COVID-19 to hurt India’s economy and the garment sector

India can expect a 0.5 % hit on economic growth this fiscal if the COVID-19 pandemic lasts longer, says Care Ratings.

The economic impact will be significant and long term if the virus continues for longer. A widening of the fiscal deficit is also feared. NPA levels in the banking sector are expected to increase. Exports and imports are likely to contract. While hospitality, tourism, aviation, auto and auto ancillary will be hit hard, pharma and healthcare will benefit from the pandemic.

If China continues to battle with the coronavirus, Indian garment manufacturers will need to look at other alternatives, including local sourcing, which in turn may increase the cost of finished goods by three per cent to five per cent. In addition to this, identifying vendors in such a short time can take a toll on lead times, quality and cost. On an average, India exports 25 million kg of cotton yarn a month to China. The garment sector in Tirupur is heavily dependent on China for sourcing accessories. The total shutdown in China has disrupted the supply chain. The sector may hurt its margins if accessories are sourced from a trader in India or from an overseas market other than China.

India’s garment exports down four percent

Readymade garment exports dropped around 4.51 % in February 2020. COVID-19 outbreak is expected to impact exports for the next few months and has impacted sentiment in the European market — the largest for Indian exporters. Recent trends in US apparel imports have also been discouraging. For orders placed, delivery is taking much more time than usual. This is the primary reason for the fall in exports. As most countries are under lockdown, stores are shut and people do not go out and stay at home. The drop is mainly due to weak buying and many customers’ going bankrupt or witnessing lower sales.

Indian apparel exporters expect a correction of around 100 to 150 bps in their operating profitability in fiscal ’20. This is expected to result in a moderation in debt coverage metrics. The impact is likely to be more pronounced for leveraged and smaller companies, with limited bargaining power with customers, and modest liquidity cushion.

When the outbreak started in China, initially it was looking like an opportunity for Indian exporters. This was because European customers, who were traditionally sourcing from China, started discussions with Indian exporters for new orders. But, ever since the virus started spreading to Europe, things have turned upside down.