New Delhi [India]: Though domestic apparel exports are expected to remain in the positive zone during rest of the year, there are multiple threats looming which could slow down the pace and make it challenging for apparel exporters, investment information firm and rating agency ICRA said on Tuesday.
Apparel exports revived during the current financial year, growing by about four per cent year-on-year during April to July, after two consecutive years of de-growth.
"The external environment for India's apparel exporters remains challenging amid a pick-up in activity on several free trade agreements among the key trading nations, which has intensified competition from nations having a cost advantage over India," said Jayanta Roy, Senior Vice-President and Group Head for Corporate Sector Ratings at ICRA.
In terms of region-wise trends, the growth in India's apparel exports during first four months of the current fiscal was primarily driven by a seven per cent increase in exports to the US market, while exports to key European and the UK markets declined by two to three per cent.
In addition to a general slowdown in EU's import demand amid weakening of currency (with euro depreciating by about four per cent against the dollars during January to June vis-a-vis the average level in 2018), India's position in the EU market has been adversely affected by the preferred access to key competing nations like Bangladesh and Vietnam by way of free trade agreements.
These include Comprehensive and Progressive Agreement for Trans Pacific Partnership (CP TPP) between 11 nations including Vietnam which had come into force for seven nations by January, and EU-Vietnam Free Trade Agreement which got signed in June (pending ratification).
These could make it increasingly more difficult for India's apparel exporters to maintain their competitiveness in its largest market -- the European Union -- which accounts for 35 per cent of India's apparel exports.
"Apart from challenges in the EU market, retail trends in the United States also remain unencouraging, which could exert additional pressure on the order flow for India's apparel exporters going forward," said Roy.
This apart, steps taken by the government to provide clarity on continued access to export incentives will play a crucial role in determining the ability of the Indian apparel exporters to garner a larger pie of the global apparel trade. In this context, the government has taken some steps recently which have come as a respite for the Indian apparel exporters.
Following the replacement of the Rebate of State Levies (ROSL) Scheme with the Scheme for Rebate of State and Central Taxes and Levies (RoSCTL) which has a wider scope, with effect from March onwards, the government has announced the introduction of a new scheme called Remission of Duties or Taxes on Export Products (RoDTEP). The scheme is proposed to be made effective from January 1, 2020 onwards.
While the details are still awaited, pending which its impact on profitability of apparel exporters remains uncertain, the government aims to replace all existing export incentive schemes with this scheme and has assured that the new scheme will more than adequately incentivise exporters than the existing schemes put together. Nevertheless, this remains a key monitorable for the sector in the near term.
Given the headwinds, ICRA expects Indian apparel exporters to grow at a slower pace in the near term. However, despite moderation from a healthy 14 to 16 per cent growth in FY2019 and Q1 FY20, pace of growth for the larger domestic apparel exporters is expected to remain comfortable at 8 to 10 per cent during FY20.