Published by yourcollegebars on April 18, 2017

Need for long-term measures

The government interventions continue to distort cotton economy


Of late, the obstructionist pol­icies of the government have been blocking the way of the market forces and creating unwar­ranted distortions in the cotton market. And, despite a strong cot­ton production base, the domestic industry has not been able to take full advantage of the situation. The instances are many and varied.

Case 1

India had an eventful cotton season (2007-08), when India’s cotton pro­duction touched a then all-time high of 30.7 million bales of 170 kg each. At that time, we emerged as the sec­ond largest cotton producer in the world, displacing the US. Yet, the cot­ton season (October 2008 to Septem­ber 2009) could not begin its journey in October 2008 on a high note, with the global recession in the aftermath of Lehman crisis taking a heavy toll on the overall demand of cotton. In a pre-emptive move to safeguard the interest of cotton farmers, the gov­ernment of India increased the min­imum support prices (MSP) of cotton (seed cotton or kapas) significantly, with the support price for medium staple length cotton being fixed at ?2,500 per quintal (39 per cent higher than the previous year) and long sta­ple at ?3,000 (48 per cent higher).

Earlier, looking at the cotton sit­uation, the Union government had removed cotton from the list of Essen­tial Commodities Act in February 2007. This was followed by freeing of cotton imports from duties, as also removal of incentive of duty draw­back of 1 per cent on cotton exports from the country.

As anticipated, amidst weak demand, the prices of cotton started dipping from October 2008 and soon breached the MSP level. The govern­ment had to mandate Cotton Cor­poration of India (CCI) to undertake

MSP operations across the country. It procured about 8.9 million bales of cotton from farmers, with the effect that the cotton prices stabilised in the short run. However, CCI couldn’t draw up a proper sale policy to dis­pose of its stock and, in a kneejerk reaction, came up with a policy that was skewed in favour of large players and traders.

In a hurry to dispose of the cot­ton stock, it offered bulk discount of ?450-650. The ticket/lot size was in excess of 50,000 bales and 90 per cent of the industry players (with their requirement ranges from 100 bales to 1,000 bales) couldn’t be in a posi­tion to avail this offer. The result was that most of the stock was cornered by large international traders. Cotton prices (Shankar 6 variety) which were hovering around ?20,800 per candy of 356 kg each in February 2009, spi­ralled to ?23,800 by May 2009.

The textile industry, which was try­ing to overcome the global recession, had no option but to bear the brunt of buying its raw material at higher prices. This happened in a season


(2008-09) when the total domestic demand was 22.9 million bales, as against a total supply of 33.5 million bales and a crop size of 29 million bales. In other words, the domestic textile industry couldn’t leverage its strong cotton base.

Case II

In another intervention, to keep cot­ton within India (as there was a short supply globally, which led to huge demand for Indian cotton), the gov­ernment tried to restrict exports of cotton by making registration manda­tory in April 2010. Earlier, the global demand, led by China, saw Indian exports touching 8.3 million bales, creating a strong demand situation, due to which cotton prices in the domestic market doubled to as high as ?59,000 per candy in a short period of three months (between December 2010 to February 2011). This was fol­lowed by the government putting up a cap on cotton exports at about 6.5 million bales in October 2010.

As raw material prices soared, cot­ton yarn prices also went through


the roof to ?280 per kg from ?190 in a short time. At the behest of the domestic fabric and garment indus­try, the government again swung into action and imposed a ceiling of 720 million kg on exports of cotton yarn for 2010-11. Consequently, there was no export of cotton yarn for over two and a half months (from 15 January to 31 March 2011), which resulted in a huge stock of unsold cotton yarn lying with the mills, as they contin­ued to produce yarn using high-cost cotton in anticipation of a strong realisation in the global markets after the removal of the export restriction. However, the demand moderated sig­nificantly. India is the largest exporter of cotton yarn, exporting almost 25 per cent of its production.

The pile-up of inventory was also due to the sluggish demand in the domestic market which faced clo­sure of dyeing units in Tirupur, Tamil Nadu, a leading hub for hosiery exports, as also a slowdown in the garment sector following levy of 10 per cent excise duty on branded gar­ments. The weak demand for yarn amidst estimation of another bum­per crop of 33.9 million bales (sea­son 2010-11), then an all-time high, had its impact on the cotton prices which nosedived to almost ?30,000 per candy. This adversely affected the cotton yarn prices.

Spinners were forced to sell cot­ton yarn below the production cost as they had to get rid of the high- cost inventory they were stuck with. The industry incurred a net loss of ?11,000 crore at a time when they were on an investment mode under the TUF scheme. The textile industry sought a ?35,000-crore debt restruc­turing package.

