Effort to get mills to foot bill for ensuring 50% profit for farmers over production cost
The agriculture ministry is weighing an option to mandate the textile industry to buy cotton and jute from farmers at least at the minimum support prices (MSPs) fixed by the Centre. The move is part of the efforts to make the government’s promise of ensuring a 50% profit to farmers over their cost of production a reality, without letting the Centre’s procurement expenses spiral out of control. Inter-ministerial consultations are currently being held on procurement-based price support schemes for agricultural crops.
The ministry’s proposal — fraught as it is with serious implementation challenges — could spell trouble for the labour-intensive textile and garment industry by inflating the cost of cotton, a key input. The sale of raw materials to industry at state-fixed prices is currently adopted in cane where sugar mills are bleeding while footing the bill for the profligacy of states and the Centre.
MSP for cotton will increase by at least 28% for 2018-19 from the current level if the government’s promise to farmers is to be met. A back-of-the-envelope calculation suggests cotton accounts for roughly 60% of yarn costs, and yarn makes up for 50% of fabric costs. Fabric, in turn, makes up for 50% of garment costs. So higher cotton prices will push up costs in the entire value chain and jeopardise its competitiveness.
“For cotton and jute, there are two options. Either the Cotton Corporation of India (CCI) and the Jute Corporation have to buy the two crops at MSP everywhere and later sell it in the open market, or the mills are asked to buy at MSP and in return get some incentives,” said a government official. The idea is being mooted at a time when garment production has dropped for 11 months in a row and exports have contracted for a seventh straight month through April, with most units reeling under elevated costs. Garment production dropped 11% in 2017-18 and exports contracted almost 4%, even though the country’s overall merchandise exports rose 9.8%.
Given its traditional focus on a balance between the interests of both producers and industrial consumers, and exports, the textile ministry will most likely oppose the farm ministry’s idea. “We are unaware of any such proposal on cotton procurement that will potentially render the Cotton Corporation of India irrelevant,” said a senior textile ministry official.
The CCI had bought a record 8.9 million bales — or nearly a third of the cotton production — in 2008-09, and procurement levels have been below average in the past three to four years. However, since cotton is almost entirely consumed by industrial users, the burden of procurement will be too high for them if market prices trail the inflated MSPs by a substantial margin. In such a case, the value chains of the textile industry that work on thin margins will be substantially hit.
Noted textiles sector expert DK Nair said: “The proposal is impractical and will be very difficult to implement, considering the existence of thousands of units. More importantly, it will have a substantial damaging impact on the entire textile value chain.” Unsurprisingly, such a system has choked the growth of the sugar sector that experiences recurrence of massive cane arrears when sugar prices crash.
Mills haven’t quite expanded capacity in almost a decade and are now saddled with cane arrears of over Rs 22,000 crore. However, while the sugar sector is highly organised with only 720-odd factories operating in select states, cotton is grown by most states and thousands of textile units, mostly the micro ones, are spread across the country. Ensuring compliance of any such proposal, therefore, will be an uphill task.
Currently, the CCI and even Nafed procure cotton from the market at the MSP if prices crash below the benchmark levels, to prevent distress sales by farmers. Subsequently, they sell the stocks to mills or other bulk consumers. Any losses in this operation are reimbursed by the government.
In 2017-18, the MSP of medium-staple cotton was Rs 4,020 per quintal, which is 22.71% more than its estimated cost of production (A2+FL) of Rs 3,276 per quintal. According to an Icrier study, the A2+FL cost could rise to Rs 3,439 a quintal in 2018-19, which means the government will have to fix the MSP at Rs 5,160 per quintal for the year to meet the promise of providing 50% profit over cost.
In 2017-18 season (October-September), the CCI has so far purchased 3,88,758 bales of cotton whereas it didn’t procure any last year as prices were generally higher than MSPs. Some incentives to textile mills, along the lines of a similar subsidy of Rs 5.50 per quintal the government offers on cane supplies, is considered for cotton and jute so that World Trade Organisation rules are not violated, the sources said.