Manufacturing's vanishing jobs

Mohammad Afroz is disconsolate. A tailor employed with garments exporter Orient Craft for the past two-and-a-half years, Afroz was earning almost Rs 4,000 a month. But a couple of months ago, his Gurgaon-based employer handed him the pink slip.

And Afroz can’t quite fathom why. “I was told it had something to do with the dollar,” he mumbles. Out of work since, he has been doing the rounds of other textile units in the Gurgaon area (there are about 350 units here) but finding a job is proving to be hard.

Without a job, Afroz is now living off his savings, but life is tough—after all he has a family, with a wife and two kids to feed. He is now contemplating going back to his native village in Madhepura in Bihar and return to farming.

Afroz, of course, is not the only one to be laid off. Orient Craft has given the marching orders to as many as 3,000 of its employees in the past four months.

The reason for the retrenchment is obvious— with the rupee strengthening more than 12 per cent against the dollar, the margins of exporters have been severely eroded, forcing them to focus on paring costs to shore up bottom lines. Says Sudhir Dhingra, Chairman and Managing Director, Orient Craft: “We were left with no option. After the layoffs, we have managed to expand our margins by 3-4 per cent to about 8 per cent.”

The problem for laid-off workers like Afroz is that right now there aren’t enough jobs for them in the market, with most textile companies looking to downsize to cope with a loss of export income.

Where it hurts	Why it hurts	What next
FIEO estimates 8 million jobs likely to be lost in export-intensive industries 600,000 textile workers could become jobless 700,000 jobs likely to be lost in the leather industry 800,000 artisans could become jobless in the handicrafts industry 1.6 million jobs may be lost in engineering export units	Rupee appreciation increases dollar price of Indian goods in global markets Exports from other low-cost destinations becoming more competitive Margins of Indian exporters getting squeezed Order books of exporters taking a severe hit Several exporting units running at low capacity utilisation levels Many small export units are folding up	Rupee likely to continue to appreciate More job losses likely More manufacturing sectors, like pharma to feel the impact Exporters likely to expand in non-US markets Increased invoicing in other currencies like the euro and the yen Exporters to increase focus on the domestic market

In fact, like Afroz, many workers are being forced to return to their native towns and villages as opportunities dry up. According to Dhingra, an estimated 70,000 jobs may have been lost in the textile export hub of Gurgaon alone. (The number seems reasonable, assuming just 200 job cuts at each of the 350 units in Gurgaon.)

The big squeeze

The weakening dollar has now started taking its toll on manufacturing in India. The worst hit are export-intensive sectors like textiles, leather, handicrafts and engineering.

Faced with contracting margins, companies in these industries are now resorting to drastic measures, like retrenchment drives, to stay competitive. And the estimated job losses run into several millions.

According to the Federation of Indian Export Organisations (FIEO), the apex export body, almost 8 million jobs are likely to be lost this financial year. And it reckons that the problem will get worse if the rupee continues to appreciate rapidly.

If textile and apparel exporters seem worse hit by the dollar’s depreciation, it’s for good reason. More than 80 per cent of India’s textile exports are dollar-denominated.

A stronger rupee has made exports more expensive and, hence, less competitive against other lowcost competitors. With receding bottom lines and dwindling orders from key markets in the US and Europe, textile and clothing units across the country have no choice but to cut back production— some small and medium enterprises are even downing shutters. Already there are early warning signs that the industry is in for tough times. In April 2007 (latest month for which figures are available), textile exports fell more than 18 per cent. In previous years, exports were growing at between 15 to 20 per cent.

Not surprisingly then, the situation in the industry that’s the second-largest employer after agriculture, looks grim. The export squeeze has not only affected the incremental growth in employment in the sector but also existing jobs. According to the Confederation of Indian Textile Industry, almost 500,000 jobs are likely to be lost this year. FIEO estimates are even higher—it puts the expected number of jobs lost at 600,000.

Business Today’s own research and interviews with exporters indicate that the situation is grim. Take India’s knitwear hub, Tirupur, for example. According to the Tirupur Exporters Association, almost 10,000 direct jobs have been lost in the region and by the end of the year, the number could soar to 50,000.

And there’s more bad news for the industry that could impact business in the long term. Says A. Sakthivel, President, Tirupur Exporter’s Association (TEA) and Managing Director of the Poppy Group: “Clients are migrating to cheaper destinations like Bangladesh and China. This will make it difficult to get business from them in future.” What’s more, at a time when Indian companies are trying to increase invoicing in other currencies such as the euro, their buyers are refusing to play ball. Says G. Kartikeyan, General Secretary of TEA: “Just when we are trying to increase the base of our euro customers, our existing ones are, instead, switching over to the dollar so that they can make more money.”

The biggest problem for the textile companies is that their products are highly price sensitive. Most garment and apparel companies supply to the intensely competitive retail market in the US and Europe, where sharp price hikes are difficult. Says Orient Craft’s Dhingra: “We have consciously moved up the value chain to hand embroidered and denim products. But 60-70 per cent of the market is still with the lowend garment exporters who work on thin margins.”

The end result is that most exporters are now working at breakeven prices and many are even booking losses. Says Vijay Agrawal, Chairman, Apparel Export Promotion Council, and Chairman of Creative Group, an exporter of readymade garments to the US and Europe: “Factories are running at 50-60 per cent capacity and many are closing.”

