New Delhi. A massive restructuring of debt in India’s ailing textile sector will likely provide relief to thousands of mills struggling with losses and revive demand for cotton in the world’s second-largest producer, industry officials said Wednesday.
The government late Tuesday asked state-run banks to restructure INR350 billion ($6.24 billion) worth of debt on the books of textile companies and also asked the central bank in consultation with the finance ministry to consider a two-year moratorium on term loans and other measures to help cash-strapped companies improve their working capital positions. This way, they would avoid the need for immediate repayment and would also likely get more time to repay their debts under the measures that banks would consider.
The decision provides hope to local cotton producers for a pickup in demand in the coming months, as it will likely inject greater liquidity into cash-strapped mills just when overseas demand has dried up from major buyers such as China, Pakistan and Bangladesh.
“It will help mills pull through the crisis they are going through because they don’t have working capital to buy raw material,” D.K. Nair, secretary-general of the Confederation of Indian Textile Industry, told Dow Jones Newswires.
Mills incurred huge losses after buying cotton when prices had hit record highs in March-April last year and subsequently collapsed globally in the next two to three months as output in countries such as Pakistan picked up.
Since then, mills in India–the world’s second-largest producer of cotton yarn–have found it difficult to offload their products and repay debts.
India’s textile industry contributes about 11% to industrial production, 14% to the manufacturing sector, 4% to GDP and 12% to the country’s total export earnings, according to the Confederation of Indian Textile Industry.
India ships cotton yarn to key garment exporters such as China, Pakistan and Bangladesh.
A. Ramani, secretary of the Indian Cotton Federation, said the mills’ capacity utilization should improve to 90%-95% from 70%-80% in the next three to nine months following easier capital availability.
“That means a minimum 10% improvement in the production of cotton yarn, and to that extent, demand for cotton,” he said.
Faced with slow buying by mills, the government had lifted all restrictions on export volumes last August to enable farmers to sell their cotton.
Mills are currently buying between 1.7 million and 1.8 million bales monthly, according to industry officials.
Farmers and traders are estimated to be saddled with around 4 million to 5 million bales of cotton stocks from the current season’s crop due to low overseas demand and a lack of domestic buying.
“This will get absorbed very fast because of the government’s decision,” Ramani said, adding that the bulk of the demand pickup would become evident when the new season crop arrives in October.
India is estimated to have produced a record 34.7 million bales of cotton, weighing 170 kilograms each, during the marketing year ending Sept. 30.