The Hindu Business Line : Cotton export ceiling may hurt farmers

Mumbai, July 9 The Government deserves to be complimented on its resolve not to ban export of cotton, despite tremendous pressure from the textiles lobby. News has just come in that customs duty of 10 per cent on cotton imports has been withdrawn and the incentive granted on export has also been withdrawn.

This is just as well. Textile mills are now free to source their raw material requirement from any part of the world. Similarly, exporters can continue their business, but must reckon with withdrawal of incentive. In other words, both exports and imports are free without any fiscal prop.

However, given the current tightness in global supplies, high international prices and considerably weaker rupee, it is not going to be a cakewalk for the mills to arrange for imports quickly. The one big advantage in import could be that Indian buyers may be able to obtain three to six months credit from origins such as the US.

Out of the three demands the industry made, New Delhi has rejected one (ban on export), and rightly so, and conceded one (withdrawal of customs duty). But this is not the end of the story. The industry has demanded a cap on cotton exports probably from the beginning of 2008-09 season. It has argued that unlimited exports propel cotton prices higher in the domestic market threatening the industry’s competitiveness. While this may be true (but exaggerated in some sense), it is clearly a sectoral view and does not coalesce with the complex nature of the entire cotton sector.

Textile mills are no doubt one of the stakeholders and an integral part of the cotton value chain. But there are others too, equally important and a lot more vulnerable to changes in production and incomes, than the mills. You have the primary producer (the cotton grower), ginning and pressing factories, producers of intermediary products, domestic traders and exporters.

Ceiling on Exports

Of these, cotton grower at the back-end is the most critical participant and at the same time, most vulnerable. Nothing shall be done to compromise the ability of the grower to produce more and to market the produce as per his choice. Policymakers in the various ministries in New Delhi and elsewhere should look at the bigger picture. Reports from the capital suggest the Government is in the process of examining a proposal to place a quantitative ceiling on cotton exports from the next season. A ceiling or any kind of restriction would be the most undesirable and would go against the interest of farmers.

Without an iota of doubt, the benefit of rising domestic prices has flowed to cotton growers, at least in part, if not in full. It is likely traders and intermediaries who had taken a smart trading call may also have benefited. Nothing prevented the textile mills from taking smart trading positions. If traders can do it, why not mills. Unfortunately, the mills had all these years got used to cushy supplies, either from domestic sources or through imports. With market conditions – global and domestic – changing, the mills suddenly find themselves exposed to volatile conditions.

Absence of a smart trading instinct adds to their woes. The call for a cap on cotton exports deserves to be rejected. Farmers should have the liberty to sell to anyone who pays the highest price. If exporters, and not mills, are in a position to pay a remunerative price, why should cotton growers not sell to the former? If mills are able to match the price exporters are willing pay, there is no reason why they will not be able to source enough raw material locally.

A ceiling on cotton exports is sure to affect the marketability of the crop and hurt the interest of farmers. Also, if history is any guide, monitoring and operating a quota system is sure to generate its own problems and market distortions. It may also create opportunities for undesirable practices including cornering of quotas by a select few. As cotton imports are currently free, so should exports be.

After several years of oppression, marketing restrictions, and low prices, cotton growers have begun to receive remunerative returns in the last 2-3 years. Global market conditions have also turned favourable for cotton exports. Indian cotton is now beginning to make a mark in the international arena. The gains should not be squandered by imposing quantitative restrictions at the behest of the cotton textile industry.

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