The government announced on Monday a significant reduction in duty benefits under the Remission of Duties and Taxes on Exported Products (RoDTEP) Scheme, cutting rates by 50% with immediate effect. According to reports from ET Now and The Economic Times, the Directorate General of Foreign Trade (DGFT) stated that the applicable RoDTEP rates shall be limited to 50% of the existing rates. The scheme, launched in 2021, provides refunds ranging from 0.3% to 3.9% and is designed to compensate exporters for taxes, duties and levies incurred during manufacturing and distribution processes. As per CNBC TV18, the DGFT notified this move across all lines with immediate effect, creating immediate market pressure on textile stocks. The decision follows a significant cut in the budgetary allocation for RoDTEP for FY27 to ₹10,000 crore, compared with ₹18,232.5 crore in the previous fiscal, with the reduction in incentives expected to increase operational costs by an estimated 1-2% for exporters.
Textile stocks experienced significant selling pressure on Tuesday, February 24, with major players falling as much as 6% following the policy announcement. According to The Hindu BusinessLine, Gokaldas Exports declined 6% to ₹703 apiece on the NSE from the previous close, while Arvind shares fell 6%. Pearl Global Industries and Trident shares were down around 2% each in the morning trading hours. The Economic Times reports that Vardhman Textiles fell over 6% to a low of ₹502.30 on the BSE from the previous close of ₹529, though it later recovered to trade at ₹529 at 12.07 pm. The sharp correction comes despite the sector's strong recent performance, with Gokaldas Exports up 31%, Arvind up 19%, and Pearl Global Industries up 14% over the past month, significantly outperforming the benchmark BSE Sensex's less than 1% rise. The rate reductions will have specific impacts across different textile categories, with cotton yarn exporters seeing their RoDTEP rates drop from approximately 3.4% to 1.7% of Free on Board (FOB), while fabric exporters will experience a reduction from 3.5% to 1.75% of FOB.
The policy change has prompted strong opposition from the exporting community, with S C Ralhan, President of Federation of Indian Export Organisations (FIEO), urging the government to review and reconsider this decision. As reported by The Economic Times, FIEO stated that the reduction in RoDTEP rates and the 50% reduction in value caps come at a particularly difficult juncture, when Indian exports are already navigating significant global headwinds, including slowing demand, heightened uncertainty, and rising protectionist tendencies. Ajay Srivastava, Founder of the Global Trade Research Initiative (GTRI), highlighted that halving RoDTEP rates will raise the cost of exporting from India by reducing refunds of domestic taxes that exporters cannot otherwise recover, noting that even a 1-2% increase in costs can decide whether orders are won or lost in price-sensitive sectors. The exporting community has responded negatively to the decision, seeking a reconsideration of the government's stance, with the policy change adding to industry concerns about competitiveness in international markets. The reliance on government incentives like RoDTEP highlights a structural vulnerability for Indian textile exporters, as the halving of these benefits directly impacts profit margins, making Indian goods less competitive internationally.
Despite immediate headwinds from RoDTEP cuts, the broader outlook for Indian textiles remains buoyed by the conclusion of the India-European Union Free Trade Agreement (FTA). This pact is anticipated to grant Indian textiles zero-duty access to the EU market, eliminating a substantial tariff disadvantage estimated between 10-12%. Analysts project this could potentially elevate India's textile exports to the EU from the current $7.2 billion to $30-40 billion, challenging Bangladesh's market share. The agreement is expected to drive volume growth and spur expansion, particularly in home textiles and garments, though the immediate impact of increased export costs and uncertainty surrounding potential US tariffs could overshadow these long-term benefits in the near term. The India-EU FTA presents a compelling long-term opportunity for growth and enhanced competitiveness, but the immediate implications of reduced RoDTEP benefits and persistent global economic headwinds warrant caution.
Several textile companies face additional structural challenges beyond the RoDTEP cuts. Arvind Limited carries a significant debt of approximately ₹1,354.40 crore, while Gokaldas Exports faces concerns over its low promoter holding (9.15%) and a high promoter pledge of 96.3%. Valuations present a mixed picture, with Gokaldas Exports showing a TTM P/E of 41.4, considered by some as overvalued, while Pearl Global Industries shows a high TTM P/E of 94.28. The most exposed companies include Vardhman Textiles, Arvind, and Nitin Spinners, while KPR Mill is relatively insulated due to higher garment exposure. A reduction in RODTEP rate will increase the cost of the entire value chain as yarn and fabric are primary inputs for Value Added Products, with historical adjustments to export promotion schemes previously leading to temporary margin pressures and sector-specific growth dips for 3-6 months post-announcement.
