Scheme (TUFS): The government launched textile packages such as TUFS - introduced in 1999 - to improve productivity and make the industry cost-competitive. It initially provided a 5 percent interest subsidy on loans borrowed from specified institutions to all segments within the textiles value chain. The government decreased the interest rate subsidy on spinning machinery from 5% to 4% in 2011. The interest benefit to the standalone spinning units was further reduced to 2% in October 2013 under the updated scheme.
• State policies: In order to further give a boost to investments and increase employment, some of the states such as Gujarat, Maharashtra and Madhya Pradesh have come up with their own textile policies. These policies aim to bring new investments into the sector, thereby making the industry more competitive. The state governments benefit over and above the TUFS benefit provided by the central government.
Regulations in RMG sector
• Remission of Duties or Taxes on Export Product (RoDTEP): The government of India introduced a new scheme RoDTEP in September 2019 and released by March 13, 2020 with a budget allocation of Rs 50,000 crore, in a move to replace MEIS and RoSL (only refunds state taxes).
• Goods and Services Tax on readymade garments: Currently, under Goods and Services Tax (GST), players who sell apparel worth more than Rs 1,000 attracts 12% GST and those who sell apparel worth less than Rs 1,000 will fall under the 5% bracket.
Sector snapshot: Textile
Cotton yarn exports on a declining trend Cotton yarn top exporting destinations
Note: Top export/ import destinations are on the basis of share of trade to respective countries in FY22, y-o-y growth and YTD is for Apr-Aug’2023 for export/ import
High domestic yarn prices led to
rising imports Cotton yarn top importing destinations
Domestic market to aid yarn revenue growth this fiscal Global headwinds to impact yarn exports next fiscal
FY22 SME Revenue Outlook1100-1150 75:25 75-80%
Market Size (Rs bn) FY 22E
Domestic : Export share
Share of MSME in industry
2-4% (13-15)%
FY23E FY24P
Ratings upgrade to downgrade at 0.8
0%
50%
100%
AAA AA A BBB BB B C D
Feb-22 Jul 22 13% of SME
at / above investment grade
Feb 22= 93 companies, Jul 22= 135 companies
Total rated debt = Rs 3239 Cr
Rationale for SME revenue growth
Revenue to grow 2-4% on a high base and led by moderation in exports demand. Demand from the downstream apparel industry and home textiles to support the growth in domestic yarn consumption Global headwinds in the exports market to lead to revenue declining by 13-15%.
FY23
FY24
43%
9%
-34% -49% -53% -60%
-80%
-60%
-40%
-20%
0%
20%
40%
60%
Mar-22 Apr-22 May-22 June-22 July-22 Aug-22
On-year
Cotton Yarn exports
Exports witnessed headwinds on account of a combination of high input
costs and moderation in global demand Bangladesh
FY22 export share
Y-o-y growth
China Portugal Egypt Vietnam
15%
42%
5%
4%
4%
-33%
-93%
-54%
11%
-53%
FY23 YTD export share
2%
45%
4%
7%
3%
-79% 0% -12% 135%
2061%
1496%
-500%
0%
500%
1000%
1500%
2000%
2500%
Mar-22 Apr-22 May-22 June-22 July-22 Aug-22
On-year As domestic cotton yarn prices were sharply higher than those of yarn availabile internationally, Indian weavers resorted to using imported cotton yarn thereby leading to a rise in imports
Vietnam
FY22 import share
Y-o-y growth
China Italy Turkey Sri Lanka
7%
6%
4%
840%
73%
18%
-96%
399%
56%
11%
FY23 YTD import share
2%
0.04%
3%
78%
5%
Sub-sector snapshot: Cotton Yarn
Exports growth moderated in August RMG top exporting destinations
Note: Top export/ import destinations are on the basis of share of trade to respective countries in FY22, y-o-y growth and YTD is for Apr-Aug’2023 for export/ import
RMG imports continue to be high RMG top importing destinations
Revival in consumer spend and healthy exports to aid growth this fiscal Improved domestic demand to support growth in fiscal 2024
FY22 SME Revenue Outlook4300-4400 75:25 70-75%
Market Size (Rs bn) FY 22E
Domestic : Export share
Share of MSME in industry
17-19% 11-13%
FY23E FY24P
Ratings upgrade to downgrade at 0.9 Rationale for SME revenue growth Domestic demand will be driven by revival in consumer spend amid improving economy.
