Why the government banned cotton exports
N Madhavan March 7, 2012Farmers and farming industry bodies are up in arms against the government of India's decision to ban cotton exports on March 5. While they see it as anti-farmer - an arbitrary move that will deprive them of higher realisation - a closer look at the numbers does suggest that the government has kept the overall interests of the textile sector in mind while ordering the ban.
This is not the first time cotton exports have been banned and will not be the last time as well. The cotton sector in the country works in a unique manner. Cotton Advisory Board (CAB) is the apex body that estimates (or guesstimates to be more precise) the cotton availability in the country. It determines the crop size, domestic consumption and the estimated stock that needs to be carried forward to the next year before arriving at what the exportable surplus should be. But the problem is that CAB estimates often tend to be way off the mark, forcing sudden policy changes. This year has been no different.
CAB had arrived at an exportable surplus of 84 lakh bales (one bale = 170 kilograms) for the cotton season 2011-12 (October-September) based on its availability estimate of 399 lakh bales and consumption of 260 lakh bales, leaving a comfortable carry forward stock of 55 lakh bales. Based on this exportable surplus data and with international prices ruling higher by about 20 US cents per pound, cotton exports happened briskly.
Then came the first revision. CAB had overestimated the opening stock for the 2011-12 season by a mile as exports in 2010-11 overshot the limits by 12 lakh bales. In reality the opening stock was just 32.59 lakh bales, as against its initial estimate of 48.30 lakh bales - a shortfall of 16 lakh bales. To compound this problem, it revised downwards the crop size for this season from 345 lakh bales to 340 lakh bales. This should have immediately set the alarm bells ringing in the textile ministry and the exportable surplus should also have been revised downwards so as to maintain adequate stock of cotton in the country for domestic use. But that did not happen. Exports continued and by March 3, they touched 94 lakh bales - again overshooting the originally fixed limit by 10 lakh bales. Another 26 lakh bales of cotton have been registered for exports so far.
This export frenzy comes at a time when domestic spinning mills - reeling under huge financial distress - have not been in a position to stock their requirement of cotton. Typically they buy bulk of their cotton between December and March every year as the quality of the arrivals is good and consistent. This year they have not been able to make the purchases as they saw massive working capital erosion last year - The Southern India Mills Association estimates this at Rs 15,000 crore - when they were adversely affected by sharp cotton price movement. With just 25 per cent of the arrivals due in the market (cotton arrivals as of March 6 was 245 lakh bales as against the crop size of 340 lakh bales), unhindered exports would have sent the closing stock for the 2011-12 season to less than 10 lakh bales which is just 15 days consumption.
"Government of India has fixed 50 lakh bales as the minimum opening stock as the cotton arrivals typically happen from mid-December even though the season starts in October. It is the opening stock that will feed the demand for the first two and a half months of the season,'' says K Selvaraju, Director General, SIMA. "Had the government not banned the exports, we would have run out of stock by August this year and forced to import cotton at very high prices."
The farmers, however, are angry. "We are flabbergasted with the government notification banning export of cotton. The price of cotton last year touched Rs 7,000 per quintal and this year it has been hovering around Rs 3,700 only. With the ban on export of cotton, the price will further reduce. Instead of subsidising and protecting Indian farmers, the government ban will increase international cotton prices and profits of farmers in Brazil and Australia,'' says Ajay Vir Jakhar, Chairman, Bharat Krishak Samaj. They also point to the fact that due to massive power cuts in Tamil Nadu, which accounts for 50 per cent of the country's spinning capacity, domestic cotton offtake is likely to be poor.
The government has made it clear that the textiles policy strives to balance the competing interests of the entire value chain. It has advised the Cotton Corporation of India to protect farmers' interests by procuring in all mandis where the prices fall below the minimum statutory prices. Since the ban, the price of Shankar 6 - the bench mark cotton variety - has declined from 34,500 per candy (two bales equal one candy) to 32,000 per candy.
"What government has done is correct and in time. Otherwise India would have been forced to import cotton at very high prices which would have significantly impacted the competitiveness of Indian textile exports,'' says KN Viswanathan, vice-president, Indian Cotton Federation.
It is indeed a tight rope walk for the government to manage the conflicting interests of the cotton growers and the consumers. This time around, it seems to have played its cards right.