The Days of Easy & Cheap Money are Over Again

After Standard & Poor’s downgrading of US credit rating from AAA to AA+, Indian financial experts’ opinion is divided on its impact on the country’s economy. A large number of these self righteous people think that this event will have ‘no’ or ‘very little’ effect on the Indian financial and industrial scenario due to what they call ‘strong fundamentals’ prevailing here as compared to the US or the European economy. But this time around, unlike after the previous housing crisis in the US, nobody is daring to speak of the decoupling of the Indian economy from the developed world. The impact on the Indian stock markets is a clear indication of the fact that in the new integrated and globalised world order the interdependence is going to prevail for a very long time. No country can be truly free or independent from financial or market view points.Now talking about the Indian textile industry, there are already rum ours doing the rounds that the textile sector firms are lobbying for getting a two-year moratorium – a payment holiday for the principal amount of the loan – and also reduction in the interest rates. The entire textile sector which already has a nasty image is again at the risk of becoming untouchable due to further downgrading of the industry. It is estimated that loans worth Rs 1,45,000 crore to textile firms might be at risk if they failed to pay the installments in time.
It is believed that a sudden and sharp drop in the prices of cotton yarn, which was a result of the government’s decision to ban exports, has left companies holding on to high-cost inventory. The government capped cotton yarn exports in 2010-11 at 720 million kg against the industry demand for 1,100 million kg. The export ban has now been lifted, but things have not improved much due to sluggish domestic demand.The $62-billion (Rs 2.75 trillion) Indian textile industry has seen a steep fall in the prices of cotton and cotton yarn since March 2010, and low demand for finished products. A few large textile firms have already defaulted and many more are at the edge. The textile sector is estimated to have accumulated losses to the tune of Rs 11,000 crore and there are clear signs of the situation becoming worse. The removal of the cotton export ban has not helped the domestic companies due to very sluggish demand, and this means they can’t raise prices. Hence they have to carry high-cost inventories adding to their losses.The textile industry repays Rs 7,000 crore worth of interest and principal every year, which needs to be restructured. It is reported that banks are willing to recast the loans, but are against a bailout and refusing to infuse cash. Loan recasting by banks is not new especially when the sectors have political support e.g. real estate, airlines and microfinance sectors. The textile industry is again facing a difficult phase and a restructuring is unavoidable. RBI’s signals are very clear. The days of easy and cheap money are again over, at least for a few years from now.

Managing Editor