Demand for lower cotton prices is not justified

Cotton farmers have been hit by the double whammy of rising costs and unremunerative prices | Photo Credit: RAO GN

The recent rise in the price of cotton yarn seems to have hit the textile manufacturers hard, so, a large section of participants involved in value chain products of cotton has called on the government to take measures to arrest the price rise.

While demanding higher taxes on cotton exports, they have demanded scrapping of the 11 per cent import duty and halt of cotton from the futures trade to stabilise the price.

But are these demands justified ? Will lowering the price of yarn not affect the 58 lakh farmers who have been cultivating cotton on about 134 lakh hectares with various hardships? Do the farmers reap any profit from cotton cultivation?

Cotton cultivation

Cotton has been cultivated as an important commercial crop in India for many centuries now. The area under cotton increased from 76 lakh hectares (lha) in 1960-61 to about 134 lha in 2019-20. Although the crop is grown in various States, — Maharashtra, Gujarat and Telangana account for about 70 per cent of India's total area in 2019-20. But, the area under cotton declined sharply from 3.96 lha to 1.69 lha during the same period in Tamil Nadu, where a large section of textile companies is demanding a reduction in yarn price.

Although India is the world's largest cultivator of cotton with an area of 37 per cent, its yield per hectare is one of the lowest. The yield of cotton increased from 152 kg/ha in 1980-81 to only 190 kg/ha in 2000-01. So India's share in global cotton production was low till the early part of 2000s.

But, this scenario completely changed after the introduction of Bt cotton in 2002. While the area under cotton has increased significantly from 77 lha in 2002-03 to about 134 lha in 2019-20, its production increased from 86 lakh bales (one bale is 170 kg) to 352 lakh bales during the same period.

Today, India is the world's largest producer of cotton. But has this revolution benefitted farmers is the question one needs to answer in the context of demanding a reduction in yarn price?

Cotton economics

Cotton crop cultivation is a complex exercise. Cotton growers face various hardships. First, since cotton is predominantly cultivated (about 70 per cent) under rainfed area, its yield is very low and risk is very high. Second, due to the high risk of bollworm and other pests attack, the cost incurred on account of pesticides is relatively large.

Third, cotton-picking is done using manual labour and therefore, the harvesting cost of cotton is also very high. In view of this, the total cost of cotton cultivation is very high and has been rising rapidly in recent years.

As per the data of the Commission for Agricultural Costs and Prices (CACP), in Maharashtra, which accounts for about one-third of India's total cotton cultivation area, the per hectare cultivation cost (c2) in current prices increased from ₹14,234 in 2000-01 to ₹84,743 in 2018-19.

During this period, the same cost increased from ₹10,691 to ₹75,186 in Gujarat and from ₹28,149 to ₹1,13,334 in Tamil Nadu, where the issue of yarn price has been particularly resonant. During the 2000-01 to 2018-19 period, the cost of cultivation in these three States increased 4 to 7 times.

Along with the cost of cultivation, the value of production (VOP) of cotton per hectare has also increased from 2000-01 to 2018-19.

It has increased from ₹12,148 to ₹85,937 in Maharashtra, from ₹8,696 to ₹83,209 in Gujarat and in Tamil Nadu, from ₹20,992 to ₹98,966.

Despite a significant increase in VOP, farmers have suffered huge losses over time because the cost has increased at a relatively faster pace than that of VOP (Figure 1). For example, during the 2000-01 to 2018-19 period, Maharashtra’s farmers have incurred losses for 11 years and Tamil Nadu’s farmers for 12 years.

Most farmers who committed suicide from 2000 to 2015 in Maharashtra weretraditional cotton growers. Ironically not even a single mill owner involved in the value addition of cotton came forward to help the farmers at that time.

With the ever-increasing cultivation costs and absence of remunerative prices for cotton, farmers are forced to incur losses. Though the government has been increasing the minimum support price (MSP) for cotton, farmers are forced to sell cotton to private traders at a price less than its MSP due to low State procurement. Evidence from the CACP reports shows that market prices of cotton stayed below the MSP from January 2019 to January 2021 for which data was available.

Further, during the kharif season, from October 2020 to February 2021, market prices remained above the MSP for just 86 days out of the total 119 market days in Maharashtra and just 32 days out of 140 days in Gujarat. All these clearly reinforce the fact that cotton farmers have faced tremendous hardships.

Are the demands justified?

After a long time, the price of cotton has started moving up allowing farmers to reap some profit from its cultivation. Therefore, the demands of 11 per cent import duty on cotton and a higher tax to restrict cotton exports are not justified.

Similarly, futures trade in cotton has been in existence for many years now. But the textile manufacturers now have vociferously demanded its halt. It is a misnomer that the price of cotton increases due to futures contract because India's share in the total global cotton futures trade was just 0.27 per cent in 2021.

Cotton price started rising recently as the textile production, which was paralysed during the lockdown , has resumed at a rapid pace around the world, increasing the demand for yarn. This is purely a demand-supply mismatch, which is a reflection of the market economy.

Due to the continuous rise in the cost of cultivation and repeated losses, the area under cotton in Tamil Nadu alone declined by about 2.27 lha between 1960-61 and 2019-20. If remunerative prices for cotton are not provided, its production may decline in future which may force the textile manufacturers to import cotton at a higher price.

That will have a deleterious impact on the textile industry. The constant demand for lower agriculture commodity prices also affect the welfare of farmers.

The writer is Senior Professor and Head, Department of Economics and Rural Development, Alagappa University, Karaikudi (TN)

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