The Indian textile industry benefits from Sri Lanka's deepening economic crisis- Here's how

Across the world, low and middle-income countries including Sri Lanka are struggling with a three-pronged crisis- the ongoing Covid-19 pandemic, the rising cost of their debt, and the increase in food and fuel prices caused by Russia’s invasion of Ukraine.

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May 13, 2022

Ever since Sri Lanka is buffeted by economic headwinds, Indian textile exporters are receiving orders from countries where they had little or no presence. The island country is the first to buckle under economic pressures compounded by Russia’s war on Ukraine.

Raja M Shanmugam, President, Tirupur Exporters' Association told The Economic Times, "Manufacturing sector has crippled in Sri Lanka, especially apparel. Due to the ongoing crisis, global brands have started diverting some of the orders from Sri Lanka to India's Tirupur textile hub. These orders are being placed for the upcoming fall season."

Fast fashion global conglomerates like Zara, Mango and H&M usually place the manufacturing orders with Asian countries, including India, Sri Lanka, Bangladesh, Cambodia and Vietnam. "Bangladesh, Vietnam and Cambodia have huge orders in their hands. The only option left in this scenario is India. However, high cotton and yarn prices are a major concern for the Indian textile trade," Shanmugam added.

Shanmugham also highlighted that high prices of cotton and yarn could limit inflow of orders for units in Tirupur. “Due to same reason, the international brands may shift their sourcing to countries like Bangladesh and Vietnam,” he added.

Why apparel orders are being diverted to India?

India and Sri Lanka produce similar kinds of garments and apparel. The ongoing economic distress was followed by the departure of the country’s prime minister, Mahinda Rajapaksa and a deepening crisis.

Across the world, low and middle-income countries including Sri Lanka are struggling with a three-pronged crisis- the ongoing Covid-19 pandemic, the rising cost of their debt, and the increase in food and fuel prices caused by Russia’s invasion of Ukraine. Manufacturers across Sri Lanka are complaining of long power outages, violent interruptions during work hours and rising prices of fuel which hampers the production process, as factories use generators during long power cuts.  

The chief of Kolonna Manufacturing, which is based in Sri Lanka's central province narrated his ordeal to BBC in April and said that he has been running from station to station looking for 400 litres of fuel for the generator which is just enough for one day. "Today we survived somehow, but I don't know about tomorrow,” he said.  Kolonna manufactures knitted garments for world-famous brands like Victoria's Secret, Puma and Levi's, and is among dozens of clothing factories struggling to meet production targets.

Garments are the second largest foreign exchange earner for the Sri Lankan economy. The sector had just recovered from the pandemic, with export earnings increasing by 22.1% to $514m (£393m) in January 2022 compared with a year ago, BBC reported. Due to prolonged production disruption, importers have now diverted these orders to other South-Asian countries including India.

While the yarn and cotton prices continue to rise in India, Secretary Ministry of Textile India, pointed out that countries like Bangladesh and Vietnam have no import duties for importing cotton from Australia, Brazil and South Africa. He told news agency ANI, “conversely, our importers had to pay 11 per cent duty leading to high input cost which makes them uncompetitive. So our importers were demanding the government to lift the import duty. Vietnam, Bangladesh, Sri Lanka and Pakistan were getting the advantage in certain markets like European Union and the UK and our exporters were at disadvantage.”

However, since now we do not have to pay import duty on cotton, this will certainly make our exporters more competitive, he  emphasized.

Explaining how buyers have now started calling Indian exporters, A Sakthivel, President, Federation of Indian Exporters Organisationtold ANI that we are hopeful that some queries may turn into orders. And this is an opportunity. He added,  Indian exporters are getting queries from countries like the United Kingdom and European Union Countries for tshirts, pants, baby garments and woven items.

How Sri Lanka’s crisis spiralled?

Sri Lanka is facing the worst economic crisis since it’s independence. A severe shortage of foreign currency has left the government unable to pay for essential imports, including fuel, leading to debilitating power cuts lasting up to 13 hours. Along with shortages, residents are dealing with sky rocketing prices of essential commodities, after the country steeply devalued its currency last month ahead of talks with the International Monetary Fund (IMF) for a loan programme.

The root of the crisis lie in the economic mismanagement by successive governments. The government left a budget shortfall alongside a current account deficit. “Sri Lanka is a classic twin deficits economy,” said a 2019 Asian Development Bank working paper. “Twin deficits signal that a country’s national expenditure exceeds its national income, and that its production of tradable goods and services is inadequate.”

Reuters reported that as of February, Sri Lanka was left with only $2.31 billion in its reserves but faced debt repayments of around $4 billion in 2022, including a $1 billion international sovereign bond (ISB) maturing in July. ISBs make up the largest share of Sri Lanka’s foreign debt at $12.55 billion, with the Asian Development Bank, Japan and China among the other major lenders.

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