YarnsandFibers: The Budget for Growth

A large section of textile companies are content with the 2006 Budget proposals. The Fifth consecutive survey on Business Confidence of Indian textile companies for the quarter April to June 2006, conducted by YarnsandFibers reveals this. The survey has assessed the impact of 2006 Budget proposals on Indian textile companies. The Budget had attempted to remove/reduce tax anomalies and placed duties in line with other Asian countries. The key feature was the reduction in excise duties on fibre and yarn and peak custom duty from 15% to 12.5%. However, new impost of 4% additional import duty has been unfavourable to many companies which are import dependent.

About 55% of the respondents are satisfied by the Budget proposals and indicated that it would have favourable impact on their businesses. While 35% were content but feel that the changes will have no impact on their businesses. Remaining 10% of the respondents believed that the 2006 Budget would adversely affect their performance as the tax anomalies still persist. The Budget has put them at disadvantage with other players. The imposition of fresh levy of 4% has raised the cost of textile companies which are import dependent. The new impost would impact their costs vis-à-vis the companies sourcing domestic raw material.

Producers of polyester yarn using PET chips indicated that the excise duty on POY was reduced from 16% to 8%, but duty on PET chip is still at 16%. Acrylic fibre producers with 100% importers of raw material are adversely affected by the 16% CVD plus additional custom duty 4%. Of this they can adjust only 8% by way of CENVAT on acrylic fibre as against 22% cenvatable duty on import. With this anomaly, they are unable to fully utilise the cenvat credit which blocks finance.

On the business prospect front, the survey reveals that the textile companies will apparently try on hold on to their recent past performance during the quarter April to June 2006. The Business Confidence Index for the quarter April to June 2006, computed by Yarnsandfibers based on the fifth survey is at 85.9. On the scale of 0 to 100, where the highest is 100, at 50 the confidence is same as today and below 50 implies lower than the current level. The June 2006 index is a shade lower than the previous week’s index which was at 87.5. Of the respondents, 72% were of the opinion that their performance would be better in the April-June 2006 quarter. The remaining 28% respondents believe that their performance would remain unchanged compared to the preceding quarter. None of the respondents see their performance turning worse in coming quarter.

However, rising input costs, particular that of manmade fibers is the only dampener to this prospect. This is clearly evident from the Business Marginal Expectation index, which measures the input costs and end-product pricing strategy. Business Margin Expectation Index, stands at 48.7 for the June 2006 quarter. On a scale of 0 to 100, index below 50 implies that companies’ increased cost is not compensated by output pricing. Index above 50 indicates that the increase in output prices is higher than the increase in input cost. In the last two years, prices of fibre intermediates in Asia have increased significantly by 30-80% due to the spurt in crude prices. However, cotton prices declined 15% in the last two years.

The survey for June 2006 quarter, indicate that firms would be facing power and labour bottlenecks for growth in the quarter. About 28% of the respondents feel that power was a major constraint. Labour follows as the next impediment with 26% of the respondent claiming that insufficient supply and labour laws were hampering growth.