We have seen rudderless cotton policy of the Government of India, because of which Indian textile industry had had to suffer grievously for almost two years. It is incredible that the India, which produces and consumes the cotton most in the world, save China, had had no policy even to register the exports of cotton, which went on and on for year after year, by the Government, leave aside the question of regulation of exports. It was almost no man's land, where anybody could get away with any thing, right from advance purchases to exports as cotton was listed under "free" exports. The Government even went to the extent of subsidising the exports, even when the indigenous cotton mills were feeling the heat of not only availability of cotton at exhorbitant prices but also highly degree of scarcity. But It is only on persistent demand by all the trade bodies put together that the Government realized that it has do something and designated an institution-trust me-for the first time, with whom all the prospective or intending exporters would seeks registration. The Government was persuaded (in fact, pushed into) categorizing cotton in Restricted List and the export subsidy was also withdrawn. But all this happened, after considerable damage had been done to the textile and garment industry, including exports.
It can be termed only as epileptic act on the part of the Government of India to have once again repeated the act of allowing unbridled export of cotton right before the beginning of cotton year that starts from October. This precisely is insane as it works clearly and loudly against the national interest of first fulfilling the home demand, before allowing exports. This has once again sparked loud protest from all the stake holders of Indian textile industry.
It is, to my mind, only a second occasion when all the trade bodies in India, who have stake in textile and garment industry and exports, joined together not only to write a letter, jointly as well as severally, to an Economist Prime Minister Dr. Man Mohan Singh, veteran Finance Minister Pranab Mukherjee, an ebullient Commerce Minister Anand Sharma and a sulking Textile Minister, Dayanidhi Maran and other high ranking officials of the Government, and addressed a joint press conference to highlight the dangers in Government placing cotton exports in the free list. This conglomeration of trade bodies chiefs also sought an interview, which may not be easy to come by.
Before we take up and examine the textile industry's case, we need to take an overview of the facts which are relevant to the issue of cotton exports. Briefly:
1. India has the highest production (around 20% of world production 295 lakh bales in 2009-10, with an estimate of 325 lakh bales for 2010-11) and consumption in the world, save China;
2. Cotton-based textile and clothing industry employs over 25 million workers directly and over 36 million in allied sectors, mostly in cotton farming.
3. A huge capacity of about 20 lakh spindles have been added during last two years alone.
4. Over one trillion rupees have been invested in Textile and Clothing sector during last three years, with cotton textile segment accounting for around 75%.
5. India has one the lowest Stock to Use Ratio in case of cotton, which is as high 39% in China, 21 in the US, 35% in Pakistan, 77% in Brazil and 26% in Turkey, as compared to 12% in case of India.
Textile Industry's Case
According to textile industry, cotton prices in India are currently at an all time record high, in spite of a bumper crop of 295 lakh bales during cotton year 2009-10 (October-December). Shankar -6 which is our standard cotton was being sold at around `23000 a candy (355 kg) at the beginning of the year, but it is now being sold at `38000 a candy and is scarcely available even at this price. The current price is more than 50% higher than the Minimum Support Price fixed by Government. And the prices continue to increase every day.
A substantial portion of the price increase has been after most of the cotton reached the hands of traders and, therefore, farmers have not been benefited from such increase. Export of over 83 lakh bales (nearly 30 percent of the crop) played an important role in the unprecedented increase of domestic prices. The Government announcements of cotton exports being removed from restricted list resulted in an increase of around `6000 a candy within a few weeks. Increase in cotton prices pushed up prices of yarn and fabrics affecting exports of value added products. Increase in the prices of textile products has also added to inflation and affected the livelihood of the masses.
While the Government has decided that cotton exports during 2010-11 will be restricted to exportable surplus, after meeting the domestic requirements; however, surprisingly, there have not been any measures to ensure that actual exports of cotton get restricted to exportable surplus. Export policy for cotton has been changed from 'restricted' to 'free' earlier this year and the stipulation of license for export has also been withdrawn. Thus, the Department of Commerce cannot put any restrictions on cotton exports under the current policy. Textile Commissioner has notified the guidelines for registration of contracts for export of cotton during 2010-11, but they do not have any provision for discontinuation of registration once the exportable surplus is registered.
The industry has further pointed out that rains have delayed the arrival of new crop in the northern zone at least up to the middle of October 2010, which has added to the cotton crisis in our market. There are reports that large quantities from the new domestic crop are being purchased by traders through forward cover, which will further reduce and delay availability of cotton to the mills. With extensive damage to cotton in Pakistan because of the recent floods, global demand for Indian cotton is likely to increase in the coming months. Thus, the cotton crisis currently being faced by the textile and clothing industry is likely to become only graver in the ensuing cotton year, unless effective measures are taken immediately to ensure that exports are limited to the exportable surplus.
