G. Chandrashekhar

Mumbai, April 24

The Government is known to do the most rational thing, but only after exploring other possibilities – so goes a popular comment about official decision-making. But it seems the Government does not want to be stereotyped; and is, therefore, keen to do things differently.

For a change, New Delhi has tinkered with a well-settled and rational Exim Policy for cotton that sought to balance the interests of all stakeholders including growers, spinners, textile mills and exporters.

Exports were first taxed with burdensome Customs Duty and, more recently, there is a virtual ban on exports in the form of suspension of export contract registration. The ill-advised and ill-timed changes the Government has introduced in the export trade and tariff policy for cotton heightens the risk of policy failure and the erosion of welfare gains of recent seasons.

Admittedly, the cotton textile industry is an integral and important component of the cotton value chain as it generates incomes, employment, value addition and export earnings. The industry operates in a largely free-market environment with no trade or tariff restrictions; if anything, there are incentives.

To be sure, access to raw material is unrestricted; cotton imports are free.

The industry has now demanded creation of buffer stocks of cotton aimed at what it calls cotton security akin to buffer stocks of foodgrains (rice and wheat) with Food Corporation of India for food security.

None can fault the industry that seeks to ensure uninterrupted access to raw material by creating buffer stocks. The question simply is: who should do it. The mills want Cotton Corporation of India, a Government parastatal, to carry at least 50 lakh bales of cotton by the end of the season (September) as closing stock.

But why should the onus of creating and carrying buffer stocks be on the Government? Why should the industry seek to be at the mercy of CCI?

Nothing prevents the industry from securing its interests by creating buffer stocks all of its own. Indeed, such a step would not only be progressive but also in the industry's best self-interest. Such inventory can be created either from domestic sources or through imports (free, in any case).

The comparison of FCI with CCI is odious because there is a major difference between foodgrain buffer stocks with FCI and proposed cotton buffer stocks with CCI. Supply of foodgrains to the poor at subsidised rates under the public distribution system is a sovereign function of the Government. The same cannot be said of cotton supplies to textile mills. It is no part of Government's sovereign duty to supply raw material to a processing industry.

Given its size, reach and clout, in addition to business interests, the textile industry has tremendous moral and social responsibility to ensure that interests (often conflicting) of stakeholders are harmoniously reconciled.

Most important, policymakers have to take a holistic and long-term view of the effects (often adverse) of policy changes, especially made mid-course or mid-season. It would be imprudent to impose trade and tariff controls unless there is an emergency; and as far as cotton is concerned, there is simply no emergency at the moment; it is just that mills are aggrieved with high open market prices.

Be that as it may, in the interest of credibility, it is critical that New Delhi takes a clear call about what it intends to do in the ensuing season.

Let it fix well in advance, indeed now, that is before commencement of planting, a well-defined Exim Policy for cotton so that stakeholders are not forced to struggle with wholly unanticipated policy changes.

(This article was published in the Business Line print edition dated April 25, 2010)
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