Leather exporters are a worried lot and difficult times are ahead for them as the sector's bottomline has been hit and overhead costs (primarily on labour) have shot up.

Being a labour-intensive industry, a serious fallout has been the retrenchment of about 8,000 workers during the last 6 months. Of this, 4,000 workers have been in Tamil Nadu alone with the rest in Agra and Kanpur, where the leather sector has been traditionally strong. Another 10,000 direct employees are likely to be laid off by March-end 2008. And if the current scenario continues, an equal number is expected to be affected in the indirect segment too.

The year 2007 witnessed mixed fortunes for the sector. The period between April and September saw a growth of about 15 per cent in leather exports which stood at $ 3.1 billion. The September to November quarter saw a dip, with exports growing by 8 percent. Leather footwear, which constitutes about 45 percent of the total exports, grew at 18 percent during this quarter.

This was on account of a steady rupee appreciation against the dollar by over 12 percent during the year. The September to November period marked the rupee vs dollar strengthening by about 8 percent, according to Chairman, Farida Group and Chairman FICCI, Tamil Nadu State Council, M Rafeeque Ahmed.

Consequently, the leather sector was worst affected during this quarter. This resulted in lower price realisation on export contracts despite high demand for leather products globally.

"The sector has not been able to pass on the price increase to the customer, who has the option of purchasing cheap leather goods from China. China is the biggest player in leather goods globally and is able to achieve economies of scale because of large volumes. Also, the sector entered into new export orders because of the rupee volatility and the payment mode being the dollar. The Chinese yuan is linked directly to the dollar, so does not experience much currency fluctuations," Ahmed told a daily newspaper.

Production suffered a dip of 9 percent. This led to retrenchment of workers to bring down overhead costs. The sector is not likely to meet its growth target of 15 percent in exports in FY 08. Instead, growth figures are likely to hover around 7 percent compared to 11 percent in FY 07.

The sector countrywide is also awaiting clearance of the Rs 250 crore Central government assistance.

This is for upgradation of the existing effluent treatment plants and setting a new reverse osmosis plant for treating the total dissolved solids in the waste water, discharged from tanneries.

To tide over the industry's financial crisis, the sector is planning to approach the Central Government for extending the facility of lowered interest rates on bank loans by another year. About 4 months ago, the interest rate on loans for the sector stood at 9 percent.

Thereafter, the government lowered it to 7 percent. This rate is valid till March this year, unless extended further. The industry also plans to ask the government for an excise duty reduction on imported capital goods from 16 percent to zero percent.

This would strengthen the cash flow of the industry and make them more competitive in the international market.

Faced with a slowdown in the sector in 2008, the industry is toying with a strategy of further cost cutting. This would involve more cuts in production and order sizes. Middle employee level of supervisors and managerial staff are also likely to be hit.

Mr. Divya Aggarwal

Money Management Consultants Ltd

Senior Copy Editor, Money Management Consultants Ltd
New Delhi, India

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