Ban on high value currencies in India is likely to hit the unorganised segment of the textile industry, which is one of the most labour intensive sectors of the economy, a report by rating agency ICRA said.
Post demonetisation, sales of apparel and other textile products have dropped drastically due to the ongoing cash crunch. The effects of such demand slowdown has started showing results with the entire value chain from cotton farmer to high-end garment manufacturer being impacted as of now.
"The impact is expected to be pronounced on the unorganised segment, which forms a large part of the domestic textile sector where cash transactions are more prevalent, as reduction in currency circulation is likely to temporarily affect their routine business transactions," the report said.
The rating agency said the impact of dip in consumer spending has already been visible in sales figures by retailers, which will slowly trickle down to the entire value chain in the coming days.
"While textile retailers are facing the immediate impact, the impact 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," the report said.
It, however, noted that the overall impact would be limited as one third of the textile industry is export-focused. Textile exports from India during last financial year stood at $40 billion, around 10 percent of total exports. The industry provides direct employment to around 40 million workers with creation of indirect employment for around 60 million people.
The report said the impact of demonetisation is likely to be most severe on winter wear manufacturers. "The impact of demonetisation is likely to be the most severe for winter-wear retailers and manufacturers focused on domestic market, who witness 60-70 percent of their annual sales during the period October-February," the report said.
Even cotton farmers are likely to be affected due to ban on high value currencies as most payment to farmers take place through cash. "Announcement of demonetization has delayed cotton arrivals in the market due to widespread prevalence of cash payments to farmers," the rating agency said. Accordingly, farmers are holding on to inventories resulting in a fall in daily cotton arrivals, jacking up prices.
