India’s cotton output likely to fall to 540kg in 2016

India’s cotton yields have fallen from 566kg per hectare in 2014 to 504kg in 2016 which is already among the world’s lowest. Fall in yield is due to delayed rains and white fly problems in northern India and pink boll-worm attacks in Gujarat. As a result, raw cotton production is expected to fall to a five-year low of 33.8 million bales in the year to Sept.30 from 38 million bales a year earlier, and cotton prices have jumped from $1.50 to $2 a kilogram. A bale of cotton weighs 170kg.

According to the Cotton Association of India, in the year ending March 2017, the area under cotton cultivation is expected to further shrink to 11 million hectares from 11.9 million in the previous year due to farmers’ fears of winged pests.

The textile industry’s future is critical to India’s social and economic prospects. It employs 45 million people, including the informal sector — second only to agriculture — and was recently the target of an $895 million package of incentives announced by the government with the aim of catalyzing investments of $12 billion over the next three years. The government has also sought to improve productivity by relaxing some labor regulations, including increasing the flexibility of working hours and encouraging the employment of more women.

However, textile industry officials said that multiple problems will have to be resolved for the sector to prosper, including a lack of reliable market data, which is blamed by the India Texpreneurs Federation, an association of textile companies, for compounding the price spike.

Much of this problem is blamed on the government-run Cotton Advisory Board, which is responsible for collecting data on cotton production.
Raja M. Shanmugam, chairman of Tiripur-based Knitwear Fashion and a former member of the CAB, said that the board’s methods are unscientific and open to manipulation. The CAB said that in February production this year would total 35.2 million bales, but five months later revised its estimate to 33.8 million bales, fueling speculation about the industry’s problems.

The sector is also asking the government to take measures to protect it from price volatility. These would include using satellite imagery to estimate crop size accurately, rather than simply surveying market traders; sanctioning direct interventions in the market to support prices by buying cotton; and measures to reduce textile imports.

As a first step, K. Selvaraju, secretary general of the South Indian Mills Association, has suggested that Tuticorin port in the southern state of Tamil Nadu should be declared a free port, which would not levy customs duties on goods in transit. This would allow exporters to hold imported cotton in the port area, and then to process and ship their products out duty free. Malaysia and China already provide such facilities.

The industry is also in desperate need of consolidation, or help for companies that cannot cope alone. More than 80% of textile mills are small and medium sized enterprises that cannot compete against better-capitalized foreign rivals. At the last count, in June 2015, India had 1,954 SME textile mills with an average workforce of 400 employees. Of these, 962 were located in Tamil Nadu. Government data shows that more than 60 textile mills have gone out of business in the last three years.

Most companies do not have the ability to import cotton at short notice because they lack scale, cannot access credit or lack the skills to manage business risk. However, while most textile mills have reduced their production capacity, some have started importing cotton from Australia and West Africa, including small mills that traditionally bought from the local market.

Most of the mills, including small mills, are now meeting their requirements through imports for August and next month’s production, said Prabhu Damodharan, secretary of the Texpreneurs Federation.

B.K. Mishra, chairman of the government-run Cotton Corporation of India, which supports cotton growers, confirmed the increasing role of imports. India has imported a record 1.5 million bales of cotton so far this year. The previous record was 1.4 million bales in 2012-2013.

Many in the industry blame foreign textile companies and traders for the industry’s woes. Selvaraju said that the sector is looking for cheap working capital and a regulated cotton market to provide a level playing field with foreign players. He said that foreign competitors can access loans for as little as 2% interest compared to 15% in India. At the very least, extend loans at lower cost to mills, he suggested.

The government runs programs to support textile companies in upgrading technology and rehabilitating workers who are laid off, but does not provide direct financial assistance to the textile industry. However, the CCI supports farmers’ incomes by buying and storing cotton at state-mandated minimum prices, which helps to set the lower bound for trading prices in the market, raising input costs for textile mills.

The corporation has purchased 840,000 bales of cotton under this program so far this year, according to figures released in May. Stocks are eventually sold to traders and government-run mills, although the textile industry has asked the CCI to sell direct to small and medium-scale mills as well.

Price setting is also complicated by the lack of a domestic cotton index that could be used a basis for hedging by traders. Selvaraju said that plans for an index have been under consideration by the government since 2008. Foreign traders have dominated the market since cotton was removed from a list of essential commodities in 2007.

After Welspun India, the country’s largest textiles exporter accused by a major U.S. retailer of passing off cheap cotton sheets as containing valuable fine Egyptian cotton. India’s textile industry is facing unwelcome international scrutiny.