Our warped cotton policy

Strange were the ways of the Cotton Corporation of India (CCI), when it conducted its marketing operations during the year 2009. The same can be said for what is happening in the current crop season 2012-13.

CCI’s procurement actions (the government announces minimum support prices for the cotton crop) no doubt helped ensure that Indian farmers secure remunerative prices for their cotton, both then and now.

But it has calibrated its subsequent actions so as to benefit textile mills abroad to the detriment of domestic producers of cotton textiles and readymade garments. Its moves have adversely impacted the domestic textile industry, besides causing huge losses to the exchequer.

How has CCI done so? From time to time, the international prices of cotton are lower than the Government-announced ‘support’ prices for domestically produced cotton. During these periods, neither the private trade nor the textile mills are left with any incentive to source cotton from domestic supplies. The field is then left to CCI and NAFED (National Agriculture Cooperative Marketing Federation of India), the other public procurement agency, to maintain prices in the domestic market at the ‘support’ price levels.

2009 fiasco

In 2009, CCI and NAFED acquired close to 70 per cent of all the cotton that was harvested, as international prices remained below our ‘support’ prices during the entire season.

If international cotton prices are below Indian ‘support’ prices, it rules out export in the form of fibre. It stands to reason that the Indian textile industry, too, cannot export value-added products (yarn, fabric, garments) if it were to buy cotton at ‘support’ prices. Therefore, there is a strong business case for both CCI and NAFED to align their cotton sale prices with international prices --- selling to the domestic trade and the textile mills and absorbing in its books, the inevitable loss.

But there can be no case for the CCI choosing to give more than 10 per cent discounts (to the price that was marginally higher than international prices) only to those tendering to purchase more than two lakh bales. The scheme was thus designed to help large cotton merchant exporters, as over 99.9 per cent of the mills consume less than 2 lakh bales in a cotton year.

Not only did CCI give these bulk discounts to large cotton traders, it also temporarily stopped fresh sales after the bulk sale exercise was completed. When the CCI resumed fresh sales, it did so at much higher prices than the rate offered to large merchant exporters. As a result, all textile mills requiring cotton to keep their production going either went to the merchants, who were gifted the same stock at a discounted price, or paid more to obtain the same from the CCI.

As a result, private trade made a profit while mills lost out on export competitiveness.

The Ministry too helped the cotton traders with 5 per cent export incentives, that too with retrospective effect, giving away close to Rs 900 crore to around 15 traders who were also the recipients of the CCI’s largesse.

Cotton traders used a part of the largesse and incentives to sell domestic cotton to textile mills abroad, forcing the domestic textile industry to be priced out of the market and suffering losses in the bargain. The government later recognised the losses to the textile mills and rescheduled the Textile Upgradation Fund’s subsidised loans by 18 months, losing over Rs 3,000 crore in the bargain.

An encore in 2013

The total losses to the nation were thus in excess of Rs 5,000 crore.That apart, the viability of the entire textiles industry had been destroyed by this lopsided policy, ruining the chances of creating at least five lakh jobs. It is only over the last six months that the industry has recovered from the blows it suffered due to the export ban on yarns and created over 1.5 lakh jobs, according to GOI estimates).

During the early part of the 2012-13, the international prices were below support prices, and CCI and NAFED were called upon to procure cotton. They have procured around 30-35 lakh bales, which includes 25 lakh bales of 32 mm cotton, out of the 45 to 50 lacs bales of 32 mm cotton produced in the country.

After selling a few lakh bales in January this year, CCL and NAFED have stopped sales, even though the current market prices are 30-35 per cent higher than support prices.

The merchants are holding 30 lakh bales. The stocks with private traders, CCL and NAFED are in excess of 60 lakh bales. Such a large inventory has created an artificial shortage in the market and caused our cotton prices to go above international prices.

This is forcing mills to import cotton to meet their requirement using precious foreign exchange, even as hoarders are slowly selling their cotton at higher than international prices and booking profits. In effect, CCL and NAFED are using taxpayers’ money to help hoarders make profits.

The beneficiaries of the CCI’s marketing ways in 2013 are the same as those in 2009. The CCI is refusing to release cotton to wipe out the artificial shortage, despite repeated requests from the textile industry, for reasons best known to it.

This raises the important question of how the CCI must respond when it holds stocks of cotton procured as a part of support price operations. Its actions can make or break the cotton textile industry, which employs a large workforce and contributes to inclusive growth, besides adding $30 billion to exports.

Long-term policy

The CCI should not discriminate between very large merchant exporters and textile mills, whose annual requirements are by no means small, while offering to sell its stocks through public tender. Prices should be closely aligned to international prices. Sales of stock should not stop, so long as CCI carries an inventory and international prices are higher than ‘support’ prices.

Even when international prices are lower than ‘support’ prices, inventory must be offloaded by balancing the carrying cost of inventory with the likelihood of price recovery in international prices in the future.

Holding on to inventory for too long in the facile belief that international prices would recover is a loss to the public exchequer.

Such an approach will bring in the necessary transparency in operations and substantially minimise the losses to CCI and NAFED.

It will reduce the net working capital required. It will ensure those who add value, provide employment and bring in foreign exchange are given preference over those who merely trade.

Through the above policy we can also ensure that ‘support’ price operators (CCI and NAFED) make minimal losses, should international prices remain soft (compared to domestic ‘support’ price levels) for extended periods. The country too, will not end up losing money through bailouts of the textile industry.

Are we ready to let the vehicle of inclusive growth, the rural job creating engine for unskilled workers, perform to its potential?

The textile industry, otherwise the most internationally competitive industry, can rapidly scale up its exports, grow faster and provide at least 10 lakh new jobs each year.

The author is CMD, Loyal Textiles