There are two schools of thought prevailing with regard to cotton exports. The textile industry is seeking a ‘freight equalisation' tax to be levied on cotton exports to ensure that the landed price of Indian cotton for both Chinese/Bangladeshi and Indian mills remain roughly the same.

But the cotton exporting community and the Government-owned Cotton Corporation of India want that exporters be paid an incentive to facilitate better access to export markets.

A WEIGHTY MATTER

It is extremely important that the Government takes a decision on the basis of accurate data rather than data that skews the decision . It must weigh the consequences of past decisions on export incentives or banso that the ultimate decision balances the best interests of farmers, the textile industry and the government. .

International carriers are prevented from carrying domestic cargo between two Indian ports. The shortage of capacity and the relatively fewer competitors among domestic shipping lines has naturally resulted inreducing the cost differential between transportation by road and sea.

The spinning industry is forced to use cost-inefficient road transport to haul cotton from Gujarat (the biggest producer of cotton) to Tamil Nadu (the largest consumer of cotton).The freight cost difference in transporting cotton from ginning factory to the mill gate of a unit in India or China works out to Rs 2,500/tonne or 2.5 per cent of the cost of cotton in the latter's favour.

The international markets for textiles/readymade garments are shrinking and the margins are expected to be close to zero. To give away at a time such as this, a 2.5 per cent cost advantage to our competitors who enjoy, in the case of Bangladesh lower labour costs and zero import duty, and in the case of China and Vietnam, far better infrastructure, can be a very costly risk. Hence, the claim of the textile industry appears reasonable.

PRICE, DEMAND SCENARIO

On the other hand, this year the country is expecting a bumper crop of 350 lakh bales. Domestic demand will be moderate. Tirupur, a major producer of garments, has pollution compliance issues that cannot be sorted out soon. High inflation and slower economic growth will reduce the growth in demand. Zero import duty status given to exports from Bangladesh, too, will impact domestic supply.

This means that India can expect only a 2-5 per cent growth in domestic demand, leaving a cotton surplus of 80-90 lakh bales which needs to be exported. If the exports don't happen fast enough and the domestic price drops rapidly to below support prices, then the CCI will have to step in to procure . It is therefore very important to understand ground realities. At support prices, the cost of S4 variety of cotton (the most exported cotton ) will vary between Rs 26,000 and Rs 28,000 a candy, depending on the yarn quality.

This translates into 67-72 cents per pound (the unit of measure in which cotton is traded in the New York market) of ginned cotton. Add profits for the ginner, transportation and FOB charges, this works out to 72-77 cents. The ‘S4' cotton trades at 7-12 cents premium over New York Index.

Currently, cotton trades at roughly $1 per pound in New York. Taking into account the premium enjoyed by Indian cotton, the New York prices for Indian cotton would comfortably prevail in the region of $1.07-$1.12 per pound — a good $0.25 more than what would constitute a basic minimum remunerative price for the grower. Until New York Index for cotton prices reaches 65- 70 cents, there will be no need to consider support price operations. Again, if a 5-cents a pound export tax (something tha the textile industry is demanding as needed for levelling the playing field) is levied, the support price operation would be triggered if the New York prices drop to a price level of 70-75 cents. Today the prices are close to a dollar; the prices have to drop by more than 25 per cent.

BALANCING PRIORITIES

There is another reason why prices should stay at the current levels. The Chinese maintain a support price for domestic crop which translate into a price of around 115 cents. China has depleted its strategic reserves substantially and when prices of S4 variety drops below $1, China will see it as an opportunity to shore up its depleted reserves.

Therefore, the fear that the global prices will drop steeply and trigger the need for support price operations is totally unwarranted. Any price increase in the domestic market for cotton will most certainly improve the lot of the farmers. In that sense, export tax will impact the farmer negatively and export incentives will help the farmers. The question then becomes one of balancing the various factors.

If export incentives are given, the domestic mills will incur huge losses. Last time around when export incentives were given, the entire textile industry suffered losses and the government had to bail out the industry by giving a moratorium on repayments of subsidised loans for 18 months, at a cost of nearly Rs 2,000 crore to the exchequer.

Therefore if any subsidy is given to market cotton, then it must be given in equal measure to our mills, and not just only to Chinese or Bangladesh, or Pakistan mills. The subsidy of 5 per cent on 350 bales will amount to Rs 2,600 crore plus.

The support price for cotton by itself makes it the most preferred crop for farmers. We, therefore, cannot spend Rs 2600 plus crore on a crop that is the most profitable to the farmer among all crops.

And the higher prices resulting from an export incentive only makethe problem of containing inflation that much more difficult.

(The author is Chairman and Managing Director, Loyal Textiles Ltd.)

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