The industry leaders have requested that the Government policies may be designed to ensure that the benefits of Indian cotton are available to the domestic textile industry, rather than to industries of China, Pakistan and Bangladesh, which otherwise would be competing with us in the global textile and clothing markets on the strength of the Indian cotton,
The industry leaders were categorical on what they expected the Government to do. Shishir Jaipuria, Chairman, Confederation of Indian Textile Industry (CITI) said that despite the bumper crop of 295 lakh bales during cotton year 2009-10 (October-December), Shanker-6, which is the standard cotton, is being sold at `38,000 per candy (355kgs) as against `23,000 per candy in the beginning of the year. "The unfortunate part is that even at this price, which is roughly 50 per cent higher than the Minimum Support Price (MSP), cotton is scarcely available," and added "at this price, textile mills cannot run viably and most mills are likely to incur losses, which will force them to default on repayment of huge loans they have taken under Technology Upgradation Fund Scheme (TUFS)."
Mentioning that the cotton farmers have not much benefited from the current price rise, S.V. Arumugam, Deputy Chairman, CITI said that a substantial portion of the price increase has been after most of the cotton reached the hands of traders. Procurement of cotton by the traders are mostly for export purposes. "Export of over 83 lakh bales, a whopping 30 percent of the total production, is the crux of the problem that has upset the apple cart. The Government announcement of cotton exports being removed from the restricted list resulted in an increase of around `6000 a candy within a few weeks,"he added.
A. Sakthivel, President, Federation of Indian Exporters
Organisation (FIEO) observed that the announcement that the cotton exports
during 2010-11 will be restricted to exportable surplus was a realization of
the seriousness of the situation but maintained that it fell short of the
requirement and expectations of the textile community."Surprisingly, there
have not been any measures to ensure that actual exports of cotton get
restricted to exportable surplus. Export policy of cotton has been changed from
restricted to free earlier this year and the stipulation of license for exports
has also been withdrawn. Thus, the Department of Commerce cannot put any
restrictions on cotton exports under the current policy," he added. Moreover,
the Textile Commissioner has notified guidelines for registration of contracts
for export of cotton during 2010-11, but they do not have any provision for
discontinuation of registration once the exportable surplus is registered.
Rakesh Vaid, President, Garments Exporters Association, in a separate statement, also has expressed serious concern at the reduction of duty drawback rates for both knitted and woven garments from September 20, 2010, as it would have adverse impact on the export potential of readymade garments. He added that the reduction in the duty drawback rates would have serious adverse consequences on the profitability of exporters who are already suffering from worldwide recession, low unit value realization from highly competitive overseas markets and steep hikes in cotton, yarn and fabric prices. Vaid further pointed out that keeping in view the present export scenario, the garment exporters were expecting the Government would increase the rates or at least maintain at the present level. However, the Government has completely ignored the legitimate expectations and needs of the exporters and the cost data submitted by the Apparel Industry highlighting the justification for higher drawback rates for readymade garments. He reiterated that the garments exporters have been pleading for increase in duty drawback rates by increasing the scope and coverage of drawback scheme. The reduction in drawback rates has therefore shocked the garment export industry. He has again appealed the Government to restore the duty drawback rates as there is no justification for reduction in rates, in view of sharp increase in duties announced in the last Budget proposals on most of the inputs and materials used by garment exporters.
J Thulasidharan, Chairman, Southern India Mills Association (SIMA) said that apart from apprehensions that the rains would delay the arrival of the new crop in the northern zone at least up to the middle of October 2010, there are reports that large quantities from the new cotton crop are being purchased by traders through forward cover, which will further reduce and delay the availability of cotton to the mills. The availability will be further compounded by the extensive damage to the cotton crop in Pakistan on account of the recent floods and conversion of large acreage under cotton cultivation to food crops in China.
The unanimous recommendations on what the Government needs to do have been made and listed and discussed, on merit, hereunder:
1. No Registration of Contracts during Oct.-Dec. 2010
The industry leaders want that the registration of contracts may not be allowed for exports of cotton during the period October-December, 2010, so that the best cotton of the country that arrives in the market during this period will be available for the domestic textile industry and exports will start only after supplies in the market stabilize.
