Government policies impact cotton economy

12 May '09

4 min read

With efforts of Government through Technology Mission on cotton and the industry through extension activities of CITI CDRA, SIMA and CDRA and individual companies, there have been substantial progress in cotton economy and Indian in recent years.

Cotton area under cultivation has grown from 8.58 million hectares in 2000-01 to 9.26 million hectares in 2008-09, but cotton production has jumped from just 14 million bales to 32 million bales in the same period, mainly due to yields shooting up by two times from 278 kgs per hectare to 591 kgs per hectare.

Imports in the period under consideration fell from 2.21 million bales to just 0.50 million bales, however exports jumped from a marginal 0.06 million bales to a staggering 7.50 million bales. Consumption also grew from 17.3 million bales in 2000-01 to 24.1 million bales in 2008-09.

In spite of excellent progress in production, productivity and quality of cotton, textile and clothing industry of India have not been able to leverage this advantage for improving the cost competitiveness of the industry because of ill-conceived policy interventions of the Government.

Minimum Support Prices is meant to avoid any distress among farmers. In the case of cotton, productivity and cotton prices have increased substantially in recent years and therefore there is currently no distress among farmers. However, Minimum Support Prices for the current cotton season was increased by Government by over 40% as against an increase of 5 to 8% implemented in the past.

The result was that Indian cotton became totally uncompetitive in global markets and export of cotton declined substantially. Domestic mills also found it impossible to keep up cotton purchase because of high cost. Consequently production, export and consumption of textile products in India declined in recent months as seen in index of industrial production and export figures released by DGCI&S and financial results of textile companies.

The financial performance of textile companies has fallen to abysmal levels. Net profits of 276 companies, which stood at Rs 2799.4 crores in 2006-07, slid to Rs 1244.1 crore in 2007-8, down by an awesome 56 percent. The net profit in 2008-09 is projected to fall further to Rs 1052.8 crores, down again by 18.5 percent when compared to 2007-08.

Nearly half of the cotton that came to the market during the current cotton season had to be purchased by Government agencies such as CCI and NAFED through MSP operations since market is not in a position to pay the high prices which resulted because of undue increase in MSP. Apprehending that it would be difficult for procurement agencies to dispose of procured cotton, Government announced a discount for bulk purchase from CCI.

The discount ranged for quantities from 10,000 bales to 2 lakh bales at a time and discount amount ranged upto Rs.650 per candy. Announcing discount restricted to bulk purchase was a fundamentally wrong decision since bulk purchase would almost always be by traders. A mill which purchases a huge quantity of cotton will take months and years to consume that quantity, whereas a trader can dispose of any large quantity to a large number of mills.

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