New Delhi / Chandigarh: In a move that appears more populist than pragmatic, the government dramatically raised the minimum support price (MSP) for cotton by up to 46%, potentially benefiting some 4.5 million farmers.
But the government-run Cotton Corp. of India, which is the main agency entrusted to buy cotton from farmers, may not be able to absorb what the country produces. And a lobby group for the textiles industry, citing falling global demand for its products and rising input costs, immediately criticized the move.
“It (the price hike) has come as a rude shock to the (textile) industry in the throes of a crisis,” said P.D. Patodia, chairman of the Confederation of Indian Textile Industry, in a statement on Thursday. “Domestic prices are already 15% higher than international prices. This would trigger another price spiral which the industry will not be able to afford.”
BUMPER CROP (Graphic)
With the introduction of Bt cotton seeds, a genetically modified variety developed by US biotechnology company Monsanto Co., India has been witnessing a bumper crop since 2004—after a decade of stagnant production—and has become a net exporter.
In 2008-09, production is expected to be 33 million bales (one bale is equal to Rs170 kg), according to data from the Cotton Association of India. Cotton yield has increased from 300kg per hectare five years ago to 560kg last year.
The “farmer will benefit from the move but, normally, a minimum support price is introduced when prices are dropping heavily,” says Sridhar Chandrasekhar, headof research at rating agency Crisil Ltd.
India is the world’s second largest cotton grower after China, with a production of 31.5 million bales. The Cotton Corp. can procure only some 2.5-3.5 million bales, a government official who closely monitors cotton trading, said on condition of anonymity. The corporation will collect an additional subsidy of Rs1,000 crore to support the new rates, he said.
The National Agricultural Cooperative Marketing Federation of India, the farmer’s cooperative that stocks cotton for commercial sale but has not acquired stock for the government in the last five years, also has the infrastructure to handle 150,000 bales, he said.
J.N. Singh, joint secretary in the ministry of textiles, however, said on Friday that “the load (of Cotton Corp.) can be increased according to need. It will depend on whether there is a requirement or not”.
Support price of long staple cotton of 30mm length, which is used in making superfine fabric, has been raised to Rs3,000 per quintal. Last year, the MSP was Rs2,050 per quintal. Prices of medium staple cotton, used for manufacturing denim and coarser material, have been raised from Rs1,800-1,850 per quintal to Rs2,500 per quintal. This has been the sharpest increase yet for cotton, whose support prices have been rising 10-15% for several years to provide relief to farmers facing mounting debt and a spate of suicides in certain pockets of the country.
Global cotton prices have surged as farmers in the US, the third largest producer, are shifting to more lucrative fuel crop, such as maize. While demand for textile and garments have slowed, demand for raw cotton has jumped on the back of strong demand from China. India exported a record 1.6 million tonnes last year, which spiked cotton prices at home, leading textile lobbies to demand a cap on exports.
On Friday, domestic spot prices of the S6 cotton variety, which is grown primarily in Gujarat and is the most popular export item, was $0.83 (Rs36.85) per pound (about 0.45kg) against an equivalent quality African cotton selling at $0.82, including cost and freight, at an Indian port.
In July, the government removed import duty on cotton and scrapped export incentives to raise supply.
Politicians whose constituencies are based in the cotton belt, however, welcome the move. Madhusudan Mistry, a Congress party member of Parliament from Sabarkantha in Gujarat, the country’s biggest producer at 10.5 million bales each year, said local farmers have shifted to cotton farming due to good demand.
Maharashtra, Andhra Pradesh, Madhya Pradesh, Punjab, Haryana and Rajasthan are other key cotton producing states.
But concerns have been raised whether India, which has a surplus production of more than 10 million bales after domestic consumption, can afford to gamble with prices when it has to depend on exports to offload excess supply.
“The question is who is going to buy Indian cotton if international prices are lower. The domestic industry needs only 22 million bales,” said a government official asking not to be named.
“The government will be forced to procure huge quantities, since the mills will not be able to purchase cotton at the increased prices. The procured cotton will have to be disposed of at huge loss to the exchequer,” said Patodia.