Mumbai: The domestic cotton textiles industry has in recent weeks intensified its efforts to get cotton exports banned. From its own perspective, the industry may be justified in demanding a prohibition on exports as internal prices have risen to levels uneconomic for the industry.
The mills have also sought duty-free import of cotton from abroad. Currently, there is a 10 per cent customs duty. The Ministry of Textiles is reportedly in the process of examining a ban on exports and allowing duty-free imports. The intention is to bring down high domestic prices of cotton.
Word is also being spread that middlemen or traders have been hoarding cotton and benefiting from rising prices. What should the government do? First, it should not be swayed by lobby pressure. There are several dimensions to the issue of high cotton prices and there are several stakeholders in the cotton sector; and each one deserves a good deal.
Rising output
Admittedly, in the current season (2007-08), out of the estimated production of nearly 315 lakh bales (of 170 kilograms each), as much as 80 lakh bales or close to a quarter have been shipped out. This is unprecedented in the history, albeit recent history, of Indian cotton.
Rising domestic output and attractive global prices have ensured such an extra-ordinary performance. Cotton growers have been the direct beneficiaries of this level of exports and the consequent rise in domestic prices.
Unlike many field crops, cotton pickings are spread over a few months in different regions of the country. Arrivals usually peak during December-January months; that is the time prices are the lowest. Indeed, given the level of production, purchases by exporters have ensured that there was no collapse in market rates. Transmission of price signals also allows growers in different regions to plan their marketing and obtain remunerative prices.
One of the major reasons for sustained increase in the country’s cotton production in last 3-4 years is the positive price signal that growers have been able to obtain. Exports have also helped establish Indian cotton in the global marketplace.
There is, of course, scope for improving upon the export performance in terms of price and quality. But that is a different exercise altogether, not connected with the demand for a ban on export itself.
Two issues
Is a ban on cotton export justified? There are two issues to be considered. First is that the cotton picking season has come to an end and almost 90 per cent of the crop has been marketed. At this point of time, a prohibition on export will not affect growers significantly.
However, a ban will surely send unwarranted negative signals to the world market about India’s unsteady trade policy. Already the country has attracted flak for banning export of commodities like rice. Also, a negative trade policy (ban on export) and consequent price impact may discourage some growers from planting cotton.
Until about three months ago, the domestic textile industry complained about the adverse effects of a firming rupee on textile exports. Now that the rupee value has eroded by as much as 10 per cent, it seems to be whipping up the issue of high cotton prices.
A ban on export may have a very limited impact on the domestic market. Most of the export shipments have already been effected. The volume of pending commitments is reported to be small. As the rupee has appreciated and the rupee realisation of exports would be higher, instead of an export ban, imposition of a modest export duty may be considered.
As for duty-free imports demanded by the industry, this has been a long pending one. There is no merit in this because, for export production, duty-free imports of raw material are already allowed. Textile mills are at liberty to import cotton at zero-duty for producing textile products for the export market.
Lessons from traders
Another objection relates to hoarding by middlemen. Middlemen or traders have been able to read the market correctly, well in advance, and have purchased cotton for subsequent sale to mills or exporters. If traders have a positive price outlook and are able to take savvy trading positions by buying low at the time of harvest, why should mills not follow?
There may be something wrong with the commercial intelligence capability of the mills. Nothing prevents the textile mills from procuring their raw material requirement at the time of harvest or heavy arrivals during the peak marketing season.
Mills should build capacity to compete with traders in the marketplace. For the domestic cotton textile mills a great opportunity is emerging for establishing backward linkages. If they want to have captive raw material sourcing, contract farming is the only way forward. The industry has a lot of homework to do instead of lobbying the government for negative trade policies.
The mills have also sought duty-free import of cotton from abroad. Currently, there is a 10 per cent customs duty. The Ministry of Textiles is reportedly in the process of examining a ban on exports and allowing duty-free imports. The intention is to bring down high domestic prices of cotton.
Word is also being spread that middlemen or traders have been hoarding cotton and benefiting from rising prices. What should the government do? First, it should not be swayed by lobby pressure. There are several dimensions to the issue of high cotton prices and there are several stakeholders in the cotton sector; and each one deserves a good deal.
Rising output
Admittedly, in the current season (2007-08), out of the estimated production of nearly 315 lakh bales (of 170 kilograms each), as much as 80 lakh bales or close to a quarter have been shipped out. This is unprecedented in the history, albeit recent history, of Indian cotton.
Rising domestic output and attractive global prices have ensured such an extra-ordinary performance. Cotton growers have been the direct beneficiaries of this level of exports and the consequent rise in domestic prices.
Unlike many field crops, cotton pickings are spread over a few months in different regions of the country. Arrivals usually peak during December-January months; that is the time prices are the lowest. Indeed, given the level of production, purchases by exporters have ensured that there was no collapse in market rates. Transmission of price signals also allows growers in different regions to plan their marketing and obtain remunerative prices.
One of the major reasons for sustained increase in the country’s cotton production in last 3-4 years is the positive price signal that growers have been able to obtain. Exports have also helped establish Indian cotton in the global marketplace.
There is, of course, scope for improving upon the export performance in terms of price and quality. But that is a different exercise altogether, not connected with the demand for a ban on export itself.
Two issues
Is a ban on cotton export justified? There are two issues to be considered. First is that the cotton picking season has come to an end and almost 90 per cent of the crop has been marketed. At this point of time, a prohibition on export will not affect growers significantly.
However, a ban will surely send unwarranted negative signals to the world market about India’s unsteady trade policy. Already the country has attracted flak for banning export of commodities like rice. Also, a negative trade policy (ban on export) and consequent price impact may discourage some growers from planting cotton.
Until about three months ago, the domestic textile industry complained about the adverse effects of a firming rupee on textile exports. Now that the rupee value has eroded by as much as 10 per cent, it seems to be whipping up the issue of high cotton prices.
A ban on export may have a very limited impact on the domestic market. Most of the export shipments have already been effected. The volume of pending commitments is reported to be small. As the rupee has appreciated and the rupee realisation of exports would be higher, instead of an export ban, imposition of a modest export duty may be considered.
As for duty-free imports demanded by the industry, this has been a long pending one. There is no merit in this because, for export production, duty-free imports of raw material are already allowed. Textile mills are at liberty to import cotton at zero-duty for producing textile products for the export market.
Lessons from traders
Another objection relates to hoarding by middlemen. Middlemen or traders have been able to read the market correctly, well in advance, and have purchased cotton for subsequent sale to mills or exporters. If traders have a positive price outlook and are able to take savvy trading positions by buying low at the time of harvest, why should mills not follow?
There may be something wrong with the commercial intelligence capability of the mills. Nothing prevents the textile mills from procuring their raw material requirement at the time of harvest or heavy arrivals during the peak marketing season.
Mills should build capacity to compete with traders in the marketplace. For the domestic cotton textile mills a great opportunity is emerging for establishing backward linkages. If they want to have captive raw material sourcing, contract farming is the only way forward. The industry has a lot of homework to do instead of lobbying the government for negative trade policies.
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