Cotton yarn manufacturers to slowdown investment in new capacity addition in the next five years due to sharp decline in exports to China, as local fabric makers slow down purchases.

Between FY12 and FY16, the sector added 7.3 million tonnes of manufacturing capacity. By the end of FY16, the manufacturing capacity in the country was 50 million spindles. The rapid growth, however, led to overcapacity, with fresh investment drying up.

Capacity addition will slow down as the cotton yarn industry will be adding only about 3 million new spindles between FY16 and FY21 because of overcapacity, subdued demand and lower benefits from the central government after changes to the Technology Upgradation Fund Scheme (TUFS), said Darshini Kansara, research analyst, Care Ratings.

Demonetisation-induced cash crunch has forced the closure of smaller spinning mills; slow purchase from China has also forced manufacturers to lower operating capacity.

Since 2014, Chinese policy of using its internal resources rather than imports, cotton yarn off-take from the northern neighbour has declined consistently.

Rachin Lamba, head, exports, Winsome Yarns said that the Indian cotton yarn market is experiencing overcapacity. Some large manufacturers had initiated their expansion plans but have put them on now.

According to the Office of Textile Commissioner, cotton yarn production was 4,138 million kg in 2015-16. High cotton prices and easy availability of manmade fibres at competitive rates led to the slower growth of production of cotton yarn. Production grew by marginal 3-3.5 per cent in FY15 and FY16.

The cotton yarn production is estimated to fall by about 5-7 per cent to 3,936 million kg in FY17 on the back of sluggish derived (domestic yarn demand) demand with substitution taking place from manmade fibre as well as distressed direct yarn exports due to lower demand from China. Yarn demand in other export markets including Vietnam, Bangladesh and Pakistan is likely to remain healthy.

While cotton yarn exports to China are estimated to remain sluggish, the surge in shipment to other destinations may, by and large, compensate for it. According to the data compiled by the International Cotton Advisory Council (ICAC) estimates India’s cotton yarn exports at 1,250 million kg for FY17 as against 1,309 million kg in FY16.