A Rising Rupee Hammers Indian Textiles

The rupee's 11% gain against the dollar has driven U.S. and European retailers to switch their orders to countries with weaker currencies

by Nandini Lakshman

In the basement of a white-and-blue painted factory, frail, sari-clad G. Sivakami is checking track pants for flaws before they get shipped. The 40-year-old Sivakami works for the Stallion Group, a $20 million garment manufacturer in Tirupur, a city of 800,000 in the southern Indian state of Tamil Nadu that is a center of the country's apparel industry and a focal point for a gathering crisis in Indian manufacturing. For the past six months, Sivakami's eight work shifts a week have shrunk to six. Her $70 monthly income has dropped 25%, and she has been struggling to feed her unemployed husband and college-bound son. The other factories in Tirupur have cut back, too, so Sivakami plans to stay put. "I have no choice," she whispers.

The rest of the world is focused on the fast rise and global reach of India's information-technology services. But the tech companies spawned in Bangalore employ only 2 million Indians. The textile and apparel sector employs 88 million, and the strength of its 15,000 companies is central to India's economy and exports. Right now those companies are being squeezed hard by the rupee, which has appreciated 11% against the dollar this year. That has driven up the cost of Indian apparel and prompted U.S. and European retailers to switch their orders to mills in Pakistan, Bangladesh, Sri Lanka, and Vietnam, whose currencies are weaker. "If we don't get the right price in India, we will move elsewhere," says Rajan Naik, a buyer for J.C. Penney (JCP) in India.

Indian textile companies are scrambling to shore up their businesses and some are even calling on U.S. private equity firms for help. Others are laying off factory hands to cut costs. Some half million textile workers have lost their jobs in the past six months. The figure could rise to 1 million by March, says Arumugam Sakthivel, vice-president of the Federation of Indian Exporters, who also heads Poppy's Knitwear in Tirupur. In that city the industry's jobless ranks are soon expected to swell from 10,000 to 40,000.

Cutting Prices to Keep Orders

Stallion's story is typical. The company, which makes inner- and outerwear for clients such as Fruit of the Loom and Jones Apparel Group (JNY), is a small operation that gets 70% of its business from the U.S. In the past year it has cut prices by one-fourth to counter the effect of the rising rupee. But Stallion has still lost four U.S. clients, including Levis, and sales are down 40% in the last six months. Its head count has dropped from 2,000 six months ago to 900. An additional 100 jobs could vanish by February. "We are now fighting just to cover our overhead," says K. A. S. Thierumurthi, Stallion's managing partner.

The sharp rise of the rupee has exposed serious flaws in government policy as well. The government in New Delhi imposes rigid labor laws on large factories with more than 100 workers. To avoid these restrictions, most Indian textile and apparel companies run small factories, where it's easier to lay off workers. But such plants lack the scale and efficiency of their rivals in China, where a textile plant can easily employ more than 50,000 workers.