The Hindu Business Line : Knotty cotton

The inflated MSP for cotton has landed the Government in a spot. Reduction of MSP is not politically feasible and the Government may be forced to bear a humungous subsidy.

The minimum support price (MSP) for cotton for the ongoing kharif season has become contentious, threatening to disrupt normal marketing activity. The Government finds itself in an awkward position, having to reconcile the conflicting interests of growers and user industries, but it cannot escape culpability for its contribution to the present mess, which may eventually hurt the two major stakeholders. As late as September, when the cotton crop was maturing, the Government announced the MSP with a steep hike of 39 to 48 percent from the previous year. New Delhi may claim it did so in the farmers’ interest but the political angle in the context of impending elections cannot escape attention.

By the time, the MSP decision was announced, the financial markets were already in turmoil and the global commodity markets, including agricultural products such as cotton, had begun their free fall. The policymakers did not factor this nor did they heed the protests of industry and trade associations that highlighted how the higher MSP was out of sync with changed market conditions. Now we are in a situation where a bumper crop (over 300 lakh bales) is staring us in the face but mandi arrivals have slowed down because of growers’ price expectation, while ginners are reluctant to purchase because of price disparity. Clearly, the high MSP has rendered the produce uncompetitive. Many mills are buying just hand-to-mouth while some are looking at the possibility of importing low priced cotton from abroad. Recessionary conditions in the West have put paid to any hopes of sizeable exports. Even a considerably weakened rupee has not helped. The Cotton Corporation of India (CCI) is doing a reasonably good job of procuring at MSP; but it is likely to soon reach its limits in terms of logistics and finance. A huge amount of carrying cost will be incurred and eventually the CCI will have to find a market, whether domestic or overseas at a considerable loss.

The Government is truly in a quandary because the inflated MSP is unrelated to the market price. Reduction of MSP at this point in time is, of course, politically unthinkable and can be ruled out for all intents and purposes. The way out could be for CCI to begin to sell to ginners and others at a pre-determined price below the MSP. This is sure to involve a humungous amount of subsidy. There is, of course, the possibility of global cotton market conditions improving some time in the first quarter of 2009 but for our cotton sector it could be too late.

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