Agrawal himself is in the midst of a cost-cutting initiative at his unit and admits that almost 600 workers have been “affected” in the process.

The malaise spreads

Another sector reeling under the rupee’s relentless march is leather. More than 90 per cent of exporters have a turnover less than $5 million (Rs 20 crore) and account for half of the country’s leather exports. All these units are in the small and medium sector and work on wafer-thin margins. The large units with more than $15 million in revenues account for only a fifth of the total exports and even these units are seriously affected as they compete in price-sensitive segments.

"Most exporters are wary of taking orders as they are worried that the rupee will continue to appreciate" - Habib Hussain, Chief Executive of Chennai based AV Thomas Leather

The sector is said to employ 2.5 million workers whose employment now seems seriously jeopardised by this turn of events. Most leather product exporters are now in the midst of a retrenchment drive. Says Habib Hussain, Chief Executive of Chennai-based AV Thomas Leather, which manufactures a wide range of leather products from accessories to shoes: “Most exporters are now wary of taking orders as they are worried that the rupee will continue to appreciate in the future as well.

This has inevitably meant job cuts as well.” Hussain himself is planning to lay off people in his company and admits that almost a quarter of his workforce could be given the marching orders.

The Council for Leather Exports estimates that the rising rupee will seriously impact leather exports from the country, which are likely to stagnate at last fiscal’s levels of $3 billion (Rs 12,000 crore). What’s more, it says the future growth prospects, too, will be hit as the rupee appreciation has seriously dented the order books of most exporters for the next summer season as they are negotiating for higher prices. Says Mukhtarul Amin, Chairman, Council for Leather Exports: “According to our analysis, almost 300,000-400,000 jobs have already been lost and by the end of this financial year the figures could be as high as 700,000.

In particular, the smaller players have been severely hit and many tanneries and shoe factories have already closed.” Amin’s company, Superhouse, which makes footwear, is itself in the midst of a retrenchment drive. While 800 employees have been asked to leave, another 800 may have to go soon. The Rs 350-crore company at present has around 5,000 employees.

The handicrafts industry, too, is being forced to bear the brunt of the rupee appreciation. Exports of handicrafts have been growing consistently at an average rate of 16-17 per cent over the previous years. But since June, exports have shrunk—again due to a stronger rupee. The Export Promotion Council of Handicrafts (EPCH) estimates that exports of handicrafts during the current year may decrease by 15 per cent in comparison to 2006-07. This also entails job losses—according to EPCH, almost 800,000 artisans are already jobless. Says Navratan Samdria, Partner, Beauty Art India, an exporter of wooden handicrafts and imitation jewellery: “Most exporters are just about managing to break even as their entire profit margins have been wiped out."

Samdria’s company is cutting down on production as well and has reduced the number of its suppliers by almost 10 per cent, and may cut it further by half. It’s no different for engineering product exporters. Employment in engineering exporting units is highly elastic and sensitive to currency fluctuations.

The Engineering Export Promotion Council (EEPC), on the basis of a survey, estimates that a 1 per cent rupee appreciation adversely affects nearly 160,000 workers. The rupee gaining by about 10 per cent implies job losses of approximately 1.6 million workers according to EEPC.

Across categories, exporters are downsizing to cope with the changed ground realities. For instance, the EEPC study estimates that several auto component exporters will be incurring losses in 2007-08. Already, the survey says, during the April-June period, sluggish exports have led to an average loss of 1,350 man days per exporter. Says Rakesh Shah, Chairman, EEPC: “Exporters used to earlier go in for long-term contracts. But with the rupee appreciating that is no longer possible. Many exporters are now opting for short-term contracts, which means that their order books have been hit and jobs lost”.

Shah’s company Nipha Exports, which manufactures agricultural machinery parts, has already laid off about a quarter of its workforce (mostly contract workers) and is now trying to expand into the domestic market to shore up margins.

Steep climb ahead

Exporters, then, are struggling to cope with the onslaught of the rising rupee. If the rupee continues to appreciate, then it could force many small exporters to fold up operations or slash production, resulting in more job losses.

"After the lay-offs, we have managed to expand margins by 3-4 per cent to about 8 per cent" - Sudhir Dhingra, Chairman and MD, Orient Craft

Economists point out that at the root of the problem is not the appreciating rupee alone but the pace at which the currency has gained against the dollar. Says Subir Gokarn, Chief Economist, Standard & Poor’s, Asia Pacific: “If you see between 2002 to 2007, the rupee gained about 10 per cent. An average of 2 per cent a year was manageable for exporters, who offset the losses through improved productivity and export growth remained buoyant. But this time, the sharp spike in the rupee value has really hurt exporters.”

On their part, exporters are looking to the government and RBI for relief measures. While the government has announced a package that includes increase in DEPB and duty drawback rates, service tax exemption/refunds on several services and making the Exchange Earners Foreign Currency (EEFC) accounts interest bearing, exporters feel a lot more needs to be done. In particular they want RBI to stem the rise of the rupee. Says G.K. Gupta, President, FIEO: “The RBI could reduce the CRR or lower benchmark interest rates to check the inflow of dollars. It would help stabilise the rupee”.

As always, the central bank has to walk a fine line keeping inflation low without tightening money supply. This time, it’s even more of a delicate balancing act, given that job losses won’t just hurt the demand for consumer goods, but can snowball into a political hot potato.

Additional reporting by Nitya Varadarajan