The cotton fiasco

Cotton has been in the news, quite prominently, of course,for wrong reasons. According to the industry sources, there has been runawayincrease in cotton prices and the textile sector is on the verge of collapsebecause of the crisis it faces on account of steep rise in cotton prices, which shot up by 35% during the last one year, aggravated by disappearance of cottonfrom the market because of speculative operations of internationaltraders.  According to P.D. Patodia, Chairman of confederation of Indian TextileIndustry (CITI), "The textile and clothing industry is gong through aserious crisis because spiraling increase in cotton prices and unabatedincrease in prices of cotton, will be deleterious to the economy in general andthe textile sector in particular, which has already eroded its exportscompetitiveness on account of appreciating rupee.  The serious ofonslaughts being faced by the industry will cripple its growth and employmentgeneration potential."

Recently, CITI had organized a press meet to highlight theplight of Indian textile mills, in which I also participated. It was addressedby a number of functionaries as also office bearers of South India MillsAssociation. It was pointed out that some of the mills have already closed downwhile others are on their way to closure. It is understood that the steep risein cotton prices has brought 20 mills to closure in the last sixmonths.  These bills, which boasted of a capacity of 25,000 spindles and above,had more than 20,000 employees, who have been rendered jobless. These millsincluded Ashok Textiles, Chakola Spindles, Western India Cotton Mills, VanajaTextiles, Sri Bhagavathi Textiles, Rajgopal Textiles as well as MadrasSpinners.

Why have we reached the crisis level?

There are a number of factors at work. These are primarily the short availability of cotton, high interest cost, and above all, the unbridledcotton trading by international players.

Short Availability of Cotton

There is an apparent short availability of cotton in themarket today. It might generally be presumed that it is because of lower productivity levels of Indian cotton production or lower overall production of cotton in thecountry.  It is true that all-India per hectare yield is estimated at 553kg per hectare for 2007-09, which is a positive improvement over 520 kg perhectare in a year before. Yet it is much lower than the world average of 765 kgper hectare. In spite of our having the highest total area under cottoncultivation in the world, we are still number two in our total production.

However, in term of actual production of cotton, we are notthat badly placed. In fact, this year we expect a total crop of 31.5 millionbales (each of 170 kg each), which was only 24.4 million bales in 2005-06 and27 million bales in 2006-07. Of course, the industry needs some 27.8 millionbales, which should have been more than enough for the industry to meet itsrequirement.

But unfortunately, there has been an unrestricted export ofcotton, which according to the "estimates" of the Ministry ofTextiles, is of the order of about 6.5 million bales, but the trade bodies(again) "estimates" that the cotton exports this year would notaround 10 million bales. Thus out of the total production of 31.5 million balesof cotton, export of 10 million bales would leave us with only 21.5 millioncotton bales for the textile industry against our expected consumption of 27.8million bales. There is an apparent short availability of cotton.

High Prices of Cotton

There has been an unprecedented increase in the cotton prices in the country, which registered an increase of over 35 per cent during the last oneyear. This is going to seriously affect the operations and even production of textile mills, which, despite slow down in exports due to appreciating rupee,could export textiles worth $ 20 billion. But with the closure of mills andserious financial burden on the mills on account inflated purchase bills of thecotton, the textile exports are likely to be impacted. This point hasspecifically been made out by CITI to the concerned ministers of the Governmentof India, including Ministers of Textiles, Finance and Commerce. The price trend as reflected in their movement from January 2007 through June, 2008 has been set outhereunder:

Role of International Players

It is too well known that one of the prime reasons for the unexceptional rise in cotton prices is the entry of international merchants in cotton trading. They have hoarded large amounts of cotton and procuring from the farmers at low prices which has led to artificial shortage in the markets leading to huge profiteering by them. This has been made possible on account two reasons. First, they had access to cheap funds from international markets at LIBOR rates, which advantage the Indian mills or buyers do not have. This unrestricted purchase by international merchants were allowed to continue at the cost of availability of cotton to Indian mills, who had had to contract purchase of cotton, first, for not more than their 3 months requirements. Further, these mills were also restrained in their purchase of bulk quantities of cotton, for which finance was available to them at much higher rates of interest. As if all this is not enough, the margin money of 25% is required for working capital loans for cotton purchase by the mills.

