Indian Cotton Up, Textile Industry Down
March 16, 2009 A Rich Cotton Harvest
During 2007/08, India achieved record production of 31.5 million cotton Indian bales or roughly 20% of the world’s production. India has now emerged as the second largest cotton producing country of the world and retains its leading position as the country with the largest area under cotton cultivation worldwide.
In year 2002/03, India’s production was a mere 13.6 million bales, which in a short span of five years has more than doubled to 31.5 million bales. Transgenic Bt cotton seed has taken the agriculture sector (related to cotton) by storm, which may certainly not be pleasing to the critics of Bt cotton. In 2008/09, India’s production is expected to be 32.2 million bales. This optimism stems from higher coverage, over 80% (versus 65% last year), under pest protected transgenic Bt hybrids.
The major achievement for Indian cotton has been a significant improvement in cotton yield in the last three to four years. The average national yield has almost doubled to 560 kilograms (kg) per hectare, climbing from around 300 kg per hectare as recently as 2002/03. Though the national yield level still compares poorly with the global average of 785 kg per hectare, world average yield grew by just 38% between 2000/01 and 2007/08. Conversely, India’s average yield posted a whopping growth of 102% during the same period.
The yield gap between the world and India is likely to further narrow in 2008/09, as Indian yield is projected to be up by 5.5% to 591 kg per hectare. That said, India still has miles to go before it can match yield levels in countries like Australia, China and the U.S. where yield is as high as 1840 kg, 1265 kg and 985 kg, respectively.
Paradigm Shift – Record Cotton Exports
In 2007/08, exports of cotton touched an all time high of 8.5 million bales as per CAB. Cotton exports multiplied from just 1 million bales in 2004/05 to 4.7 million bales in 2005/06 and on to 5.8 million bales in 2006/07.
India has evolved from being a net importer of cotton not so long ago to being a net exporter. All major buyers from countries like China, Pakistan, Bangladesh, India, Turkey and Thailand have shown keen interest in contracting Indian cotton recently in the wake of restricted global supply. But since most of the cotton has been exported to China and Pakistan, it will not be in the interest of our economy to supply our valuable raw materials to our most prominent competitors. Thus, per industry sources, exports are likely to dwindle to 50 lac bales in 2008/09.
Raw Material Price Challenges
Despite massive improvement in productivity as well as production, the prices of cotton in domestic market have gone up by more than 40%, which again is a record.
In 2007/08, India had the ending stock at 4.3 million bales, the lowest ever carryover stocks in recent times – an 18% stock-to-use ratio. Now the industry reports an ending stock of less then 3 million bales, or just a 12% stock-to-use ratio. Global stock-to-use ratio for 2007/08 was 44%, and some of India’s key competitors such as China, Pakistan and Turkey have stock-to-use ratios in the 30 percentiles. Ideally, stock-to-use ratio should be 25%, and this extraordinary low carryover has led to the soaring increase of domestic cotton prices.
Last year, a good chunk of cotton stock was available with international merchants as well as speculators who took full advantage of these conditions and dictated their terms. All the above led to losses to most textile companies and, as a result, most of the mills have recently cut down their production by as much as 30% to 35%.
Yearning for an Improved Climate
An unprecedented hike in Minimum Support Price (MSP) in 2008/09 is proving to be a huge challenge for the Indian textile industry. In a shocking move, the Government of India increased the MSP for cotton in the current year by as much as 47%. Given that Indian cotton prices are already 20% higher than international prices, raising the MSP increased the raw material cost for textile players, eating further into their margins. The net result is that, for the time being, Indian products have not only become expensive but also noncompetitive.
To be fair, sailing was very smooth for Indian textiles until mid-2007. An industry, which was creating $37 billion in 2004/05, has grown to $50 billion. In the last two to three years, massive expansion took place and everyone was very bullish about this sector. But an unprecedented surge in rupees (INR) in the later part of 2007 put the brakes on the advancing juggernaut. After an impressive 31% jump to $8.6 billion in the 2006 fiscal year, the rate of growth slowed to 3% and 7% in the subsequent two years.
Intervention Required
The country’s textiles and clothing exports are all set to fall short of the target for the second year in a row. The gap between actual exports and targeted exports may be as high as 21%, meaning that the target set by the government to increase exports to $55 million by 2012 may remain a distant dream.
Of late, the U.S. economy has been struggling through a slowdown and a credit squeeze that has thus reduced its appetite for imports. Small countries such as Bangladesh and Vietnam are posing a threat, especially for basic products, as Indian product is getting expensive. Many Indian companies are now contemplating to move their manufacturing bases out of India to such countries due to cost advantage. If 2007/08 was bad for the Indian textile industry, 2008/09 could be catastrophic unless conditions change quickly.
Given that the textile sector generates a substantial amount of employment, and 45 million cotton growers depend on its fortunes, the Government of India should immediately intervene to stop the impending mess. The time to act is now. The sooner the problem of this sector is addressed, the better it will be for a country of the size of India.
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