Textile’s two cents subsidy

What was brewing into a crisis-like situation, has sensibly been averted, as the government has found a middle ground with the export-oriented sector (primarily textile). The textile sector was not all at fault threatening to shut shop as the power division had inexplicably withdrawn all exemptions midway and started to charge additional tariff in retrospect. The remaining months of FY20 spell good news for the sector, which is desperately trying to capture a bigger share of a shrinking global pie.

Recall that the textile sector has also undertaken expansion projects, primarily based on the availability of power and gas at regionally competitive rates. Gas at $6.5 per mmbtu and electricity at 7.5 cents per unit, excluding GST, is now available to the export sector. But the bonanza lasts till June 2020. Come FY21, and the government has decided to put a cap on power and gas subsidy to Rs20 billion. Tariffs over and above the subsidy will be notified accordingly.

To put the Rs20 billion subsidy in perspective for the entire export-oriented sector, for gas and power combined, some context would help. The industrial sector has one-fourth of the entire power consumption share at 25 billion units annually. Assuming the export-oriented sector’s power consumption, on the higher side, at one-fourth of the total industrial consumption, the number arrives at 6.5 billion units.

If the textile sector’s claims of surcharges leading to a tariff of 13 cents per unit are correct – Rs20 billion annual subsidy is going to be insufficient to address the sector’s woes come FY21. At Rs20 billion annual subsidy, assuming exchange rate at 155, the per unit power subsidy arrives at 2 cents.

Now, this means the textile sector is in for a substantial increase in power tariffs, as the power tariff freeze is not going to last forever. And the way the government has dealt with the issue clearly indicates that, even if there is continued relief, it will be for the domestic sector, and will be cross subsidized.

The base power tariffs should rise anywhere between 15-20 percent in FY21, given that the quarterly adjustments have lapsed, and will be added as prior year adjustments. Then there are surcharges, which are hovering between 2.5-3 cents per units, as per the textile industry’s own estimates. Let us not forget that the IMF has mandated Nepra to levy additional surcharges on electricity. If anything, surcharges will only increase from the current rates, or at best, will stay where they are, and not reduce. Even in the best-case scenario, the export sector is looking at power tariffs in excess of 10 cents per unit, even after accounting for subsidy.

Or not. Because Rs20 billon subsidy to be earmarked also includes the one that goes to sector’s gas consumption. Gas price notification has also faced delay, and the one in July me be on the higher side. Currently, the differential for export-oriented and general industrial gas tariffs stands at 25 percent. Gas tariffs should go higher by 20-25 percent in FY21, and that will take Rs10 billion to keep the export-oriented gas tariff at $6.5/mmbtu.

From what it appears, the export-oriented sector is in for high energy input costs. The crisis seems to have been set aside for the moment. It remains to be seen if the textile sector comes with a fresh wave of newspaper appeals, come FY21. Meanwhile, the government and the textile industry would do well to conduct a thorough research on the implications of input price increase on export competitiveness. Is a dollar lost on export worth a few rupees earned in revenues? How competitive is the landscape? Can the export sector instead find efficiencies in other areas? Surely, there should be a lot more than just energy tariffs, for textile and the likes. On to the researchers!