Exports too will aid growth with exports to USA is likely to remain healthy.
Revenue to grow by 11-13% on a high base of fiscal 2023. Growth will be driven by improvement in domestic market as exports are expected to remain subdued.
FY23
FY24
0%
20%
40%
60%
AAA AA A BBB BB B C D
Feb-22 Jul 22 Feb 22= 138
companies, Jul 22= 167 companies 11% of SME
at / above investment
grade
Total rated debt = Rs 3809 Cr
28% 24%
35% 59%
6% 7%
0%
10%
20%
30%
40%
50%
60%
70%
Mar-22 Apr-22 May-22 June-22 July-22 Aug-22
On-year
RMG exports
US
FY22 export share
Y-o-y growth
UAE UK Germany
France 4%
52%
-47%
35%
42%
29%
33%
11%
9%
6%
FY23 YTD export share 36%
7%
9%
6%
4%
79% 80%
102% 97%
80%
106%
0%
20%
40%
60%
80%
100%
120%
Mar-22 Apr-22 May-22 June-22 July-22 Aug-22
On-year
RMG imports
Increased imports from China and Bangladesh, which supplies garments that are cheaper than domestically produced ones led to higher imports.
Bangladesh
FY22 import share
Y-o-y growth
China Spain Vietnam Sri Lanka
8%
4%
4%
91%
76%
96%
58%
59%
41%
24%
FY23 YTD import share
7%
5%
3%
41%
21%
Sub-sector snapshot: RMG
Moderation in demand from key export destinations as well as stiff competition led to deceleration
Note: WKP- Weaving, knitting and processing; RMG- readymade garments 0%
10%
20%
30%
40%
50%
60%
70%
AAA AA A BBB BB B C D
Feb-22 Jul 22
Demand from RMG to support WKP sector in FY23 Modest demand from RMG and home textiles to slow down growth of WKP in FY24
FY22 SME Revenue Outlook320-370 70-75%
Market Size (Rs bn) FY 22E
Share of MSME in
industry 11-13% 5-6%
FY23E FY24P
Ratings upgrade to downgrade at 0.5
Rationale for SME revenue growth
After growing by 24% in FY22, revenues of the weaving industry are likely to slow a tad to 11-13% primarily due to the high base effect. Demand from RMG segment to support revenue growth
Revenue growth is likely to slow down to mid single digits in FY24 on account of modest demand from the home textiles and the RMG industry.
FY23
FY24 Feb 22= 105
companies, Jul 22= 114 companies 12% of SME
at / above investment
grade
Total rated debt = Rs 2118 Cr Domestic :
Export share 70:30
Hospitality sector demand to aid furnishing growth in fiscal 2023 High base and normalising domestic demand to slow down home furnishing growth in fiscal 2024
FY22
SME Revenue Outlook
820-870 50:50 70-75%
Market Size (Rs bn) FY 22E
Domestic : Export share
Share of MSME in industry
11-13% 3-5%
FY23F FY24F
Ratings upgrade to downgrade at 0.25 Rationale for SME revenue growth
Revenue to be driven by the hospitality sector which is returning to normalcy after the Covid-19 caused disruptions. Along with rising demand from hotels, the industry is expected to benefit from the China+1 strategy which will open up more avenues for export growth
Growth is expected to moderate to 3-5% on account of a gradual, but slow recovery in international hospitality sector. Domestic revenue growth too will slow down as demand normalizes.
FY23
FY24
0%
10%
20%
30%
40%
50%
60%
70%
AAA AA A BBB BB B C D
Feb-22 Jul 22 Feb 22= 65
companies, Jul 22= 75 companies 14% of SME
at / above investment
grade
Total rated debt = Rs 1130 Cr
Sub-sector snapshot: WKP & Home Furnishings
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