The Textile Ministry wants to create a “Market Stabilisation Fund” (MSF) by imposing a cess/tax between Rs 1,000 and 2,000 per candy (356 kg) on cotton exporters. The new policy suggests that “surpluses only” may be permitted for exports after determining domestic demand.  Some of the other ‘straight out of the 70s’ ideas are to permit exports “after the crop is ready” with farmers; and providing loan waver for weavers. 

Indian cotton export has demonstrated consistent performance over the last three years — $3-$4 billion per annum. This year, it may decline to $2 billion (one million tonnes). China’s appetite for imports is tapering. The US Department of Agriculture (USDA) report of July 11 reflects higher global inventories, production almost unchanged at a high of 20 million tonnes (118 million bales) and falling prices.   The need of the hour is to ensure more exports at best prices to improve foreign exchange earnings and bring down the current account deficit, especially due to the highest-ever output seen in 2013-14 owing to a good monsoon. Ad hoc interventionism by various arms of the Government has undermined macroeconomic fundamentals. The ban on iron ore exports has made the country suffer.  Wheat export has been hit by inflexibility in pricing by the Food Ministry, while a surplus of 16 million tonnes lies hoarded.

High “State Advisory Prices” (SAP) on sugarcane has priced India out of the export market, while making the country a net importer of sugar despite having abundant local supplies. The brunt is borne by the farmers as the industry is unable to make payments for the cane supplied. Now, cotton export is under threat of being destabilised.

Unfair tax on exporters

The proposed “export tax” for MSF is to be levied on cotton exporters. The Government is attempting “to kill the export demand” by diverting a large part of the proceeds to this fund.

Poor demand will manifest in more market availability. Such domestic surpluses will be openly exploited by the spinning/textile mills at their whims and fancies by pushing domestic prices down.

This will result in lesser realisation for farmers. Undeniably, exports contribute to demand expansion, which has been a major driver of production of cotton over the past decade. The Textile Ministry’s intent is to provide freebies before elections to the industry. This is contrary to the recent directions of the Supreme Court to the Election Commission.

Act of Discrimination   

Cotton “export tax” smacks of the domestic industrial lobby trying to dupe farmers, on the one hand, and mismanaging the export economy, on the other through the introduction of a new scheme proposed by the Ministry. Such a fund is also an arbitrary discrimination between exporters vis-à-vis spinners, textile mills, garment exporters and retailers at the cost of farmers.  Legally and morally, this may be untenable.

A sugar development fund (SDF) under the Ministry of Food has been in operation since 1983 for modernisation of the sugar mills, funded by Indian consumers as part of the price of sugar paid to mills. As per the Food Ministry Web site, the status of SDF up to 2010 is — Rs 5,132 crore disbursed and Rs 2,352 recovered, indicating loss/under recoveries of 54 per cent. The disbursements of such funds (SDF or MSF) are subject to discretionary patronage by politicians and bureaucracy at the behest of lobbies. Money once disbursed cannot be monitored or accounted.

Spinners and mills suffer from logistical, labour-related, technical and performance-centric inefficiencies, apart from acute shortage of power. Had it been otherwise, Indian textiles and garments would have been cheaper than those exported by China, Vietnam, and Bangladesh. Mills cannot be compensated by taxing the farmers. 

Further, the quantum of cess also indicates the ignorance of margins that the market allows internationally. It is not a cakewalk to do business in cotton export where competition is intense and market volatility ranges between 20 per cent and 50 per cent. Profits are scant, say, Rs 200-400 per candy or (0.5-1 per cent) — for an export value of Rs 40,000/candy.

The cotton crop arrives in October and goes through a variable supply/demand/speculative cycle in the next 12 months. There is no way by which the “quantum of surplus” can be predetermined after covering domestic demand. The pattern of production of kapas , ginning, spinning, milling and garments is a continuous process in which the trade participates on a daily basis. That is the way “marked to market prices are discovered” locally and abroad.

Stable policies

All commodities are purchased and sold throughout the year and cannot be linked to “physical arrival” of crop. Futures are traded and hedged in exchanges and business is done by mitigating the risk. Indian cotton export market cannot be “closed” or temporarily terminated till such time each bale is counted. The fundamentals of doing any business, including export, is to have stable policies, rather than to be influenced by vote-bank politics. Domestic supplies are good and augmented by e-auction of Cotton Corporation of India’s 22 lakh bales. Authorities must understand that market is a natural balancing force and globally interlinked.

(The author is a grains trade analyst.)

Related Topics