Warped policy on cotton textiles

Ever since India became a serious exporter of cotton four years ago, the trouble began for both the farmers and the textile industry. MNC commodity traders set up shop in India and large trading companies of Indian ownership, with the financial muscle to take on the MNCs, have also emerged. These trading companies have been wielding a huge influence on government policies and have gained enormously, at the cost of both farmers and the industry. The textile sector uses two types of fibres — cotton (natural) and polyester, viscose and acrylic (manufactured fibres).

Import of cotton is duty-free. All manufactured fibres (produced by hugely profitable monopoly producers), which are used to make products for the poor and less affluent, are subject to customs duty and anti-dumping duties, even when the principal raw material — crude and pulp — are allowed to be imported duty-free.

All manufactured fibres cost the Indian users at least 15-20 per cent more than international prices, though garments made from them are allowed to be imported duty-free from least developed countries (LDCs) and SAARC nations.

At normal times, when no export incentives are given to exports, the cost of cotton is, at best, on a par with international prices for Indian users.

Allowing the poor man's fibre, produced by the monopoly of hugely profitable producers, to remain at 20 per cent higher than international prices, and controlling the remaining 50 per cent of the raw material, which is usually available at less-than-international prices, with the view of helping Indian textile mills, sounds strange, to say the least.

We have had two bans or restrictions in the last two years, disconnecting Indian farmers' prices from global prices. These restrictions have certainly affected the farmers' potential profits.

On two occasions in the last four years, incentives have been given to cotton exporters, and even today, duty drawback is given to cotton exporters, despite zero import duty in the process of growing and ginning cotton.

Price manipulation

During 2008, after the global meltdown, when all commodity prices crashed, cotton too crashed. The prices in the international market ruled below the support prices for cotton announced by the government.

The Cotton Corporation of India (CCI), the support price operator, was called in to buy cotton from the farmers, and it picked up most of the output. After all the cotton was sold by the farmers, the government came out with a policy to pay 5 per cent incentives to cotton exporters.

CCI, a government-controlled company, gave a 10 per cent discount to exporters and very large mill buyers and, after selling huge quantities to exporters, increased the prices by more than 5 per cent for the smaller domestic mills.

This helped the exporters make huge profits, as they were able to sell the cotton 10 per cent cheaper to the Chinese mills.

A handful of exporters got more than Rs 1,800 crore in gifts from the government and government-controlled CCI, all in the name of helping the farmer who got nothing more than the support price.

The Indian textile industry lost more than Rs 1,500 crore as a result of giving up its export market to China, which benefited from having imported cheaper Indian cotton.

More recently, there was a cotton famine, as farmers refused to grow cotton in 2009 at prices that ruled in 2008, after the commodity price crash. The year 2010 too did not see cotton production exceeding consumption because of the adverse climate globally, and prices were rising internationally.

Favouring the traders

Exports of cotton from India were brisk, and traders made contracts even before the crop moved, anticipating a huge price increase as the season progressed.

Once the figure reached 55 lakh bales, India banned export of cotton. The global shortage worsened, and prices doubled.

The 1.5 per cent given to exports as part of the Duty Entitlement Pass Book (DEPB) scheme, was suspended, as exporters were making a huge profit on their sales.

Even after the DEPB was withdrawn, trade was very brisk. After all the exports were completed, the traders ‘managed' to get from the DEPB given to them for the past 18 months, a gift of nearly Rs 500 crore.

The textile industry, which was tricked into supporting the cotton ban in 2010, soon faced a yarn export ban — a logical extension of the theory that value-added exports are more important than raw material exports — and the three months of ban caused a stock accumulation of more than 500 million kilos of yarn that drove prices to 60 per cent levels, and with it, cotton prices to less than 50 per cent of peak prices. The industry lost more than $4 billion, and more importantly, several markets.

A 35 per cent increase in prices at the retail level for the bottom-of-the-pyramid textile products caused huge demand destruction. The store groups are yet to fully roll back prices and record increased sales in terms of volumes.

The current ban, which lasted for a few days, was done in spite of the textile industry recording, in writing, that it wants no restrictions to ‘free trade' in any textile product.

The international community has surplus cotton; worse, India will have no domestic cotton, and mills will have to import cotton at international prices.

Remove all duties

With 72 per cent power disruption in the State of Tamil Nadu that consumes 50 per cent of cotton and 45 per cent power disruption in Andhra Pradesh — the next biggest consumer of cotton — mills in both States are starved of working capital, thanks to the yarn export ban misadventure of the previous year, with cotton prices ruling close to support prices, and the global community having sufficient cotton. The ban was certainly uncalled for.

If the Ministry is really serious about protecting the industry's interests, it should immediately recommend the removal of all duties and anti-dumping duties on both man-made and synthetic fibres and intermediaries.

The country has placed all garments under zero duty when imported from LDC/SAARC countries, and keeping raw materials stiffly protected is the first anomaly it needs to address, certainly not reducing the potential income of farmers while providing cotton at less-than-international prices to power-starved textile mills. The textile industry, after initially opposing the ban, later welcomed it as it had, by then, been ‘educated' on the benefits flowing to it.

The real gainers were:

Insider traders in the New York cotton exchange — the index rose 6 per cent just two days after the ban.

Exporters with unsold stocks in China — the sudden increase in international prices could have helped them to get rid of their positions profitably.

Those with short cover could have used the fall in domestic prices to cover their requirements. It is time we stopped these interventions — both bans and incentives — prospective and retrospective, on cotton trading, that are neither in the interest of the farmer or the sector, and work seriously to remove the uncalled-for protection given to monopoly manufacturers of fibres.

Only such a positive approach will improve the health of the industry, that has the potential to create another 1.5 crore jobs in three years, bearing in mind that we have allowed duty-free access to garments from LDC / SAARC countries.

(The author is CMD, Loyal Textile Mills.)

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