I feel that this recommendation of the industry has merit; inasmuch as this will take care of cotton needs of the domestic industry, before any exports are allowed for foreign markets, which, in most of the cases, are our keen competitors like China, Pakistan, Bangladesh. This is also compatible with the policy announcement of the Government of India that "cotton exports during 2010-11 will be restricted to exportable surplus after meeting the domestic requirements."
2. Registration of Contract upto 49.5 lakh Bales
The industry wants that registration of contracts for exports of cotton for the period January-September 2011 may be restricted to exportable surplus, as assessed by Cotton Advisory Board (CAB) i.e. 49.5 lakh bales. I feel that this recommendation makes an eminent sense. In this context, the cotton balance sheet for 2009-10 and 2010-11 are relevant. During 2009-10, while the opening stock was 71.50 lakh bales PLUS cotton crop of 295 lakhs and import of 7 lakh bales made a total availability of 373.50 bales. Out of this, 250 bales were consumed by domestic industry and a disproportionate export of 83 lakh bales left a closing balance of 40.50 lakh bales. This year i.e.2010-11, we started with a lower opening stock of 40.50 lakh bales, as compared to 71.50 lakh bales last year. With the projected production of 325 lakh bales and 5 lakh bales of imports, the total availability of cotton will be lower at 370.50 lakh bales. Out of this, the projected domestic consumption is 266 lakh bales, leaving a balance of 104.50 lakh bales. In order to maintain a minimum reasonable ending stock of 55 lakh bales, we need to adhere to the Assessment of CAB to limit our exports only up to 49.50 lakh bales, which is what is being recommended by the industry.
3. Export Contracts to be only for Actual Users
The recommendation is that the contracts may be registered only for exports to actual users, in order to avoid stock transfer among traders and hoarding in order to speculate.
It would be difficult for the Government to say NO to this recommendation, unless it wants to confirm that the Government stands aligned to the traders and hoarders at the cost of domestic industry and exports.
4. Cotton to be brought back to Restricted List
The industry recommendation is that in Foreign Trade Policy, cotton may immediately be brought back to restricted list subject to export licensing, so that the Department of Commerce will have legal authority to restrict exports to exportable surplus.
Only if one cares to read the Government decision of not allowing export of cotton beyond the exportable surplus, it is imperative that cotton will have to be brought under Restricted List so as to curb the unbridled and at-will export of cotton.
5. Review of Exportable Surplus in Mid-November, 2010
The industry wants that the exportable surplus may be reviewed in mid-November 2010, as proposed by the Government, according to press exports. Excessive rains are still continuing and there is now a real risk of crop damage. The review is, therefore, important.
I do think that Mid-November would be appropriate time for a review, because it is only at that time that the ground realities would be more clear, particularly in view of heavy, even excessive rainfall in large part of cotton growing areas, raising doubts on all projections including production of cotton by CAB.
6. Export Duty on Cotton
The trade bodies have recommended an export duty of `10,000 per ton may be enforced for cotton, so that our cotton will not be available to the competing countries at low prices.
It is simply a reversion to what the Government had done previously, of course, on repeated pleas by the trade and industry. I do not think that the Government would have any problem in repeating what they have done before. It is indeed necessary that we rule out the practice of our competing economies to benefit from the lower cotton prices and beat us with the competitive prices of final products in the international markets.
7. Withdrawal of Export Incentive
The recommendation is that the export incentive of 1.5% being given on exports of raw cotton may be withdrawn immediately.
The Government should agree to that, unless it wants to score a self goal, which it successfully did while allowing incentive on cotton exports at the cost of Indian textile and garment exports.
The industry is of the firm view that he survival of the entire textile and clothing industry of the country and its exports would be seriously hampered if the above measures are not put in place at the earliest. At current domestic cotton prices, textile mills cannot be run viably and most mills are likely to incur losses. This will force them to default on repayment of the huge loans they have taken under TUFS and the banking sector will also get affected. The industry has, therefore, requested that the Government policies may be designed in such manner so as to ensure that the benefits of Indian cotton are available to the domestic textile industry, rather than to the industries of China, Pakistan and Bangladesh, which would otherwise be competing with us in the global textile and clothing markets on the strength of Indian cotton.
I must admit that the recommendations made by the conglomeration of all stakeholders at the national, regional and trade levels, are what the Industry is justified in demanding and the Government would only doing a favour to the cause of textile and garment exports by quickly responding positively without giving any room to anybody to say that the Government is being guided by extraneous considerations as would be implicit and explicit in case the Government fails to quickly rise to the occasion.
Views presented here are those of the author