It?s not easy to be a cotton farmer in India. You spend R30,000 per hectare, stake your sweat, blood, aspirations and a valuable year of your life and get around R48,000. In a year of scanty showers, a plain fixed deposit with a 9% interest rate in a bank would yield more, without any risk or toil. If you complain about soaring costs of fertiliser, labour and power, the government will shut you up with its fiscal prudence rhetoric. And you number a stunning 33 million.
So what would you do? Is there a way forward?
Prime Minister Manmohan Singh will have all these questions, and many more, when he huddles with his Cabinet colleagues?finance minister Pranab Mukherjee, agriculture minister and NCP chief Sharad Pawar and commerce and textile minister Anand Sharma?on April 30 to discuss how best to balance the interest of farmers with textile mills’, without jeopardising political equations. The meeting is convened to defuse tension over Pawar’s letter to Singh earlier this month, scathing in tone and content, complaining against curbs on cotton exports, which amount to asking farmers ?to bear the burden of subsidising the textile mills?.
Pawar wrote: “It defies logic to permit the consumer of cotton (textile industry) to dictate terms to the producer of cotton (farmers) regarding trade and price regime of cotton.”
The minister added: “You (PM) are aware that pesticide costs have escalated by nearly 150%, seed costs by 75%, fertiliser costs?especially urea?by 60% and diesel costs by nearly 75% over the last couple of years. Added to this is the extremely high cost of labour on account of MNREGA. For the government’s MSP to cover all these costs is well high impossible and it’s thus necessary to allow a free market and trade regime to ensure remunerative prices to the farmers.” Farmer leaders can’t agree more.
The letter followed a series of acrimonious events between the ministries of commerce and textiles, and agriculture since March 5, when cotton export was banned. Pawar said the ban was imposed “without consulting me” and conveyed his displeasure to Singh, while Sharma said more shipments would deplete the country’s year-ending stocks and it’s better to ban exports than to import at hefty prices later. The Prime Minister’s Office directed an informal group of ministers on cotton, headed by Mukherjee, to sort out the issue. The GoM on March 9 decided to lift the ban, but agreed to open up fresh registration only after assessing latest domestic supplies.
As of April 17, the Directorate General of Foreign Trade has registered a total of export contracts to the tune of 11.5 million bales?an unprecedented 33% of the expected crop size of 34.7 million bales for the current year through September. This, according to the state-backed Cotton Advisory Board (CAB), leaves the surplus cotton for the next year at a paltry 2.5 million bales?sufficient for slightly more than a month’s consumption, although fresh registration is suspended. By contrast, largest producer China doesn’t allow exports to keep supplies steady for its textile mills and holds the world’s biggest cotton reserve, widely believed to have piled up around 40 million bales. One bale equals 170 kilograms.
FE spoke to several farmers, textile industry executives, traders and government officials to figure out the options for the government to ensure the best deal for both farmers and mills. Most of them pitch for formulating a long-term export policy, which will remove speculation from trade, and guaranteeing good prices to farmers. But arguments on how to ensure fair returns to farmers are diametrically opposite.
So will a ban on cotton export do the tricks? No. It’s detrimental to the interests of both farmers as well as trade and industry. According to Bharat Krishak Samaj chairman Ajay Vir Jakhar, cotton sowing in 2012-13 would be “substantially lower” due to the export ban, as prices have kept low.
Even the textile industry doesn’t want it, as it knows the price of imports if farmers shift from cotton planting. At the same time, it can only afford a price which will help it maintain a relative competitiveness in the global textiles and garments market, dominated by China.
“Only exportable surplus should be shipped out. The CAB should meet in August each year, two month before the new season starts, to decide on exportable surplus after taking stocks of likely output based on planting. Export registration for around 60% of that surplus quantities can be allowed from October. Shipments should be allowed in a staggered manner so that farmers get their due because textile mills will compete with traders to build stocks. On the other hand, textile mills will remain assured of steady supplies,” said DK Nair, secretary-general of the Confederation of Indian Textile Industry.
He said the CAB should again meet in January and later in April to review domestic supplies, as well as consumption, and feel free to tweak exportable surplus figure based on changed dynamics. “This will ensure that both the farmers and the textile industry are in a win-win situation,” Nair said, adding that there should be a clear-cut policy about exports and year-ending stocks. Asked if such a policy will lead to predictability in India’s trade practices and reduce the country’s pricing power, he quipped: “Speculation doesn’t give extra money to farmers, but only to traders.”
