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Crisil: Scrapping of duty on cotton unlikely to bring down prices
19
Jul '08
The government has scrapped the import duty and has withdrawn export incentives for raw cotton on July 9, 2008.

The rationale behind the move is to boost cotton stocks in India and to facilitate availability of cotton at lower
prices, domestically.

Details of measures announced:
• Import duty of 14 per cent on raw cotton (which includes custom duty of 10 per cent and additional custom
duty of 4 per cent) has been removed.
• Export incentive of 1 per cent on raw cotton exports has been withdrawn

Despite bumper crops, domestic cotton prices surged by around 25 per cent in CS 2007-08 in line with a significant increase in international prices.

There is a demand-supply crunch world over for cotton, largely triggered by shrinking US acreage. Decreasing US acreage is resulting in lower cotton supply whereas global consumption continues to increase.

Impact on textile industry:
CRISIL Research believes that the measures announced might not bring down prices because a significant portion of India's cotton consumption is of the short to medium staple variety where India is self-sufficient, cost competitive and is a key supplier to the global markets.

Our imports are restricted to the extra long staple variety
of cotton which account for a mere 5 per cent of consumption.

Further, raw cotton exports are expected to increase despite the withdrawal of export incentives as global cotton output is expected to decline in CS 2008-09, and there is likely to be a global shortage.

The International Cotton Advisory Committee (ICAC) estimates that global cotton production will continue to decline in CS 2008-09, primarily led by a sharp decline in US cotton output on account of shifting acreage towards corn.

China's consumption is expected to surpass production and therefore it will need to rely on imports to meet the shortfall.

India's cotton output, on the other hand, is likely to rise by around 5 per cent leaving India with an exportable surplus.

CRISIL Research is of the view that exports to China will continue to increase which will keep cotton prices firm and put pressure on the margins of spinning companies.

The lowering of import duty will, however, lead to the softening of prices of the ELS variety which India imports primarily from African countries and the US. This will benefit spinners producing finer count of yarn.

Credit Rating Information Services of India Limited

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