Fibre optics: Cabinet to come out with kharif 2018 MSPs today

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New Delhi | Published: July 4, 2018 5:37:43 AM

A 28% hike in the minimum support price (MSP) of cotton — to be announced on Wednesday — to ensure farmers get at least a 50% profit over the so-called A2+FL cost will drive up state-run Cotton Corporation of India’s (CCI) procurement to at least a four-year high, according to industry executives.

cotton, cotton industry, cotton sectorThe Centre raised cotton MSP (medium staple) by a record 39% in 2008-09.

A 28% hike in the minimum support price (MSP) of cotton — to be announced on Wednesday — to ensure farmers get at least a 50% profit over the so-called A2+FL cost will drive up state-run Cotton Corporation of India’s (CCI) procurement to at least a four-year high, according to industry executives.

In the past, higher MSPs nearly invariably pushed up procurement by the state-run agency. For instance, the Centre raised cotton MSP (medium staple) by a record 39% in 2008-09, driving up CCI’s procurement to an all-time-high of 8.9 million bales, as high raw material prices kept many mills away.

Wide-scale protests by the textile industry and losses on procurement operations forced the government to keep the MSP unchanged for the next two years — up to 2010-11. However, in 2012-13, when it raised the MSP again substantially by 28.6%, CCI had to intervene by buying 2.3 million bales, the third-highest procurement year so far. This was despite the fact that cotton export volume touched a record 12.9 million bales that year and domestic production had fallen 5.4% from a year before.

Industry executives say the hike in MSP and production levels have been the major drivers of cotton purchases by CCI in recent years. While the record procurement in 2008-09 was driven entirely by the sharp MSP hike, CCI had to procure as much as 8.7 million bales in 2014-15 as well, when a record harvest and subdued exports dragged down local prices. The losses to CCI on MSP procurement operation that year were pegged at as much as Rs 2,500 crore. Under the MSP operations, CCI procures cotton at the benchmark prices to avoid distress sales by farmers and later sells the fibre to textile mills and others. Any losses on account of this operation are reimbursed by the government.

FE has reported that on average, cotton prices (medium staple) will have to raised from Rs 4,020 per quintal to Rs 5,160 per quintal if the government wants to keep its promise to farmers. Given the conversion ratio of around 33%, this means the prices of finished cotton will rise to Rs 1,56,364 per tonne compared to the current global price of around Rs 1,25,553 per tonne (based on a Rs 67 per dollar exchange rate). Apart from making cotton exports unviable and eroding the competitiveness of the entire value chain (yarn, fabrics, garments, etc), it could also prompt textile mills to explore fibre imports from places like Africa.

This means there will be fewer takers for domestic cotton, which, in turn, could keep market prices subdued if the country witnesses a bumper harvest in 2018-19.

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