India: Why sops for raw cotton exporters?

It came as a shocker to India’s textile industry which was pitching hard for some additional incentives from the government to tide over the crisis caused by a sharp decline in export demand.

On February 17, the Centre announced a 5% incentive for exporters of raw cotton through its export promotion programme called Vishesh Krishi & Gramodhyog Yojana. The incentive is available for shipments from April 2008 to June this year. The intended beneficiary is the cotton farmer.

Actually, the grant, which would amount to some Rs 350 crore, would go to a handful of large traders including some multinational corporations who are in the business of exporting raw cotton. Would anyone argue that the dole for past exports would benefit the cotton farmer?

Major cotton exporters are Bhadresh Trading, Khinji Vishram, Gill & Co, Ruchi Worldwide, Mitatex, TT, Alok, Ginners and Others, Noble Exports etc. India’s cotton output has seen dramatic increase in recent years thanks to increased productivity. India has already overtaken the United States to become the second largest cotton producer in the world. We are also the second largest consumer and exporter of cotton at present and hope to pip China from its peak slot.

Cotton output in the 2007-08 season (October-September) was 31.5 million bales (MB) of 170 kg each. That was a record. In the current season (08-09) for which substantial market arrivals have been reported, the official estimate is 29 MB, which is higher than all previous years except last year.

Cotton exports last year was again an all-time high of 8.5 MB and the projection for this year is 5 MB. The consumption of cotton by Indian textile mills last year was slightly above 24 MB and this year’s consumption is projected at 23 MB.

Curiously, the government’s decision to reward raw cotton exporters comes at a time when the textile industry is struggling to be competitive in the rapidly shrinking global export markets (the exports last year was $22 billion) and save lakhs of jobs. For the current cotton year, a hike of more than 40% in MSPs for various varieties of cotton was announced in September 2008.

This despite the fact that cotton prices in the country were ruling at an all-time high. According to textile industry, global cotton prices have crashed in recent months, but the MSPs have prevented market forces from operating in India.

“Since neither Indian mills nor export markets can buy cotton at such uncompetitive prices, around half of the cotton that has arrived in the markets so far in the current season has been bought by procurement agencies, mainly the Cotton Corporation of India and NAFED.

And since the prices are high, the industry is disinclined to lift the stocks, causing huge stockpiling with CCI.

The CCI has recently announced a discount scheme for disposing of the stocks. The discount is being provided only to ‘bulk buyers’ and it increases in tandem with the quantity bought.

The textile industry alleges that this would also cotton traders at the expense of the industry since the industry currently does not have the buying ability. Increase in raw material prices is clearly something the industry can’t afford now.

It may be noted that when India is providing incentives to raw cotton exporters with retrospective effect, China has disallowed export of cotton.