It is a strange thing for a country that is the second largest producer of cotton in the world to do. Yet, India is now importing a large quantity of cotton using precious foreign exchange, and exerting what could have been an avoidable pressure on the trade deficit. And, it does this after exporting large quantities in the same season just a few months ago.In the ongoing cotton season (October 2011- September 2012), India exported 120 lakh bales, significantly higher than the Cotton Advisory Board’s (CAB) estimated exportable surplus of 80-85 lakh bales. And now, together, the mills are likely to import more than 15 lakh bales. Incidentally, the current season’s exports and imports are the highest in the last seven years!

India’s annual import of cotton was less than 10 lakh bales for each of the last seven years falling from a peak of 25 lakh bales imported in 2001-02. The textile industry mainly imported the extra long staple variety used to make fine counts of yarn as it is not available in India in large quantities.

Increase in exports

With production going up steadily in the country during the last decade, cotton exports also increased from 2005-06. Since then, almost every year, raw material security and stability in prices have been a challenge for the textile industry. Prices may not have fluctuated as sharply as in 2010-11, yet, for the Indian cotton sector, 2011-12 has been another year of extreme volatility and uncertainties.

India has emerged as a major cotton producing and exporting country, and yet, a long-term road map eludes the sector. This has, during the last five years, resulted in frequent instances of price fluctuations and fears of shortage in availability. Cotton is the source of livelihood for thousands of farmers; more than half of Indian textile industry is cotton-based; the domestic textile mills consume over 60 per cent of the Indian cotton; and, globally, India is the second largest cotton exporter. The CAB regularly provides guidance on the crop size, domestic consumption, potential for exports and imports, and these help the government take key decisions. But, the decisions are mostly based on the demand and supply situation through the season and that interferes with market dynamics. As the season comes to an end, arrival of kapas has reduced significantly and there is a squeeze in availability. Domestic prices have firmed up and are currently higher than international prices. With deficit monsoon in many of the cotton growing areas, arrival of cotton is expected to be delayed next season that starts in October. Hence, the textile mills are entering into contracts for imports to ensure availability of cotton at a relatively lower price for the next two to three months. The textile chain includes a sizable number of unorganised, small-scale units which cannot afford sudden rise in raw material costs. If there is a shortage or huge demand, cotton prices shoot up and it has a cascading effect on different segments of the textile sector — spinning, weaving and garment.

The value-adding segment, especially the small-scale spinners, weavers and garment-makers, is hit if it is unable to pass on the increasing cost to the next stage. It will be difficult for the government not to interfere in such situations.

Data monitoring

China, which is the largest producer, consumer and importer of cotton, has a strong data monitoring system. Hence, at any point of time it has data on the stocks with farmers, traders, ginners and warehouses. It also has a huge reserve of raw material.

India first needs to strengthen its data collection and monitoring system. The Ministry of Textiles is working on a National Fibre Policy targeting 6-8 per cent increase in cotton production a year, and has circulated a draft Cabinet note on Cotton Distribution Bill and mooted a Cotton Distribution Policy. However, what is imperative is a comprehensive policy at the earliest that will help all stakeholders. It should also focus on schemes that will encourage efficient operations and avoid speculation rather than controlling the prices.

Meanwhile, the industry needs to improve its efficiency so that raw material price fluctuations do not affect its cost-competitiveness.

The product made by one value-adding segment is the raw material for another — the yarn made by the mills is the raw material for the weaving and knitting units. Each segment faces cost pressure as prices of all inputs, such as power and labour, have increased manifold. The government should, therefore, refrain from controlling or monitoring prices in any one segment alone.

More In: Industry | Business