The textile industry and cotton farmers are once again in the clutches of the licence and permit raj. With the onset of the global financial meltdown, all commodity prices crashed, and cotton was no exception.
India, however, increased the support price of cotton substantially, by over 40 per cent (a pre-election year benefit given to farmers). This brought more acreage under cotton cultivation. As global prices were below our support prices, private traders could not buy seed cotton at support price levels from the farmers.
Cotton Corporation of India (CCI) and NAFED had to buy most of the seed cotton as a part of the support price mechanism. They did a good job, buying over 65 per cent of the cotton grown. Farmers were protected from the fall in global cotton prices.
COTTON EXPORT SPURT
However, CCI played havoc while marketing the cotton it procured. Its pricing was arbitrary. It gave huge discounts to very large traders with up to six months of interest-free carrying. Soon after making bulk sales at discounts, CCI increased prices, forcing mills to buy from those privileged traders.
To add to this, the Agriculture and Commerce Ministries came out with a curious policy of giving incentives to cotton exports with retrospective effect. It is alleged that 15 exporters benefited by over Rs 600 crore as a consequence of this incentive for the previous years' exports!
It is also alleged that the large recipients of this bonanza sold their DEPB scripts at much lower than market prices to nominated middlemen. The country lost over Rs 1,400 crore by way of unnecessary incentives to exporters, including deep discounts and long interest-free periods.
Meanwhile, exporters were able to sell our cotton to competitors in China, Pakistan and Bangladesh at up to 10 per cent lower prices.
While cotton exports were being subsidised, our government reduced the export incentives given to value-added textile exports such as yarn, fabrics and garments. At the same time, our competitors increased incentives to their textile manufacturers.
The Indian textile industry suffered as a consequence of this move for almost 18 months. The government and the Reserve Bank of India advised banks to reschedule loans.
POLICY RESPONSE
The new Minister met various sections of the textile industry and came out with positive initiatives.
— CCI was asked to be more transparent. But as international prices are above support prices, CCI can no longer create havoc.
— Export incentives given to cotton were scrapped.
These moves were appreciated. But they led to too many vested interest groups approaching the Minister with a sector-specific agenda.
Instead of ensuring that cotton was not sold to our competitors at a lower price than to our mills, the spinners managed to get the export of cotton brought under licence and permits.
This caused domestic prices to rule at substantial discounts to international prices, making yarn exports hugely profitable at the cost of the farmer. This made yarn prices shoot up in the domestic market. The government acted by denying the refund of taxes paid to yarn exporters. Removing the artificially high DEPB was in order but denying the refund of taxes paid was curious.
However, yarn exports continued in spite of the tax refund being denied, as cotton prices were lower than international prices. Yarn manufacturing capacities increased at breakneck speed, at the rate of over three lakh spindles each month, with another 20 open-end machines being added each month.
The quantity of yarn available for exports rose steeply. Global cotton shortage and rising per capita income in developing nations provided a vibrant market for yarn exporters. The government denied the yarn exporters the tax refund but took it into calculation while arriving at the duty drawback given to fabric made-ups and garment exporters. The value-added sectors got Indian yarn at 3-4 per cent lower than the prices at which the overseas value-added exporters were purchasing Indian yarn.
But, strangely enough, garment exporters asked the government to bring yarn exports under licence and permits. They were trying to artificially depress the domestic yarn market and bring down input prices, which were, in any case, 3-4 per cent less than international prices. The government, having brought cotton at the behest of spinners under licence and permits, extended the licence and permit raj to yarn. The spinners got a taste of their own medicine.
FABRIC CAPACITIES
Small garment exporters, which do not have adequate working capital funds, were dependent on credit from the fabric and yarn suppliers. This source has completely dried up, thanks to the change in market conditions.
Until a year and a half ago, the Chinese government was giving its fabric exporters high incentives and the fabrics imported from China were much cheaper than the domestic fabrics. Garment exporters were importing Chinese fabrics.
The fabric-making capacity in India did not grow as, until a year ago, yarn exports enjoyed 100 per cent more DEPB benefits than fabrics, making fabric exports non-profitable.
Fabric manufacturers were mainly catering to the domestic markets and a part of the garment and made-up exporters' demand. Today, as the anomaly in export benefit has been corrected, fabric exports are growing and investment in fabric making is once again becoming profitable.
However, as the TUF scheme has not yet been announced, investment is not taking place at the required pace.
TEXTILE WOES
The garments sector has to contend with the following problems: lack of working capital; domestic market eating into garment export capacities; increase in labour costs and slow modernisation; and high pollution costs due to economically unviable zero discharge requirements.
Therefore, a policy should address the following:
— Never make our raw materials or value-added products available cheaper to our competitors by way of prospective or retrospective incentives
— CCI should play the support price mechanism and, if and when our support prices exceed international prices, buy and sell cotton at prices linked to international prices. There should be no discounts for any customer, big or small.The terms should be uniform for all.
— Restore all refund of taxes to all sectors and remove quantitative restrictions at all levels
— Facilitate ocean-based marine disposal-based processing parks by involving the Environment Ministry, and
— Improve the databases and use them intelligently.
(The author is Managing Director, Loyal Textile Mills Ltd., Chennai.)