Cotton export ban vitally flawed

The ban on export of cotton has come as a bolt from the blue and raised a veritable storm at home and abroad. Both Maharashtra and Gujarat have protested to the Prime Minister who has asked the Group of Ministers to urgently re-examine the decision. 

And, the Union minister for agriculture, Sharad Pawar has stated that he was not consulted and he was opposed to this move.

The chairman of the Commission on Agricultural Costs and Prices, Ashok Gulati, observed that cotton prices were ruling below the year ago level, hurting farmers and the export ban amounts to “adding salt to injury”.  Strong words indeed but even harsh sentiments were voiced from overseas.

China -the largest buyer of Indian cotton - has flayed this action of the Indian government, describing it as “irresponsible” and “market-disrupting” while Bangladesh said that it was against global trade norms.  The International Cotton Association and the International Cotton

Advisory Board have joined the chorus of protest faulted the Centre for its retroactive nature of the ban and while lamenting the detrimental impact on world cotton trade, wanted the status quo ante to be restored.

What has triggered the official action was the fact that cotton exports have already reached a level of 94 lakh bales as against the export surplus of 84 lakh bales and the need to maintain the closing stock of this fibre at 50 lakh bales in terms of the textile policy.

Moreover, some of the registrations for cotton exports appeared to be speculative in nature and the higher-than-intended exports might be hoarded in bonded warehouses abroad.

What is overlooked in this war of words is that, in a fundamental sense, there is scope for more cotton exports this season. For one, we are poised to reap the highest ever harvest of cotton, projected at 345 lakh bales, by the Cotton Advisory Board. For another, mill consumption is estimated to decline by nearly five lakh bales this year to 216 lakh bales while non-mill offtake is expected to sag as compared to the 2010-11 season.

The record crop has also tended to depress prices and a holistic view of the raw cotton prices movements is reflected in the downward drift in the index for cotton to 204.4 (base 2004-05=100) in January 2012 from 236.6 a year ago. Though the prices had ruled higher earlier in the season, as the arrivals picked up, the bearish sentiment had set in.

Arrivals till March 4, 2012 have been lower than during the corresponding period of the preceding season -233.76 lakh bales as against 243.14 lakh bales, suggesting that there may be more offerings in the weeks ahead. 

Since demand may be subdued — most of the textile mills would have purchased their requirements by now — and in view of the mild recessionary conditions in the industry, softening trend in prices may persist.

In this background, export outlet may come to the succour of the farmers without hurting the textile industry unduly, even if the closing inventories are below the norm of 50 lakh bales.  In fact, in many of the earlier years, the year-end stocks have been even lower — as recently as the last season, these were only 48.30 lakh bales.

Even with record exports, stock level will not be so low as to warrant concern. On the other hand, if the ban is not lifted, and prices dip further, it may be act as a disincentive to farmers to expand the area under cultivation in the sowing period that is ahead. It may be added that, in irrigated tracts, the sowing starts rather early and price of cotton has a bearing on the acreage.

Most important of all, India’s image as a reliable supplier to the global cotton market  is at stake. By banning cotton exports and making this applicable to cases where registration certificates have been issued, we are muddying our reputation further. The textile ministry has clarified that all registrations up to March 4 for exports would be honoured. But this is unlikely to cut much ice.

The previous ban on cotton exports in 2010 had resulted in many arbitrations at the International Cotton Association.  A similar scenario may be repeated now also and many importers may turn to other suppliers.