Increased prices eroded the competitiveness of the garment exporters

Increased prices eroded the competitiveness of the garment exporters

Confederation of Indian Textile Industry (CITI) represents the major leading regional & industry associations, thus, covering the entire textile value chain from farm to garments & made-ups and the textile machinery industry. T Rajkumar, Chairman of CITI, outlines the cause of the fluctuating price of cotton and offers a solution.

What are the factors behind cotton price rise over the years?

Indian Textile Industry is witnessing an unprecedented volatility in the prices of cotton especially post Covid-19 pandemic. As the lockdown eased after the pandemic, the demand of textile products shot up substantially. Though, there was enough stock/ supply of cotton due to low or minimal operations carried out during back to back lockdown restrictions, however, due to increased demand of textile products world over, the prices of cotton also increased in the domestic as well as international markets. The reasons behind price rise are enumerated below:

  • Lack of data for accurate forecasting of production, demand and supply , leading to prices being largely based on speculations. With cotton production estimates falling far short of the initial estimates at the start of the cotton season, prices have steadily risen, in response to good demand.
  • Bulk buying of cotton by big MNCs which created shortage in the domestic market, which was already facing a demand supply mismatch
  • Continuous increase of MSP of cotton by the Government of India
  • Levy of 10% import duty on cotton by the Government has benefited the hoarders/speculators who create scarcity of cotton in the market during off-season which results in spike in cotton prices
  • A non -representative futures market in India. The huge variations in the Indian MCX and ICE index shows the speculative and hedging opportunities that this offers to cotton traders, often ledging to price escalation

All these factors have resulted in increased prices of cotton during the last few months.

How is the supply chain affected by this price increase?

Indian Textile Industry is mainly cotton based. Any rise in the prices of cotton affects the entire value chain especially the spinners and the apparel manufacturers.

Due to continuous increase of prices spinners were unable to honour their prices and delivery schedule to the downstream industry. Also, continuous increase in prices of cotton affected their profitability as they were not able to increase yarn prices in proportion to increased cotton prices.

Apparel manufacturers book their orders months in advance. However, due to the continuous price fluctuation they were not able to quote fixed prices for their products and hence failed to book orders due to volatility in cotton and yarn prices. Also, increased prices eroded the competitiveness of the garment exporters as they were not able to pass on the increased cost of production to the buyers.

The price rise has affected the cost competitiveness of entire T&A industryand possible loss of global orders to its competing countries like Bangladesh, Vietnam, etc.

Provide suggestions for reducing cotton price volatility.

CITI has been consistently pitching with the Government of India for the following policy framework to reduce the volatility in cotton prices:

a. Cotton Price Stabilisation Fund Scheme

Consequent to the removal of cotton from the Essential Commodities Act from February 2007, the multinational cotton traders having access to the cheaper funds and hedging facilities cover major volume of cotton and speculate the prices. This affects both the cotton farmers and the textile industry and also often The Cotton Corporation of India Ltd. (CCI). 

In order to alleviate this problem, Cotton Price Stabilization Fund Scheme consisting of:

  • 5% interest subvention,
  • reduction of margin money from 25% to 5% and
  • increasing in the credit limit from three months to nine months may be kindly be considered.

This would boost exports and enable 2% to 3% additional growth in the textile industry fetching substantial revenue and employment generation apart from stability in the prices of cotton, yarn, fabrics, etc., greatly benefitting all the stakeholders across the value chain.

India being the largest producer of cotton, a vision to enable the Indian cotton value chain to improve quality and emerge as one of the best in the world, Ministry of Textiles, has initiated by launching the first-ever Indian Cotton Brand and Logo “Kasturi Cotton”. To achieve the said international status, adequate fund may be requested to be allocated to implement the same.

b.Direct Subsidy to Cotton Farmers

The textile industry feels that an increase in the MSP of Cotton every year though benefits cotton farmers, is not a sustainable solution in its present form. In view of the declining margins of the spinning industry, the Government may devise a mechanism for providing direct subsidies to the cotton farmers as China has been doing so that the spinning industry can get cotton at an internationally competitive price.

c. Need to Launch of a Global Cotton Contract on MCX

The Industry has been requesting to the Government to advise Securities and Exchange Board of India (SEBI) about the need for having Global Cotton Contract to safeguard the interests of the stakeholders of the cotton textile sector.

Players, in the industry, who have separate international arms, are able to hedge and do arbitrage trading in ICE. However, Indian players need RBI permission for doing so which is a very difficult to obtain. Hence, they stay open to the vagaries of international fluctuations and are consistently losing due to the risk they carry.

How is the demand for cotton being impacted by synthetic fibre?

With the changing fashion trend across the world, demand of synthetic fibre is increasing worldwideincluding India. One of the major reasons behind this shift is the limited availability of cotton owing to limitations of acreage area and also cost factor plays an important role as price of synthetic fibre is relatively cheaper than cotton.

Due to the various properties of synthetic fibre, they have usage in various industrial textiles also apart from the conventional textile products. Owing to this increased application, demand of synthetic fibre is increasing at a faster rate as compared to cotton fibre and this gap in demand is expected to increase further in India with Indian Government promoting MMF sector through its policies such as Production Linked Incentive (PLI) Scheme.

How are government measures strengthening the cotton supply chain in India? Give instances.

The Indian Government has been extending Minimum Support Prices (MSP)system to the cotton farmers through The Cotton Corporation of India (CCI)’s procurement of cotton whenever cotton prices are lower than MPS level. Government every year increases the MSP for the cotton varieties. This encourages the cotton farmers for production of cotton as they get good remuneration for the same.

Recently, the Government has formed Textile Advisory Group (TAG) which has been looking into the various aspects of improving the cotton yield and productivity in the country.It is very sad that in India the cotton yield (about 460 kg per hectare) is substantially lower than the world’s average yield of about 775 kg per hectare. India also accounts for about 23% of the World’s total cotton production, however, its share in world’s total cotton acreage is about 38% which is also a serious cause of concern for India.

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