In a first, the government may build a strategic reserve of cotton this season to secure supplies for cash-strapped textile mills struggling to stock up after the Reserve Bank of India rejected a proposal for debt restructuring in the sector.
According to a proposal by the textile ministry, the state-run Cotton Corporation of India (CCI) will be directed to buy 2.5 million bales of cotton at an appropriate time to create the reserve for exclusive sales to mills, sources told FE. While the CCI procures the fibre from farmers at the state-fixed benchmark prices (minimum support prices) to avoid distress sales by farmers, this time around it will purchase at market prices for the reserve. This, sources said, will make the proposal attractive to farmers too.
At Monday?s cotton price, the reserve will cost R4,180 crore. The proposal will be sent to the finance ministry for a detailed discussion and necessary approval, the sources added.
The reserve will ensure raw material supplies to mills and help stabilise prices in times of shortage, said a senior textile industry executive. Domestic cotton prices flared up to a record Rs 70,000 a candy, of 356 kg each, in 2010-11 on a global shortage before easing to R35,000 per candy now.
Several textile mills have walked into a serious debt trap owing to a sudden fall in product prices after two successive years of relentless rise in raw material costs. Demand started falling suddenly from April as an approaching economic slowdown later aggravated into a sustained crisis in the EU and the US, which together account for around 65% of India?s textile exports.
India, the world?s second-largest cotton producer, needs to have a long-term policy on maintaining reserves if it wants to face Chinese competition in textile exports, said the executive. China, despite being the world?s largest cotton producer, doesn’t allow exports of the raw material in a bid to keep supplies for its textile mills steady. It also holds the world’s biggest cotton reserve and offloads stocks periodically to control raw material prices in the local market.
?The cotton reserve is a necessity to save the labour-intensive textile industry, which is facing a debt burden and intense competition from cotton exporters to secure the raw material. Most of the mills are small and don?t have enough financial muscle to stock up without loans. In the absence of cheaper and adequate funds, mills lose out most when raw material prices go up, and very often unbridled exports trigger irrational price spiral,? said another industry executive, who didn?t want to be named.
The country’s apparel shipment inched up by just 1.5% to $1.28 billion in February, the third worst monthly performance this fiscal, as the crisis in Europe intensified. Despite a 19% rise in apparel exports between April and February, thanks to a 16% depreciation of the rupee in 2011, textile and garment exports are estimated to have fallen short of a $33-billion target for 2011-12.
Textile and clothing exports account for around 14% of India’s industrial production and more than 10% of the country’s total exports. It is the largest jobs generator after agriculture, employing around 35 million people across various segments.
“The strategic reserve is a very good concept, but the quantity is low. Mills consume more than 2 million bales of cotton a month, so at least 6 million bales of cotton should be kept in the reserve to make any significant impact on the market in the form of price stabilisation. Moreover, it should be a dynamic reserve, which will intervene appropriately looking at the market realities,” said DK Nair, the secretary general of the Confederation of Indian Textile Industry.
The market is slowly picking up, but most textile units don’t have adequate working capital to manufacture products and cater for growing demand, Nair said. Lack of enough electricity supplies in Tamil Nadu and Andhra Pradesh has just exacerbated the problem, he added.
In November last year, commerce and textile minister Anand Sharma had sought a moratorium for two years from July 1, 2011, on the repayment of the principal amounts by the capital-intensive textile units, which account for 90% of the industry’s loans, and a one-year moratorium for other textile segments. The textile ministry had also suggested a 2% interest subsidy to the garments as well as knitwear sectors.
However, since dozens of mills had already been granted loan restructuring during the subprime 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.
To firm up a more accurate cotton output estimate, the ministry has also invited comments from stakeholders on a new law that aims to set up an accurate data collection system on cotton production and stock availability.
