Cotton price hike in India: Cause for concern or overreaction?
The recent rise in cotton prices in India has created a ripple effect across the textile industry, sparking concerns and prompting calls for action. While some, like the Southern India Mills' Association (SIMA), advocate for a balanced approach, others highlight the potential long-term impacts of this trend.
What caused the rise?
The removal of cotton from Essential Commodities Act is one major reason argues SIMA. This decision in 2007 opened the doors for multinational traders who leverage international market advantages.
Another factor is the limited working capital for small and medium mills. The predominantly MSME spinning segment struggles to procure cotton during peak season due to limited working capital and high interest rates. The 11per cent import duty on all cotton except ELS variety forces mills to rely on traders during the off-season.
The Indian textile and clothing industry heavily relies on domestically grown cotton. However, recent changes have led to multinational traders dominating the market, leaving Indian spinning mills (mostly MSMEs) struggling to procure affordable cotton during peak season. An 11 per cent import duty, especially during the off-season, further exacerbates the problem. SIMA says, the Minimum Support Price (MSP) and Cotton Corporation of India (CCI) operations sometimes create unintended consequences, benefiting traders rather than farmers. The result is speculative price increases that harm the competitiveness of downstream textile manufacturers, impacting export contracts.
Meanwhile global cotton production forecasts suggest increased supply from Australia and Brazil in the second half of 2024, potentially easing prices. However, the current price volatility in the Indian market is causing panic buying and harming the industry.
Impact on the industry
The sudden price increase has led to panic buying, further inflating prices. Also rising yarn prices due to cotton price hike make it difficult for garment manufacturers to complete their export contracts. SIMA argues that the price rise primarily benefits traders, not farmers, impacting the industry till the end of the season. In fact, the price rise has impacted Indian textile industry in many ways. In the domestic to market it has led short-term volatility and cost concerns for yarn and fabric manufacturers. Also it has potential impact on downstream garment and apparel production costs.
However, SIMA believes the rise is temporary and won't benefit farmers due to the high arrival rate and expected bumper harvests in Australia and Brazil post-July 2024. They advise against panic buying, citing comfortable global cotton stock-to-use ratios and an expected price softening post-July due to increased global supply.
However, some experts might counter these arguments by pointing out geopolitical uncertainties due to the ongoing war in Ukraine and other global factors could disrupt global cotton supply chains, impacting availability and prices. Increased domestic demand from the textile industry itself could put pressure on prices. And market manipulation by traders could further exacerbate the price rise.
SIMA meanwhile proposes reviving CCI's 2016 policy of releasing cotton when domestic prices exceed international prices and suspending sales during dips, ensuring price stability and export competitiveness. They advocate for exempting all cotton varieties from import duty during off-season (April-October) to counter import parity pricing by traders and boost exports. S K Sundararaman, Chairman of The Southern India Mills’ Association (SIMA), outlines the urgent need for a comprehensive National Fibre Policy to address the recurring cotton pricing issue and ensure raw material security for the textile industry.
Key policy recommendations
CCI intervention: CCI, which has procured substantial cotton stocks, should follow its successful 2016 model. It should release cotton when domestic prices exceed international prices (ICE futures) and suspend sales when they fall below, ensuring price stability.
Import duty exemption: The government should temporarily exempt all cotton varieties from the 11 per cent import duty during the off-season (April to October). This would prevent traders from adopting import parity pricing and help maintain export competitiveness.
Benefits of a national fibre policy
A comprehensive policy would create a level playing field for all industry players, allowing Indian textile value-added segments (fabric, garments) to better manage costs and fulfill export commitments reliably. This, in turn, would take full advantage of other government initiatives to boost India's textile exports.
SIMA advises spinning mills to avoid panic buying, as the overall cotton supply is expected to be comfortable post-July 2024. Mills should exercise caution, ignore rumours, and procure cotton strategically to manage costs while ensuring a reliable supply for their operations.