Business

Domestic Apparel Industry Bears The Brunt Of Demonitisation

The adverse impact of demonetisation on disposable incomes and hence weak consumer spending has resulted in a slowdown in domestic demand for apparels and other end-products of the textile industry in the immediate term. The resulting inventory accumulation with the retailers, in turn, has caused deferment of purchases from apparel/home-textile manufacturers (focused on domestic market) in the near term, besides resulting in stretched payments. This, in turn, has adversely affected the cash flow of the textile industry and has driven a constraint in the demand for the entire textile value-chain in the short run. While the downstream segment of garment has been impacted the most, the slowdown has a trickle down impact on the upstream segment.

The winter wear segment of the domestic retail business has been affected. According to an estimate, winter-wear retailers and manufacturers focused on the domestic market, who witness 60-70% of their annual sales during the period October-February, will be most severely impacted. Though from the manufacturers' end, the shipments typically take place by September-October, pressure on sales in the retail space during the subsequent peak season can indirectly affect manufacturers. While on the one hand, slow sales increase the possibility of stock returns to manufacturers or affect orderbook for the next year in the light of unsold inventory; on the other hand, slow sales and consequent liquidity pressures on retailers can result in stretched payments to the manufacturers.

Garment retailers are currently facing a slowdown in sales, even as the situation has improved considerably in the last few weeks. While in case of organised players, the sales of garment and other textile products are down by 10-15%, smaller retailers continue to languish with sales slowing down by 20-30%. During the first few weeks of demonitisation, the sales were down by as much as 50-70%. This has also impacted the garment manufacturers who are currently going slow in meeting their summer obligations. Most of the smaller units who normally pay their workers in cash have to cut down their production. However, units which are catering to the export markets, have been able to isolate themselves since their level of compliance is quite high. In other words, these units normally comply with all fair accounting practices and mostly deal through adequate banking channels.

"Things are gradually falling in place. But the impact on sales on the retail front is still being felt and this is expected to continue for some more time. On the manufacturing side, smaller units are the ones who have been impacted the most," says Rahul Mehta, president of Clothing Manufacturers’ Association of India, which has initiated efforts in the garment industry to educate smaller units and create overall awareness about digital transactions and other accounting practices. "In fact, the demonitisation episode is likely to infuse more transparency in the whole system as many of the smaller players primarily dealing in cash, is now trying to put their act together," adds Mehta.

"While textile retailers felt the immediate impact, the bearing on apparel manufacturers and other intermediaries in the value chain is expected to be felt with a lag of a few weeks, with reduction in orders due to a slower offtake,” an industry analyst stated.

However, he is of the view that overall impact on the sector, is expected to be limited as a large segment of the Indian textile industry is export focused (directly or indirectly). Also, as the demand reverts back to a steady state over the next few months with expected improvement in liquidity, this impact will be neutralised gradually.