A recent CARE Ratings shows, shutdown of manufacturing units and weak demand in India are expected to take a heavy toll on the cotton yarn industry in the next two quarters. This will lead to a drop in revenue and a fall in profit margins. Smaller companies with high debt levels, less access to bank funding and limited liquidity buffer are expected to be impacted the most.

The cotton spinning industry, which had already been facing multiple challenges — low demand, unfavorable duty structure and volatile cotton fiber prices — is confronting another trouble in the form of the Covid-19 pandemic. In the first 10 months of FY20, the average monthly exports of cotton yarn stood at Rs 1,616 crore, significantly lower than the monthly average of Rs 2,278 crore logged in the same period last year. China’s major cotton yarn demand is now being catered to by Vietnam, which enjoys duty-free access to China. In the last few years, Chinese companies have invested heavily in Vietnam to expand their spinning capacities, leveraging low labor cost in that country and favorable trade agreements. In 2019, China also allowed Pakistan to supply 3,50,000 tonne of yarn at nil rate of duty, while Indian cotton yarn attracts a duty of 3.5 per cent in China, making Indian cotton yarn less competitive in the Chinese market.