Industry Struggling, Even India Is Cotton Surplus

TODAY’S STATUS:

India’s crop, which was growing every year (we became the largest in 2014-15) has stagnated/reduced for last 2 years and is facing challenges of area, yield and pests – FROM PEAK OF 398 LAC BALES, WE ARE DOWN TO 336 LAC
India surplus cotton has dwindled, leading to competition between exports and domestic usuage, now industry forced to import in end season
India’s value added industry especially spinning has been suffering despite a strong cotton crop – highest % slippages to NPAs in 2015
One of the lowest stock to use ratio in the world – 12 to 15% against world average of 80%
Domestic cotton prices are many times higher than international prices

TODAY’S CONCERNS:

Country doesn’t have sufficient surplus cotton, however exports are strong leading to forced imports at high prices at end season – hence our core advantage is getting eroded
Our competitors (Pakistan, Bangladesh, Vietnam, China etc) buying 20 to 30% of our crop, forcing industry to import
2016-17 cotton balance sheet very precarious as sowing is 10 to 15% less and low opening stock
No proper mechanism for measuring crop arrivals and forecasting crop – hence prone to mis information and rumours spread by speculators at cost of industry
No clear cotton fibre policy
Part of season, domestic cotton prices are higher than international prices – in 2013-14 we had a record crop and still prices were 9 months higher – shows a fundamental problem

INDIAN COTTON BALANCE SHEET

(in lakh bales of 170 kg each)

	2011-12	2012-13	2013-14	2014-15	2015-16 (E)	2016-17 (P)
Opening Stk	45.77	40	40	33	66	43
Add: Production Imports	367 7.51	370 14.59	398 11.51	386 14.39	338 15	338 15
Total Supply	420.28	424.59	449.51	433.39	419	391
Less: Consumption Exports	250.71 129.57	283.16 101.43	299.55 116.96	309.44 57.72	308 68	310 68
Total Demand	380.28	384.59	416.51	367.16	376	378
Closing Stock	40	40	33	66	43	13

Note: Data is as per CAB, excepting 2016-17 which is based on current estiimated sowing (12% less than 2015-16), 10% extra yield from 2015-16, same level of consumption, export and imports as 2015-16.

2016-17 shows that if exports are same as 2015-16, then no cotton would be left for mills despite high imports forecasted.

Some urgent steps need to be undertaken to ensure atleast 1.5 month cotton usuage stock i.e. 40 lac bales should stay within the country.

BACKGROUND:

Cotton based textiles has been the main stay of Indian textiles over decades. India is one of the few nations where textiles is still skewed in favour of cotton (60%) as against the world where man made has a 60% plus share while cotton is sub 40%. One of the major reasons for this is our large cotton crop grown across 10 States.

One of the largest and important questions in all sectors of the economy has been – how much role should the Government have? This question has caught momentum with the liberalization of our economy in early 1990s. The cotton textile world is no exception, where the debate has been whether the Government should leave the cotton fibre economy on its own – to grow, develop, stabilize and find its own direction and level.

A country with substantial cotton surplus has a value added industry, which is struggling to even stand on its two legs, surprising but true – while nations like Bangladesh, Vietnam who have no cotton are flourishing

In 2013-14, India had its largest ever crop of 390 lac bales however still for 9 months of the season Indian prices were higher than international prices. in 2015-16 prices jumped by 50% in 2 months and industry had to import, as 20% crop had been exported earlier to competing nations.

Based on the above arguments, we feel that Government like other agricultural crops needs to ensure sufficient availability of cotton at competitive prices to the industry – otherwise the industry would find it difficult to move up the value added chain and become a large manufacturer of textile products like China, Bangladesh etc. It could instead be rendered as a supplier of raw material like African, CIS nations.

However it’s important that while meeting the above objectives, the Government does not fall into the following traps:

The Government like the Chinese should not get saddled with unmanageable levels of cotton stock.
The cotton quality should not get impacted due to Govt/CCI getting into ginning.
The industry should not be forced to buy cotton at above international prices, and in the process be rendered uncompetitive globally.
Government purchase program to help farmers, should not lead to hoarding of cotton which disrupts market forces.
There should be no discrimination between small and big players – both should be on the same footing
Govt intervention should not lead to unpredictability and uncertainty of supply flow for the industry.

IMPORTANT INITIATIVES NEEDED TO BE TAKEN:

In our opinion the Government needs to take the following further steps:

Allow funding for cotton stocking at subsidized rates of 2% below the base rate for the period October – April, so that industry can stock cotton and ensure farmers get a better price. (otherwise difficult for industry to compete with international traders who have access to low interest off shore funds)

CCI like FCI should play a constructive role by creating a buffer stock when prices are low and ensure cotton security and price stability (by keeping speculators at bay and ensuring prices are in parity to international prices).

A system of direct subsidy should be started for farmers when cototn kapas prices fall below MSP. CCI should not get in processing cotton fibre, it should just buy ready and pressed cotton fibre.

A more scientific and transparent system needs to be formulated urgently for crop forecasts and crop arrival measurement. The same needs to be conducted by an independent agency. This would avoid mishaps of 2013-14 and 2015-16 where incorrect crop estimates lead to huge losses for the industry (as it induced domestic prices going above international prices for a large part of the season)

Ginners should be made to compulsorily declare their pressing numbers online alongwith stock figures to ensure arrival data is accurate. All bales must have unique declared press marks.
Area under cultivation should be scientifically determined using latest forecasting techniques
Best practices to be picked up from other countries for agro product estimations

Impose import duty on edible oils to ensure the cotton economics is improved (as 65% of the kapas is seed – better realization from the same would improve the farmer’s return without impacting the cotton fibre prices).

Create a Cotton Board with a clear mission and goal to take India’s productivity to 1000 kgs of lint/hectare grown by 2020. Farmers earnings growth needs to come from productivity and efficiency rather than industry paying more for fibre – this is only way to protect interests of both farmer and industry. There is good scope for increasing yield if agronomy research is taken up & farmer is given knowledge on Precision Farming Techniques. The farming techniques differ from area to area. The research grant to CICR has been reduced to ₹100 lacs from ₹300 lacs.

Create standards for cotton fibre in terms of moisture, trash and packing to ensure the cotton retains its name of “ White Gold” which has lost its sheen due to man made introduced impurities. Need to put check on Ginners for adulteration

Create a program to work on reducing contamination in Indian cotton – today Indian cotton is losing minimum 5 cents/lbs due to higher contamination levels as against other competing orgins like West Africa, CIS, USA, Brazil etc.

Mandi tax / APMC fees should be applicable only for transactions done through it – where no service provided, why should the industry be burdened with fee ?

Import and export data of cototn fibre should be available to industry within a week of the preceding month (as all ports are computerised, the HS Code based data of trade should be readily available).

SUMMARY

To summarise, the main suggestions of this note are:

Short term:

Ensure the Indian industry gets cotton fibre throughout the year at atleast international spot prices i.e. maximum price of Cotlook Index less 3 cents i.e. cost of transportation etc.
Ensure sufficient stock to use ratio for cotton fibre so that the industry is not at a disadvantage to its competitors due to cotton, which is India’s biggest strength. Typically India’s stock to use ratio has been very low
Govt should avoid getting involved in manufacturing process of ginning – pay the farmer directly the difference between MSP and market price if any

Long term:

Create a comprehensive cotton fibre policy, defining clearly action needed in various scenarios.