Impact of Cotton Imports

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Cotton plays an important role in the Indian economy as the India’s textile industry is predominantly cotton based and India is one of the largest producers as well as exporters of cotton yarn. Gujarat, Maharashtra, Telangana, Andhra Pradesh, Karnataka, Madhya Pradesh, Haryana, Rajasthan, and Punjab are the major cotton producers in India. According to reports, India has been one of if not the biggest producer and exporter of cotton in the world. India has imported cotton occasionally in the past due to crop issues and the like. The latest news is that this year India is set to import cotton as imported cotton is working out cheaper than the local cotton due to the strong rupee.

Number Crunching

India’s cotton exports have increased over the last one year. India’s import of cotton (HS 52) increased from US$ 552.89 over April to February 2016 to US$ 1,063.63 during April to February 2017.  “International cotton prices do not show a significant decline in prices. In fact, it shows a mildly upward price trend since the last three years. But domestic supply in India has been hit by a draught in Tamil Nadu and Andhra Pradesh. There is also a possibility that Indian farmers are holding on to their stock as international prices are expected to firm up even more. However, during the last five months there has been a significant appreciation of Indian rupee. Appreciation of rupee implies cheaper imports. As a result, Indian mills are finding imported cotton cheaper and switching to foreign suppliers. Data show that most supplies are coming from Brazil, Africa, USA and Australia,” says Parthapratim Pal, Professor Economics, Indian Institute of Management Calcutta. Among these countries, cotton exports from USA generally are supported by farm subsidies. US cotton exports are made artificially competitive through an elaborate mechanism of US farm support system.

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Domestic Woes

While higher import from foreign countries means that domestic producers are losing their market, whether it is good or bad for a country is a more complicated question. “Cheap imports of raw materials and intermediate goods improve competitiveness of producers of final products. If these benefits are passed on, then others in the value chain also gain. In this case, mill owners and garment manufacturers can benefit from cheaper cotton imports. If the lower prices of final goods are passed on then consumers may also gain. However, it may be harmful for domestic cotton producers,” says Pal. According to reports, India, till the 1970s was an importer of massive quantities of cotton in the range of 8-9 lakhs bales per annum. However, due to special schemes through successive five-year plans, the Government managed to boost cotton production to self-sufficient levels. This brought down the import of cotton but in the late 90s and early 2000s, again large quantities had to be imported due to lower crop production and increasing demand of cotton by the domestic textile industry. Amit Vijaya and Richard Pandav, Designers, amrich: by Amit and Richard explain, “this is an alarming issue as cotton agriculture is one of the biggest in India. If we start importing cotton, there would be a problem with the consumption of locally grown and produced fibre and that would be detrimental to the farmers who are as it is struggling to make ends meet. Like in the past with silk fibres, which were sourced from China due to competitive pricing led to a dearth in locally produced silk. This almost finished the production of silk yarns in the country making us rely completely on importing from China. Today the country has a monopoly on silk yarns and fabric being sold in India. It would be an extremely sorry state of affairs if we allow the import of cotton to hamper one of our agricultural strengths.”

Currency Crisis

India’s 2016-17 cotton imports are set to jump more than a third from a year ago to a record 3 million bales as the rupee’s rise makes buying overseas cheaper according to senior officials in the Cotton Industry. The strong rupee has also caused a complete slowdown if cotton exports. Indian mills have contracted to import around 1.5 million bales and another 1.5 million bales will be imported by end of the current crop year, ending September 2017. That total of 3 million bales would be 36% more than the 2.2 million bales imported in the 2015-16 crop year, with stocks coming mainly from African countries, the United States, Brazil and Australia. Tightness in domestic supply is also boosting imports, as Indian farmers hold off on deliveries in the hope of achieving higher prices later in the crop year. The state-run Cotton Advisory Board has forecast production of 35.1 million bales in the current crop year, but industry officials say production is likely to be around 34 million bales as output was hit in southern states of Andhra Pradesh and Tamil Nadu by a drought. One of the biggest impacts is the loss of exports to other nations such as Brazil, US and some African countries.

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Price Hikes

High domestic prices have forced the industry to begin cotton imports early and about 3 lakh bales of the commodity have been imported in December 2016. Typically, imports start by April-May when domestic prices start moving up. However, this year as the arrival of cotton has dipped post the note-ban and farmers are not selling cotton in large quantities as they prefer to deal in cash and demonetization has not helped the cause. After demonetisation, several of the local cotton markets are not fully operational as arrivals have dwindled. Demonetisation has not only impacted the arrival of cotton, but also the export orders of cotton have also taken a toll. “Furthermore, farmers have delayed deliveries in the hope of achieving higher prices later in the crop year. The fact is that textile mills of South India usually do import cotton but this year the North Indian mills have also begun to import cotton,” aver Vijaya and Pandav. With exporters facing difficulties to source products from the markets, non-fulfilment of orders has led to cancellations as well as fall in forward contracts. According to Cotton Corporation of India (CCI), the total arrival during October to December 2016 was 7.5 million bales compared to the 10 million bales in 2015. South Indian mills are importing cotton from West Africa as it is comparatively cheaper than Indian cotton, by almost Rs 6,000-7,000 per candy. Cotton arrival is currently at 150,000 bales a day as opposed to the standard 225,000 bales. All this means that the industry is the midst of a crisis and urgent remedial action is really the need of the hour to ensure that domestic cotton producers get their due.

This story appeared in the August 2017 issue of Apparel India here: 53_Trade Talk_Cotton

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