COTTON FIBRE shortage on Needs

COTTON FIBRE shortage on Needs

According to P. D. Patodia, Chairman of Confederation of Indian Textile Industry, "The textile and clothing industry is gong through a serious crisis because spiralling increase in cotton prices and unabated increase in prices of cotton, will be deleterious to the economy in general and the textile sector in particular, which has already eroded its exports competitiveness on account of appreciating rupee. The serious of onslaughts being faced by the industry will cripple its growth and employment generation potential."

Recently, CITI had organized a press meet to highlight the plight of Indian textile mills, in which I also participated. It was addressed by a number of functionaries as also office bearers of South India Mills Association. It was pointed out that some of the mills have already closed down while others are on their way to closure. It is understood that the steep rise in cotton prices has brought 20 mills to closure in the last six months. These bills, which boasted of a capacity of 25,000 spindles and above, had more than 20,000 employees, who have been rendered jobless. These mills included Ashok Textiles, Chakola Spindles, Western India Cotton Mills, Vanaja Textiles, Sri Bhagavathi Textiles, Rajgopal Textiles as well as Madras Spinners.

Why have we reached the crisis level?

There are a number of factors at work. These are primarily the short availability of cotton, high interest cost, and above all, the unbridled cotton trading by international players.

Short Availability of Cotton

If one were to ask the Government today as to what is level of actual exports of cotton or their country-wise details or what quantity and/or value worth of export contracts have been signed or committed, it will be difficult for the Government to give any figures, not to speak of official, authoritative figures. At best, the Government can possibly give out some "estimates".

There is an apparent short availability of cotton in the market today. It might generally be presumed that it is because of lower productivity levels of Indian cotton production or lower overall production of cotton in the country. It is true that all-India per hectare yield is estimated at 553 kgs. Per hectare for 2007-09, which is a positive improvement over 520 kgs. per hectare in a year before. Yet it is much lower than the world average of 765 kgs. per hectare. In spite of our having the highest total area under cotton cultivation in the world, we are still number two in our total production.

However, in term of actual production of cotton, we are not that badly placed. In fact, this year we expect a total crop of 315 lakh bales (each of 170 kgs. each), which was only 244 lakh bales in 2005-06 and 270 lakh bales in 2006-07. Of course, the industry needs some 278 lakh bales, which should have been more than enough for the industry to meet its requirement. The chart below traces the progress of cotton economy:

But unfortunately, there has been an unrestricted export of cotton, which according to the "estimates" of the Ministry of Textiles, is of the order of about 65 lakh bales, but the trade bodies (again) "estimates" that the cotton exports this year would not around 100 lakh bales. Thus out of the total production of 315 lakh bales of cotton, export of 100 lakh bales would leave us with only 215 lakh cotton bales for the textile industry against our expected consumption of 278 lakh bales. There is an apparent short availability of cotton.

High Prices of Cotton

There has been an unprecedented increase in the cotton prices in the country, which registered an increase of over 35 per cent during the last one year. This is going to seriously affect the operations and even production of textile mills, which, despite slow down in exports due to appreciating rupee, could export textiles worth $ 20 billion. But with the closure of mills and serious financial burden on the mills on account inflated purchase bills of the cotton, the textile exports are likely to be impacted. This point has specifically been made out by CITI to the concerned ministers of the Government of India, including Ministers of Textiles, Finance and Commerce. The price trend as reflected in their movement from January 2007 through June, 2008 has been set out hereunder:

Role of International Players

What is particularly resented by the trade is that the export of cotton is being directed towards China, Pakistan and Bangladesh, which are our serious competitors in the matter of textile exports. Patodia says, "It is not prudent to export cotton to competing countries like China and Pakistan."

It is too well known that one of the prime reasons for the unexceptional rise in cotton prices is the entry of international merchants in cotton trading. They have hoarded large amounts of cotton and procuring from the farmers at low prices which has led to artificial shortage in the markets leading to huge profiteering by them. This has been made possible on account two reasons. First, they had access to cheap funds from international markets at L1BOR rates, which advantage the Indian mills or buyers do not have. These unrestricted purchases by international merchants were allowed to continue at the cost of availability of cotton to Indian mills, which had to contract purchase of cotton, first, for not more than their 3 months requirements. Further, these mills were also restrained in their purchase of bulk quantities of cotton, for which finance was available to them at much higher rates of interest. As if all this is not enough, the margin money of 25% is required for working capital loans for cotton purchase by the mills.

