Deaf to reason

| Updated on March 12, 2018 Published on April 11, 2012

In the long run, export bans only end up discouraging producers from increasing supplies.

The producer is the consumer's best friend. This is a maxim that governments somehow tend to ignore while taking extremely short-sighted decisions. The ban on issuing fresh registrations for cotton exports and allowing traders only to fulfil pending contracts falls precisely in this category. It sends out bad signals to growers ahead of the new planting season, which begins in less than a month's time in North-West India and takes off elsewhere with the arrival of the monsoon after mid-June. Prices of kapas (seed-cotton) are, as it is, ruling about 40 per cent lower over last year. The latest Group of Ministers' decision not to grant fresh export registrations — which follows last month's move to stop shipments altogether that was partially revoked after all-round protests — would probably induce even dithering cultivators to opt for more remunerative alternatives such as groundnut, soyabean and arhar. That will, in turn, impact the size of the next crop, with the ultimate sufferer being the consumers — namely, the mills and downstream yarn users — themselves.

The arguments trotted out in favour of the curbs imposed on cotton exports are, at best, mechanistic. The current season's crop, although reckoned at an all-time-high of 34.5 million bales (mb), is seen to be able to sustain an exportable ‘surplus' of not more than 8.4 mb. As against this, shipments have already crossed 10 mb and would touch 12 mb once the pending contracts also get executed. Permitting further registrations under these circumstances might then exacerbate a possible domestic shortfall. These calculations, however, have no meaning in today's scenario, where there is little demand for fibre from a recession-hit textile industry that is unable to service bank loans and also struggling against frequent power cuts. The best proof of this is prices: If exports were indeed causing domestic shortages, kapas wouldn't be trading 40 per cent below last year's levels at this time. Exports, if anything, have helped prevent prices from plunging to levels triggering farmers' suicides. That may not happen now, even with the latest restrictions. But one can still expect a growers' rebellion in the form of area diversion to other crops.

All this only reinforces a larger point about measures of containing inflation or ensuring sufficient domestic availability of essential commodities that mainly address the ‘demand' side. While higher interest rates or export bans may help restrain overall demand, such policies are counterproductive if they end up discouraging producers from increasing supplies. The current policy on cotton exports — or even on sugar, rice and many such agro products — exemplifies such demand-centred short-term vision. It is always better for the Government to stop playing God and allow producers to respond to normal market signals. There is no need for it to intervene at all, save in situations of extreme price volatility stemming from speculative market behaviour. One sees no evidence of that now.

Published on April 11, 2012
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