“It’s wrong to assume that only exports can ensure fair prices. Fair price for produce will come from robust demand from buyers. And it doesn’t matter to the farmer if that buyer is a mill or a trader,” he said.
Another senior textile industry executive said traders grab 90% of the profits and farmers get a paltry 10% or even less in such cases, while the stake for textile mills goes up, a claim disputed by exporters. The most cogent argument the textile industry offers is: it?s more prudent to employ millions and add value to your raw material than to allow unrestricted exports of the commodity to benefit a few dozens. The country shipped out textile products and garments worth $26.8 billion in the 2010-11 fiscal, compared with the cotton exports value of around $3 billion.
Traders refute such arguments. Value addition to cotton will remain “a bogey unless raw material is procured at international levels and then value is added to it. Ensuring discounted raw material in comparison to international levels is promoting inefficiency rather than value addition,” said Dhiren Sheth, president of the Cotton Association of India, the main traders’ body. Mills also have the option to import cotton without any tax, he added.
“Several sectors have been proposing a bench-mark level for stocks-to-use ratio. It can be noted that consumers of raw cotton are not in any way stopped from maintaining this ratio at their desired level. It is unfair on their part to not buy cotton but still wish that the desired stock to use ratio is maintained, as in this case, farmers, ginners and traders would have to do it on their behalf,” said Sheth.
Some other traders fear arbitration will increase as many had firmed up export contracts but couldn’t register them as the ban was suddenly imposed in March.
Textile industry executives said although they want to stock up significantly, an acute liquidity crunch has jeopardised their plans. Mills were caught off-guard by a fall in local yarn prices after they had bought their main raw material, cotton, at record high prices following a global shortage and large volumes of exports. They could not sell yarn locally at a profit nor could they ship out products due to poor demand as well as export restrictions, resulting in huge losses.
In November last year, commerce and textile minister Anand Sharma had sought restructuring of loans in the textile sector. However, since dozens of mills had already been granted loan restructuring during the sub prime crisis in 2008-09, the central bank was not keen to tweak its prudential norms that stipulate any repeated rescheduling of loans be declared non-performing assets.
Although apparel exports between April and February rose 19% to $12.14 billion due to an initial pick-up, the overall textile and apparel exports target of $33 billion for 2011-12 will have been missed, say industry executives. The government expected the exports to rise in 2011-12 as demand seemed to have returned after the global financial turmoil in 2008, but the debt crisis in Europe hurt shipment prospects.
Earlier this month, the government directed state-run Cotton Corporation of India to create a reserve of 2.5 million bales by mopping up the raw material at market prices for exclusive sales to cash-starved mills later. The idea is to ensure prices for farmers by creating demand while keeping supplies for mills for off-season use. But some officials are jittery if it will pressure CCI’s own balance sheet.
The farmer will always seek that extra 10% in profits even if the trader grabs the lion?s share. The textile industry will always crib about its right of first refusal to raw material and lack of sops. And the trader will always assert that his presence in the market be assured. But the government has to see beyond the obvious to guard the national interest, and possibly a cue from the Chinese may help.
Budding problem
* April 9, 2010: A cotton export tax of R2,500 per tonne slapped
* April 19: Cotton export banned on fears of domestic shortage
* May 21: Ban lifted; exports permitted under licence
* Sept 30: Export cap fixed at 5.5 million bales for 2010-11
* December 31: Process of registration resumes; record applications stoke foul play fears
* June 9, 2011: Cotton export ceiling for 2010-11 raised to 6.5 million bales
* August 2: Cotton export ban lifted for rest of 2010-11
* September 12: Unrestricted cotton exports in 2011-12 allowed, subject to licences from DGFT
* March 3, 2012: Licences sought to export 3 million bales in just 10 days, foul play suspected
* March 5: Exports banned
* March 5: Pawar says ban imposed without consulting him, seeks PM?s directive to revoke ban
* March 7: PMO asks GoM to review cotton export ban on March 9
* March 9: GoM decides to lift ban, but agrees to open fresh registration after clearer picture on supplies; registered contracts need revalidation
* April 10: Farm minister Sharad Pawar hands over letter to PM, attacks flawed export policy of textile minister Anand Sharma