Absence of Monitoring/ Regulator Agency for Cotton Exports

It is very strange that the Government of India, in all its wisdom, has failed to envisage and realize the need of setting up a monitoring agency to over-see the level of cotton exports on which hinges the availability of cotton to Indian textile mills.

If one were to ask the Government today as to what is level of actual exports of cotton or their country-wise details or what quantity and/or value worth of export contracts have been signed or committed, it will be difficult for the Government to give any figures, not to speak of official, authoritative figures. At best, the Government can possibly give out some "estimates". Only if such an agency were to exist which could assess the cotton needs of Indian textile industry periodically and permit export of cotton only to the extent of exportable surplus available and with whom all cotton export contracts were to be registered, there would not been any need for a crisis like the present one to come up.

It also needs to be noted that cotton being purchased for exports is of the finer qualities, leaving inferior quality of cotton for Indian mills.

Ban Export of Cotton

There is an immediate need to ban export till 31 December, 2008. It is well known that farmers do not have any cotton with them any more and the only beneficiaries are foreign buyers, who have been buying cotton, hoarding to sell them at exorbitant prices to Indian mills and for exporting. It is felt that ban or suspension of exports would flush out the cotton that the traders are currently hoarding.

There is an immediate need to ban export till 31 December, 2008. It is well known that farmers do not have any cotton with them any more and the only beneficiaries are foreign buyers, who have been buying cotton, hoarding to sell them at exorbitant prices to Indian mills and for exporting. It is felt that ban or suspension of exports would flush out the cotton that the traders are currently hoarding.

There has been an element of forward trading in cotton, financed by international buyers, who have been contracting the buy the crop at the field level itself. These buyers buy the cotton at cheap rates; hoard it and sell it later at higher costs, with the result that the farmers do not get the advantage of higher prices.

As an emergency measure, export of cotton may be suspended immediately for the period up to 31 December, 2008 by which time the new crop would arrive and the situation can be reviewed.

What is particularly resented by the trade is that the export of cotton is being directed towards China, Pakistan and Bangladesh, which are our serious competitors in the matter of textile exports. Patodia says, "It is not prudent to export cotton to competing countries like China and Pakistan."

Patodia ruefully comments, "The anomaly is that even at higher prices, textile mills are not able to get cotton in the required quantity, which will force them to cut back the production", adding that any production loss in the textile sector will have serious impact on employment generation in the country.

 

Government Scraps Import Duty; Incentives on Export of Cotton

Not before a vociferous protest by the industry and the announcement by 3,000 yarn mills to go on strike, pressing for their demand to abolish customs duty on cotton imports and regulation of exports, the Government has now scapped import duty on cotton and withdrew the export incentives under the duty entitlement passbook scheme.

What needs to be done?

The Stitch Times fully endorses and recommends that the suggestions made by CITI in the course of their recent meetings with the all the concerned union ministers and the Prime Minister, which are, inter alia,

1)    A mechanism may be evolved for assessing the cotton needs of Indian textile industry periodically and permit export of cotton only to the extent of exportable surplus available. The assessment can be done by Government's Cotton Advisory Board, on a quarterly basis, and quantities may be released for exports for each quarter on the basis of this assessment.

2)    A stipulation may be introduced for registration of contracts for exports and imports of cotton with the Textile Commissioner of the Government of India, within a period of 15 days from the finalization of such contracts. This will help Government to monitor the trends in cotton trade and take necessary steps to regulate the trade, whenever felt necessary.

3)    The margin money of 25% applicable for working capital loans for cotton purchases may be reduced to 10%, as a temporary measure for one year.

4)    As an emergency measure, export of cotton may be suspended immediately for the period up to 31 December, 2008 by which time the new crop would arrive and the situation can be reviewed.

5)    Additional fund allocation of Rs. 2,000 crore under Technology Upgradation Fund Scheme for the current year may be made to meet the current backlog of nearly one year in disbursement of TUFS assistance.

About the Author:

The author is associated with The Stitch Times, New Delhi.