There is nothing wrong with cotton prices going up, and farmers making a decent profit for a change. The issue is to align policies such that the farmers can make their money, even as the textiles industry is assured of raw material and inflation in textiles kept under control.
REASONS FOR PRICE RISE
Cotton prices have risen steeply as a result of the global shortage of cotton over the last two years. It is expected that world cotton stock would be exhausted by the end of this cotton year.
When global financial crisis broke out, all commodity prices, including cotton, crashed. The acreage under cotton fell steeply in most countries. Barring US and India, there is little subsidy or support for cotton farming in most other countries. Not surprisingly, these factors caused the first year of lower production than consumption.
Prices rose above 100 cents per pound and cotton was once again a good crop to grow. Consequently, acreage under cultivation went up across the globe.
However floods in Pakistan, parts of India and Australia brought cotton production down to below consumption levels for the second year in a row.
Naturally, the price of cotton is rising steadily and steeply. This is a once-in-a-lifetime opportunity for our cotton farmers to make a decent profit and move cotton out of its image of being the crop that triggers farmers' suicides in Maharashtra. We should welcome this God-given opportunity to our farmers to make a decent living.
THE DOWNSIDE
The problems arising out of this situation cannot be brushed aside. These are:
There is a global shortage of cotton and the MNC traders are keen to buy up the available cotton and export it after ensuring steep price hikes.
MNC traders have abundant cheap funds.
Indian mills do not have enough funds to stock very expensive cotton (it has become twice as expensive as last year). Besides, the cost of funds is very high for the Indian mills.
With the increase in cotton prices, the textiles inflation index will fast outpace average inflation. Unless we overcome the downsides with least cost to the country, we may be forced to deny our farmers an opportunity to make a decent profit.
POSSIBLE SOLUTIONS
We need to come out with an action plan in quick time, with the Budget round the corner. Some of the possible approaches are:
Advice and enable banks to provide $ loans at LIBOR plus 1 or 1.5 per cent to carry cotton up to six months with 10 per cent margins. This will put Indian mills on a par with international traders and help them stock up their raw material requirements.
Open up trade for exports in a calibrated manner after two months, after giving this facility to the mills, giving them time to procure their stocks.
To keep the inflation of textiles at lower than the prevailing level in spite of the steep increase in cotton and fibre. We should remove customs duty on intermediaries in polyester production and on polyester fibre.
This will bring down polyester prices in the domestic market by over 15 per cent (on a par with world prices).
We should bring down the excise duty on polyester fibre to 4 per cent, the same as on textiles. As in the case of most developing countries, in India too the use of synthetic fibre will climb and reach the 60 per cent level.
These two steps, increased synthetic fibre consumption and reduced fibre prices, will bring down inflation due to textiles products in the domestic market, even as we allow our farmers the freedom to price their produce at international prices.
REVENUE EFFECTS
The country will not lose much as it is hardly earning revenues from the import duty on fibre intermediaries or fibre imports (as practically no import is taking place).
On the other hand, the government is doling out thousands of crores as DEPB on fibre exports consequent to the notional duties on fibre intermediaries. Reduction in fibre duties will have a smaller negative impact than the positive impact of zero DEPB on fibre exports.
In the final analysis, cotton farmers can make a decent profit by being connected to international prices.
Fibre producers can enjoy similar protection as their cotton fibre counterparts, while giving up the unwarranted DEPB protection.
The domestic market can quickly move to 60 per cent synthetic fibre and reduce textile products prices and inflation. Mills can have adequate cotton at similar financing costs as international traders. Meanwhile, the nation will remain revenue-positive.
(The author is Managing Director, Loyal Textiles Ltd. >blfeedback@thehindu.co.in )