The agriculture ministry is favouring another hike, by around 27%, in the minimum support price of cotton for 2011-12, aimed at increasing returns for farmers but potentially worsening a liquidity crunch in the textiles sector?the largest consumer of the fibre?which is struggling to pass on raw material costs to consumers in key export markets due to the global financial turmoil.

The ministry wants the minimum support price of cotton to be raised to R4,200 per quintal for the marketing year through September 2012 for the popular grade, compared with R3,300 per quintal the government had fixed in June, according to official sources, amid persistent demand from leaders as well as farmers from the second-largest producing state of Maharashtra.

Domestic cotton prices have nearly halved from the last year?s record level of R75,000 per candy, of 356 kg each, due to a surplus output and lower export demand.

?An inter-ministerial consultation for the hike in the MSP is going on,? said one of the sources.

The sources said with a fall in cotton prices this year due to lower demand and plentiful supplies, any move to raise the MSP will ultimately force the government to undertake massive procurement operations, widening its subsidy burden. The government had to procure a record nine million bales, of 170 kg each, in 2008-09 after it hiked the cotton MSP by more than 40%, leading to strong protests by textile mills which deferred purchases. It later sold the stocks to the mills at a subsidy after the industry complained of an ?artificial shortage? created in the market through huge official mop-up.

?If the MSP is raised to R4,200 per quintal, mills won?t be able to buy significantly, and the government may have to purchase a record quantity this year. With the domestic and global demand for cotton going down, the government may have to again offload the stocks at a subsidy,” another source said.

Farmers? leaders say sales realisation has dropped sharply this year while the cost of production has gone up by around 30% due to a rise in labour as well as input costs. However, a senior textile industry executive said, ?Last year was an extra-ordinary year because of an acute global shortage of cotton. But this year, spinners are expecting a drop in raw material prices due to a record production. Moreover, demand for textile products has declined substantially due to financial slowdown. If we are forced to buy cotton at hefty price, we won?t be able to pass it on to our customers and the result will be disastrous for us.?

Spinners are incurring a loss of R15 in each kg of yarn at the current cotton lint price of R38,000 per candy, as yarn rates haven?t picked up accordingly. Raising the MSP to R4,200 a quintal, cotton lint prices will remain at R38,000 per candy, which means their losses will be perpetuated if global conditions don?t improve significantly,? the executive said.

The textile industry has been struggling to offload huge inventories due to a fall in global demand as the slowdown fears in the EU and the US, which together account for around 65% of India?s textile exports, intensified.