Case III

The Union government imposed a complete ban on cotton exports on 5 March 2012, after the exports from the country touched a then all- time high of 9.5 million bales (actu­ally shipped) in the first five months (between 1 October 2011 and 4 March 2012) of the 2011-12 cot­ton season. Total exports registered with the Directorate General of For­eign Trade (DGFT) during the period
stood at about 11.5 million bales, as compared to the government’s esti­mated exports of 8 million bales for the entire season. China was a major importer of cotton, as it was creating stock for its industry. Global cotton prices firmed up considerably.

The government of India justified this move saying that it ‘wanted to ensure steady supplies of cotton for the local spinning mills, which were reeling under huge financial distress and were not in a position to stock their requirement of cotton. How­ever, the government had to partially revoke its decision of banning cotton in a week’s time due to pressure from its own agriculture ministry, as also international markets since the coun­try was heading for another all-time high crop of 36.7 million bales. The total supply of cotton during the sea­son was as high as some 42 million bales, as against a domestic demand of about 25 million bales. In fact, the government had to completely remove the ban in May 2012.

For the 2011-12 season, India finally exported 12.9 million bales, which continues to be an all time high. Despite such a comfortable cot­ton supply scenario, the government’s ad hoc ban and restriction on exports created a real stressful situation for the domestic trade and industry. Case IV

For the current cotton season (2014-15), which ends on 30 Septem­ber 2015, CCI, at the behest of the government, carried out a major MSP operation by procuring 8.6 million bales. Now, it is facing the problem of liquidating the stock, as the demand has slowed down in the domestic as well as international market. China, which has been a major buyer of Indian cotton for over three years, has decided not to build up any more stock, as part of its new policy. At the end of August 2015, CCI has been able to sell about 5.8 million bales of cot­ton. With just a few weeks remaining in the current season, it looks impossi­ble that it will sell all of its remaining stock. In fact, the state-owned agency waited too long to devise its sales pol­icy and, hence, could only start the actual process in June this year.

The delay in disposing of the stock created a shortage-like condition in the market, where cotton arrivals moved slowly during the very end of the season. In fact, this caused a flare-up of the cotton prices for some time – that too, when the country is estimated to produce another all-time high crop size of about 39.8 million

bales. In fact, India is on the verge of challenging China for the numero mo position. States like Maharashtra, Andhra Pradesh, Telangana and Guja­rat, from where CCI procured large quantities under its MSP operations, now have to face acute shortage of cotton. The local mills in these states have been forced to buy cotton from distant places, incurring additional transportation and other costs.

Safeguarding interests

Moreover, initially, when CCI started sales through e-auctioning, cotton lots were too large for mills to buy. Only large MNCs could buy them. How­ever, subsequently, on the instruc­tion of textile ministry, the lots are now being offered in small sizes to facilitate purchases by the domestic industry which, in fact, desperately looked for cotton amidst weak arriv­als towards the very end of the sea­son. Now, since the new arrivals will also start becoming available, any attempt to dispose of its stock will only create a glut in the market. Due to this delayed disposal, the domes­tic cotton prices, which were ruling lower than the international prices at the beginning of the season, are cur­rently higher than those in the inter­national market. In another words, despite a bumper cotton crop, the domestic industry has had to pay higher prices than its competitors to buy cotton.

In all the above cases, the govern­ment has come in the way of mar­ket forces and created disruptions in the market. At the same time, India’s strong cotton production base could not help the domestic industry to take advantage of the situation. On the contrary, the industry has had to buy cotton at higher prices, with the result that it is finding it difficult to compete in the global market. Experts are of the view that it is high time the government reviewed the situation in the changed scenario and came up with a long-term policy framework, doing away with short-term ad hoc measures.

In the last decade, cotton pro­duction, as also productivity, has undergone a sea change, follow­ing the adoption of newer farming
technologies and Bt cotton, even as global cotton production has grown moderately. The domestic textile industry should be in a position to reap the benefits from this develop­ment. However, the government’s recent interventions have not allowed this benefit to reach the industry in the true sense. While, undoubtedly, there is a need to protect the inter­est of the large population of farmers involved in the cultivation of cotton; there is also a need to revamp the entire approach.

“We are not against safeguard­ing the interest of our farming

Cotton prices

44000                       (t per candy)





community,” says T. Rajkumar, chair­man, South India Mills Association (SIMA). But we have to quickly look for a mechanism that can do away with the anomalies in the present sys­tem too. Despite having such a strong cotton base, India has often been deprived of the benefits it deserves”.

“We need to formulate long-term policies,” concurs B.K. Patodia, man­aging director, GTN Textiles, one of the largest yarn exporters. “Often, the government moves come as a mere reaction to a particular scenario. In fact, they need to be more proactive”.

Prem Mallik, chairman, Confed­eration of Indian Textile Industry (CITI), the apex industry body, feels “It is high time that the government reviews the entire MSP operation afresh and passes on the support to farmers directly”.


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