Business Today

No soft landing

N. Madhavan | Print Edition: Apr 15, 2012

Will Vijay Mallya commit suicide for running up huge losses at Kingfisher Airlines," asks Talaka Rajiah, a farmer near Parkala town, 35 kilometres from Warangal in Andhra Pradesh's Telangana region. "He will not. The government has already thrown some lifelines for him and the airline sector in the Budget," says Rajiah, who also happens to be the secretary of the Telangana Farmers Association. "But when it comes to farmers the government does not have a similar commitment. And unlike industrialists, farmers give up their lives as they cannot stand humiliation."

Parkala, a dusty town at the heart of Andhra Pradesh's cotton belt, is where the farmer suicides started, way back in 1997. Fifteen years on, the region's cotton growers are still under pressure. Rajiah, for instance, harvested 90 quintals of cotton on his six acre farm this year but is saddled with a debt of Rs 1 lakh, the bulk of which he borrowed from moneylenders at 24 per cent interest.

What farmers want
Unlimited export of cotton. This way, domestic prices will remain high and they earn more

What spinning mills want
Restrictions on exports. Prices will soften, making yarn competitive in export markets

What garment/hosiery companies want
Restrictions on cotton and yarn exports. This will make cotton garment exports competitive and promote value addition in the sector

What the government wants and fails to do
A policy that benefits the entire supply chain equitably

"Though no record is maintained on farmer suicides anymore, the deaths never stopped. This year, the situation has worsened due to inadequate and untimely rainfall. Instead of support what we get is the government's decision to ban cotton exports," says M. Shankar Reddy, another farmer.

In neighbouring Tamil Nadu, which accounts for almost 50 per cent of the country's spinning capacity, about 65 spinning mills are up for sale. According to The Southern India Mills' Association (SIMA), the rest of them are operating at just 45 per cent capacity and steeped in losses.

In Tirupur, where yarn gets converted into hosiery products, the situation is no better. With the US and European economies still struggling, demand has fallen. Crippling power cuts imposed by the Tamil Nadu government have also hit production, which has fallen 20 per cent. If the Tirupur Exporters Association (TEA) is to be believed, not a day goes by without a unit receiving a possession notice from banks. Both the spinning and garment sectors are seeking massive financial bailouts from the government.

In short, all is not well in the business of cotton, right from the farm to the factory. The responsibility for this mess lies with the government. "Most of the problems have been caused by government interventions," says A. Sakthivel, Chairman, Apparel Exports Promotion Council, and President, TEA. The cotton sector is unique in many ways. At every stage of the supply chain, cotton products are saleable and there is strong export demand as well - be it for raw cotton, cotton yarn or finished garments.

Making matters worse, each of these constituents has conflicting interests. What the farmer wants goes against the interests of the spinning sector. What the yarn sector wants goes against the interests of the finishing sector. "It is in this quagmire that the government gets trapped time and time again," says A. Ramani, Honorary Secretary, Indian Cotton Federation.

On March 5, the Directorate General of Foreign Trade (DGFT) banned cotton exports after 94 lakh bales - one bale is 170 kg - were shipped out of the country against the pre-fixed quota of 84 lakh bales. "The decision to ban further cotton exports took into account the trend of domestic consumption and depletion of domestic availability. The scenario ahead pointed to a cotton shortage for the domestic industry and huge rise in domestic cotton prices," the DGFT circular said, justifying the ban. Less than a week later, the ban was revoked after a hue and cry by farmers and politicians. The shrillest voices came from Gujarat, India's largest cotton producing state, which is heading for assembly polls later this year.

Now that another 26 lakh bales will get exported, the closing stock of cotton is estimated to fall to about 10 lakh bales this cotton year (October 2011 to September 2012), or just 15 days worth of domestic consumption. This goes against the minimum carry forward stock of 50 lakh bales - two and a half months' consumption - that the informal Group of Ministers had fixed in April 2010. This time India may run out of cotton and be forced into costly imports later this year, triggering price volatility. It is this volatility that hurts everyone. Last year, cotton prices rose as much as Rs 68,000 per candy - one candy of cotton is equal to 356 kg.

With an eye on these prices, Raji Reddy, a former village sarpanch of Ramanagudam village, 15 kilometres from Parkala, chose to plant cotton on his seven acre farm and spent heavily on agro inputs.

But when the prices crashed to Rs 30,000 this year, he was caught in a bind. Today he has a debt of Rs 1.50 lakh and wants to sell two acres of land to clear the dues but is unable to find buyers. Parkala and neighbouring regions are flush with farmers who have burnt their hands with cotton this year.

In December 2010, the government, in a bid to protect the finishing sector, suddenly decided to ban cotton yarn exports. But the action proved untimely - mills had already procured and stocked cotton at high prices. By the time the ban was lifted in April 2011, cotton and yarn prices had crashed and the mills were left with a large stock of high-cost cotton.

"This caused a working capital erosion among the mills to the tune of Rs 15,000 crore," says K. Selvaraju, Secretary General, SIMA. The sector will take at least three years to recover, he adds. "Every time the government intervenes with a ban or otherwise it sows the seeds for a crisis," says Sakthivel. It has a poor record implementing the Textiles Policy's stated objective - balancing the interests of the entire supply chain - with vested interests pulling it in every direction. "The best way is for the government to free the sector with adequate safeguards. It can ask Cotton Corporation of India to build a buffer stock of 25 lakh bales, which will help tackle future shortages or price spikes," he adds. Most players in the sector agree it is the best way forward.

After repeatedly failing to come up with a policy that is equitable to all the stakeholders, it is time the government gives way to market forces.

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