Absence of Monitoring/Regulator Agency for Cotton Exports

It is very strange that the Government of India, in all its wisdom, has failed to envisage and realize the need of setting up a monitoring agency to oversee the level of cotton exports on which hinges the availability of cotton to Indian textile mills. If one were to ask the Government today as to what is level of actual exports of cotton or their country-wise details or what quantity and/or value worth of export contracts have been signed or committed, it will be difficult for the Government to give any figures, not to speak of official, authoritative figures. At best, the Government can possibly give out some "estimates".  Only if such an agency were to exist which could assess the cotton needs of Indian textile industry periodically and permit export of cotton only to the extent of exportable surplus available and with whom all cotton export contracts were to be registered, there would not been any need for a crisis like the present one to come up.

It also needs to be noted that cotton being purchased for exports is of the finer qualities, leaving inferior quality of cotton for Indian mills.

Ban Export of Cotton

There is an immediate need to ban export till 31 December, 2008. It is well known that farmers do not have any cotton with them any more and the only beneficiaries are foreign buyers, who have been buying cotton, hoarding to sell them at exorbitant prices to Indian mills and /or exporting. It is felt that ban or suspension of exports would flush out the cotton that the traders are currently hoarding.

There has been an element of forward trading in cotton, financed by international buyers, who have been contracting the buy the crop at the field level itself. These buyers buy the cotton at cheap rates; hoard it and sell it later at higher costs, with the result that the farmers do not get the advantage of higher prices.

What is particularly resented by the trade is that the export of cotton is being directed towards China, Pakistan and Bangladesh, which are our serious competitors in the matter of textile exports. Patodia says, "It is not prudent to export cotton to competing countries like China and Pakistan."

Patodia ruefully comments, "The anomaly is that even at higher prices, textile mills are not able to get cotton in the required quantity, which will force them to cut back the production", adding that any production loss in the textile sector will have serious impact on employment generation in the country.

Government Scraps Import Duty; Incentives on Export of Cotton

Not before a vociferous protest by the industry and the announcement by 3,000 yarn mills to go on strike, pressing for their demand to abolish customs duty on cotton imports and regulation of exports, the Government has now scrapped import duty on cotton and withdrew the export incentives under the duty entitlement passbook scheme.

What needs to be done?

The Stitch Times fully endorses and recommends that the suggestions made by CITI in the course of their recent meetings with the all the concerned union ministers and the Prime Minister, which are, inter alia,

1)    A mechanism may be evolved for assessing the cotton needs of Indian textile industry periodically and permit export of cotton only to the extent of exportable surplus available. The assessment can be done by Governments Cotton Advisory Board, on a quarterly basis, and quantities may be released for exports for each quarter on the basis of this assessment.

2)    A stipulation may be introduced for registration of contracts for exports and imports of cotton with the Textile Commissioner of the Government of India, within a period of 15 days from the finalization of such contracts.  This will help Government to monitor the trends in cotton trade and take necessary steps to regulate the trade, whenever felt necessary.

3)    The margin money of 25% applicable for working capital loans for cotton purchases may be reduced to 10%, as a temporary measure for one year.

4)    As an emergency measure, export of cotton may be suspended immediately for the period up to 31 December, 2008 by which the new crop would arrive and the situation can be reviewed.

5)    Additional fund allocation of Rs. 2,000 crore under Technology Upgradation Fund Scheme for the current year may be made to meet the current backlog of nearly one year in disbursement of TUFS assistance.

Long Live the Government, which has blissfully ignored the crying need for ensuring adequate availability of cotton to textile mills at reasonable prices; allowing unbridled, unregulated export of cotton cheaper rates to our competing economies by international buyers by starving Indian textile mills of their basic raw material; turning a deaf ear and a Nelson eye to the cries of the industry, which has partially closed with imminent more closures due to shortage and high prices of cotton; and then grudgingly agreeing to scrap incentives for cotton exports as also import duty on cotton -and yet not creating any agency to assess the cotton needs of Indian textile industry and regulate cotton exports -and above not banning or suspending export of cotton, even if our own mills are closing down.

About the Author:

The author is associated with The Stitch Times, New Delhi.