Cotton export quota allocation leads to chaos

G. Chandrashekhar Mumbai | Updated on January 28, 2011

The country's cotton exports have got into a bigger mess and its ongoing attempts to present itself to the world market as a reliable supplier of quality cotton is at serious risk of failure, thanks to the unimaginative manner in which export quotas have been administered in recent weeks.

After a section of the trade and industry raised a hue and cry (seen by a discerning few as exaggerated noise) over allocation of quotas by the Office of the Textile Commissioner in October-November, the Government was forced to transfer the responsibility of quota allocation to the Director-General of Foreign Trade (DGFT). The decision is now proving to be a major embarrassment.

Cotton exporters are now more upset than before over the manner in which the ceiling has been administered and quotas allocated.

Against a meagre ceiling of 19 lakh bales (representing unshipped quantity from the previous allocation by the Textile Commissioner), it now transpires that the DGFT has received as many as 928 applications covering a total quantity of 300 million bales.

Shockingly, over 700 applicants applied for a mere 500 bales. As many as 20 applicants were allotted 99,000 bales and it is reported that only five applicants have any track record in cotton export.

A flourishing trade in export quotas has resulted. Large exporters, including multinational corporations, are reportedly buying up all the quota allotment letters at a premium from most of the small-time allottees. It now turns out that a substantial part of the over 900 applications were clearly speculative in nature and most of the applicants did not have any serious intention of being in the cotton export business.

Worse, the DGFT system of seeking applications based on ‘expression of interest or intent to export' has actually whipped up an unwanted frenzy in the cotton market with a mad scramble for quotas as a result of which cotton prices have risen even further.

Those who have managed to corner large stocks are, of course, benefiting from the price escalation.

The DGFT's administration of the cotton export quota and the resultant mess in the marketplace raises uncomfortable questions. “It is more like a grand clearance sale of Indian cotton at discounted rates rather than genuine cotton promotion,” was the wry comment of a veteran exporter.

Worse, there are allegations of invoice manipulation. Compared with world market prices of 170-175 cents a pound, a significant part of India's cotton export sales have taken place at much lower prices of 145-150 cents a pound.

The huge discount has raised suspicions about the correctness of export pricing. Some traders are now demanding a thorough investigation into the possibility of invoice manipulation.

“Export sale at below market prices is sure to dilute Indian cotton's brand equity in the global marketplace,” remarked a trading house executive. Obviously, something is fundamentally wrong with the way in which the quota system has been administered.

Meanwhile, cotton export quota holders are set to reap huge profits. Despite the fact that export prices are lower than world market prices, there is still a good amount of profit to be made. Currently, prices range around Rs 50,000-55,000 a candy.

While cotton growers have received fairly remunerative prices this season, they may not have reaped the full benefits of the price rise. The average realisation of cotton growers is estimated at Rs 40,000-42,000.

Published on January 28, 2011

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