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G. Chandrashekhar

Mumbai, June 10 Last year, the Centre fixed minimum support price (MSP) for cotton at an unrealistic level unrelated to global market conditions.

This arbitrary action was perceived as a political decision clearly intended to woe cotton growers across the country as general elections were nearing then.

A sharp hike in MSP did not result in an increase in cotton output. If anything, output declined to about 285 lakh bales in 2008-09 as compared with nearly 310 lakh bales in 2007-08. There were several other hardships.

There was havoc in the market. Supplies were disrupted. While growers waited for MSP, buyers could not afford the high rate because of poor market conditions.

Cotton exports which are an excellent market-driven cost-effective way to support growers have taken a plunge. From a level of around 80 lakh bales in 2007-08 that propelled India into the second rank among world’s exporters, shipments in 2008-09 are estimated to have plunged to far less than half.

While exporters were unhappy, cotton textile mills have been complaining about high domestic prices of raw material that render textile exports uncompetitive. Cotton constitutes a significant part of production cost for mills. A slowdown in global economic activity also resulted in a slowdown in textile exports and loss of export earnings.

Clearly, the mills are still upset with the policy of pitching the MSP at unrealistic levels.

To ensure export competitiveness, raw material should be made accessible at international market prices. It makes little sense for the country to import cotton when there already is a large production base.

Therefore, the argument that cotton imports are duty-free is fallacious.

A sharp hike in MSP for cotton resulted in slowdown in offtake which forced the government parastatal, Cotton Corporation of India (CCI), to step in and procure the produce as much as was offered to it. The CCI no doubt did a commendable job and acquitted itself well.

But look at the enormous costs associated with such an operation. High price paid to farmers (MSP), high operational cost of procurement, high carrying costs (storage, movement, interest) and finally, loss incurred in sale at lower prices as part of inventory liquidation have added to a huge amount.

A conservative estimate of losses on government account in last season’s cotton price support operations is over Rs 1,000 crore. This is a huge amount of subsidy that the economy has to absorb.

This newspaper has consistently maintained that under Indian conditions of agriculture, supply response to prices is rather limited. The ability of the growers to respond to prices is limited because of several factors that overpower him. This is not to suggest that farmers should not be assured of remunerative prices. Indeed, real support to farmers will have to come in the form of assistance in input sourcing, water management, agronomic practice and rural infrastructure.

We need to build capacity among growers to be able to withstand global competition. However, without addressing any of the structural and intrinsically important issues, the government seems to be satisfied with merely hiking MSP, divorced from market realities.

It would be dangerous to keep the growers in an artificial world of price security. Such price security may not last long. The recommendations of the Commission of Agricultural Costs and Prices are not binding on the government. The government’s discretion to bypass CACP recommendation should be challenged; or at least, the decision making process must be open to scrutiny.

With the onset of southwest monsoon, kharif season planting would start anytime soon. It is absolutely essential that the government fixes the MSP for various crops at a realistic level. Global and domestic market price outlook must also be considered while fixing MSP. However, New Delhi’s research and commercial intelligence capabilities are suspect. Considering international conditions, domestic cotton prices are high. These high prices are hurting textile mills and export opportunities. There is nothing to suggest all growers have really benefited from high MSP. The cotton trade has demanded that MSP should be fixed on a ’cost plus’ basis. There may actually be a case for reduction of MSP; but no government would have the guts to antagonise the farm lobby. A freeze on MSP may be in order.

More Stories on : Cotton | Commodity Commentary | Commodity Markets

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