Mills seek restoration of Drawback and DEPB for cotton yarn exports

Textile mills across the country downed shutters for a day on Monday as cotton yarn stocks were piling up in the units. The mills will also cut one-third production from May 24 for a week.

“The strike was to draw the government's attention to the crisis faced by the mills,” said Shishir Jaipuria, Chairman of the Confederation of Indian Textile Industry.

About 3,300 mills in the country (with over 40 million spindles) that produced 120 lakh kg of yarn a day did not operate on Monday. Of these, Tamil Nadu had nearly 2,100 mills with 21 million spindles that produced 57 lakh kg of yarn a day. The total production loss because of the one-day strike was estimated to be Rs.270 crore, J. Thulasidharan, chairman of the Southern India Mills' Association, told journalists here on Monday. The mills are having 45 to 60 days stock with them.

Mr. Jaipuria said in a release that the ban on export of cotton yarn resulted in huge unsold stock of yarn with the mills. When exports were permitted again from April 2011, the accumulated stocks led to a crash of yarn prices in the global and domestic markets.

Mr. Thulasidharan said India was so far a reliable source for cotton yarn supply globally. However, the domestic manufacturers had lost the confidence of their overseas buyers now because of the restriction on yarn exports in 2010-11.

The market sentiment was affected. “The textile industry in the country has never faced such a crisis so far. We are unable to sell the yarn produced,” he said. At today's yarn prices, the mills would not be able to recover the cost of cotton (the main raw material). Many mills have cotton that was purchased when the prices were more than Rs.60,000 a candy. The cotton prices had fallen to about Rs.43,000 a candy now. The yarn prices had also declined. However, the industry feared further fall in prices of yarn and this made it unviable for the mills to continue production.

He appealed to the government to form a Directorate of Textile Intelligence and come out with a system to have accurate data on production and consumption of cotton and cotton yarn in the country.

The spinning mills associations in the country appealed to the Union government to restore the Drawback and the Duty Entitlement Passbook Scheme for cotton yarn exports. These were withdrawn in April last. The 10.3 per cent excise duty on readymade garments should be withdrawn.

Moratorium sought

The government should announce that there would be no restriction on export of cotton yarn in the future. The mills should be given one year moratorium for repayment of loans and interest and they needed working capital term loan assistance.

The pollution problem faced by the dyeing units in Tirupur and other clusters in Tamil Nadu should be solved immediately so that the domestic garment industry could operate to its full capacity, they demanded.

“Extreme steps will not help”

N. Anand reports

from Chennai:

Manickam Ramaswamy, managing director of Loyal Textiles Ltd. and former chairman of the Southern India Mills Association, has expressed the hope that the government will realise that extreme steps to incentivise cotton exports or to restrict the export of finished goods are injurious to the long-term health of the industry.

Talking to The Hindu, he said the problems of the textile industry started when the government gave a five per cent incentive to cotton exporters, and the Cotton Corporation of India gave deep discounts and six months interest-free terms to large buyers who bought in excess of two lakh bales. Only the exporters and a few mills took this discount. The large exporters in effect got a 15-20 per cent benefit. They passed on a good part of it to importers, spinning mills and competitors in China and Bangladesh.

Sudden drop in exports

The exports of finished goods, therefore, became uncompetitive, he said. “The sudden drop in exports resulted in huge losses for the entire textile industry for over 18 months.”

According to him, the right solution would have been to remove all incentives for cotton exports, including the Duty Entitlement Pass Book (DEPB) and allow exports to continue, but the industry over-reacted to the government's previous mistake and demanded restrictions on cotton exports. The government, which was pressured by both the spinners and more importantly by the Tirupur exporters and garment exporters, got the export of cotton restricted to 55 lakh bales. Once cotton was brought under restriction and the 55-lakh ceiling was reached, the world feared a cotton shortage. This pushed up international cotton prices.

This, in turn, pushed up domestic prices despite export restrictions on the back of active buying by mills. Though the domestic yarn prices were below international prices by 3 to 4 per cent, the domestic industry pressured the government to restrict yarn exports. Having restricted cotton exports, the government had to accept the demand for yarn export restriction too. But the manner in which it restricted the exports, without proper data assuming the surplus to be 720 million kg based on available historic data, caused the export quota to be exhausted by December. Notwithstanding the spinning industry's repeated plea to increase the quota for exports, the government did not do so, Mr. Ramaswamy said.

Huge accumulation

This caused a huge accumulation of yarn — around 500 million kg. Spinning mills kept producing yarns even by buying expensive cotton and power at Rs.12 a unit, as they were assured by international buyers of regular orders at high prices. The yarn exports were resumed only after three-and-a-half months, but by then the sales of cotton textiles worldwide had dropped in volume owing to very high prices, and the switch over to other fibres happened rapidly, as international cotton yarn prices went through the roof.

By the time the Indian yarn exports were allowed again, the world market realised that India had a very huge inventory of cotton yarn and cotton, and there was no reason to buy to protect against a possible famine of cotton. All store groups postponed purchases. The pressure of inventory with the Indian mills and the mills' eagerness to get rid of their inventory before the new cotton arrived pushed the prices down by more than 30 per cent within a month, and the Indian cotton prices fell far below the international levels, resulting in the present crisis, he said.

“For a country that is exporting 30 per cent of the global trade of yarn, to ban export for three months is a definite recipe for disaster,” he said.