Cotton sales row deepens as traders question move to offload stocks

Written by Banikinkar Pattanayak | New Delhi | Updated: Mar 21 2013, 08:31am hrs
As demand for offloading cotton stocks held by the government intensifies, trade and apparel industry executives believe state-run procurement agencies have no reason to sell stocks at heavy losses to benefit spinning mills, which are already raking in profits by raising yarn prices at a pace vastly out of sync with the price rise in the fibre.

The government may incur losses to the tune of R1,100 crore if it offloads cotton stocks worth R5,800 crore now despite a recent pick-up in the fibre's price as it has to factor in costs on interest payment against bank loans, staff, insurance and storage, said a senior official.

Earlier this month, Confederation Of Indian Textile Industry (CITI) deputy chairman SV Arumugam asked the government to offload cotton stocks procured from farmers as the fibre's prices had increased steeply because of an artificial shortage of cotton in the market, which is created partly by hoarding of cotton by traders, and partly by the non-release of procured cotton by the Cotton Corporation of India (CCI) and other procurement agencies. However, the traders' body the Cotton Association of India (CAI) disputes CITI's claim, saying the 10% rise in domestic cotton prices over the past six months or so is quite normal compared with a 20% spurt globally. "The mandate of procurement agencies is to provide minimum assured returns to farmers to prevent distress sales by them, but the government isn't obligated to offload the stocks at losses so that bulk consumers make gains," said a senior government official.

The CCI has piled up 2.2 million bales of cotton, which is less than 7% of the crop expected in the year through September, a government official from a cotton-producing state said. The level of cotton procurement is too low to cause any scarcity, he added. Moreover, purchases by textile mills are still trailing the daily cotton arrival of 125,000 to 150,000 bales in the domestic market, which negates their claim of a domestic shortage.

"Although cotton prices have risen by 10% in recent months, yarn prices have shot up by 25% during the period. Normally, price rises in both the items should be in sync, which is not the case now. So we are requesting the government to allow duty-free yarn imports," said Rahul Mehta, president, Clothing Manufacturers Association of India.

CAI president Dhiren N Sheth said cotton prices are rising because of the spurt in yarn prices, and demanded that the CCI offload stocks to the highest bidder and at an appropriate time to cut losses to the exchequer. Government agencies usually buy cotton at MSPs and sell the stocks later at market rates. Losses on account of the procurement operations are reimbursed by the government.

However, a senior textile industry executive said: "The problem can be solved if the government allows more working capital loan to the textile mills so that their purchasing power improves. The mills had been facing tough times since 2009-10 due to the volatility in cotton prices. Better availability of affordable credit will help them a lot, apart from reducing the need for procurement by the government." At present, mills get loans to stock up raw material against the requirement of a maximum of three months, and the industry has been demanding making credit available for nine months' consumption.


* Cotton prices have risen 10% in recent months while yarn prices have surged 25%, implying spinners are raking in the moolah

* Govts obligation is to protect farmers, not to incentivise bulk consumers

* No shortage in open market as govts cotton procurement makes up for just 7% of crop compared with 34% for rice and 41% for wheat

* Offloading by state agencies at heavy losses amounts to subsidising the industry in times of high fiscal deficit


* Improve textile mills purchasing power by extending more working capital credit instead of subsidising them