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Enveloped in Ambiguity: Indian Cotton Industry – I

Enveloped in Ambiguity: Indian Cotton Industry – I

By Priyanka Dey

Edited by Michelle Cherian, Associate Editor, The Indian Economist

Besides generating huge employment, the Indian cotton industry is the only industry after agriculture, which has retained its glory in history. Indian cotton holds the maximum share of Indian textile sector. This industry provides more than 35 million skilled as well as unskilled workers, jobs. They are also the second largest employment generator after agriculture. A large part of the cotton production is used for domestic demand and only around 10-15 % of total production has been exported in the past 5 years. India’s textile exports improved from US$ 12.3 billion in 2004-05 to 22.4 billion in 2009-10, registering a CAGR of 8.93%. The policy recommendation for ending quota in textile industry did not accomplish as a tool to increase export growth.

After a progressive growth of 24.90% in 2005-06, the export growth rates steadily declined by (-) 5.00% and 6.31% in the subsequent years. EU and USA are the highest importers of Indian textile industry followed by China and Turkey which has improved by 69.51% and 47.90 % in US$ terms as matched to the same period of previous year. Thus, cotton industry in India is underutilised and clears a path for trade creation. However, because of the geographical realities, all the neighbouring countries of India are major competitors of the Cotton market internationally. During the post-quota period, India’s competitors Bangladesh, China, Pakistan and Vietnam achieved higher export growth rate than India due to their positive competitive policy formulation. A vital step was to increase exports in new markets. As part of this strategy, mega textile shows have been held to capture new markets in Japan, South Asia, Australia, Latin America and South Africa[1] . The price of land, price of labour, hours worked, electricity and energy costs, building costs (or rent), ocean transport, land transport and taxation determines cost of production in different countries . But a neglect field of benefit is warehouse and transportation cost which creates competitive edge. In this analysis we will consider the various shortfalls as well as advantages of Indian cotton industry.

The strong hold of Indian cotton in the world market is due to its cost advantages. It is produced in the most indigenous and labour incentive traditional ways, which keeps cost of production low. India also charges lower freight as compared to other participants, hence causing a smaller pocket pinch. The Indian Government has also provided a major policy shield to the cotton industry like export incentives in the past creating a stronger presence of Indian cotton.

The major concern which is hindering growth projections of the industry is non-availability of quality & skilled manpower and the inadequacy of training facilities in the country. To bridge the skill deficit in the textiles sector, an initiative called “Skill Development Programme” has been recommended to expand the skill base of 30 lakh workers employed in the sector over a period of five years with an estimated Rs. 2,200 crore cost. India has a geographical advantage of port facility; all the major importers of Indian cotton can be reached easily on water ways. This reduces price, insurance and travel route concerns of cotton trade.

Due to government support and facilities cotton producers are also able to operate at thin margins, thus enjoying a competitive advantage over other exporters. The Indian government has always been very concerned towards the cotton industry and they continue to be so. The GOI is taking steps to enhance the capacity of the Indian cotton industry. In last ten years capacity addition has increased at a CAGR of 7.5% for man-made filament yarn, 5.5% for man-made fibres, 4.4% for rotors and 3.45% for power looms[2].However there is no evidence of strengthened spindles, looms in organised sector and huge losses in spindles as well.

But there are weaknesses of Indian cotton industry as well which have proved to be a hindrance to its growth, as desired. The developed countries which, many a time, use quality checks as a non-trade barrier to protect domestic insecurities, claim Indian cotton to be non-standardized. They claim Indian cotton to have high contamination and moisture, thus labelling it as undesirable and harmful. Due to the lack of ability to check standards of Indian cotton, India losses its importers. Being a demand driven segment it is unable to form a forward market even after being in trade for a long time. Thus market ups and downs cause insecurity towards production and uncertainty causes demand gaps from time to time. These trades are not being accomplished by Indian cotton exports as cotton production is a time consuming procedure in India whereas developed countries use well-developed technologies to produce cotton very fast and effectively.  Recently the hike in power prices has led to the producers’ margin suffering a terrible blow. A lot of cotton export houses have been shut down.

[1]  “Benchmarking of International Competitiveness of the India Textile and Apparel Industry”, ICRIER. May 2010

[2] Ministry of textile , STRATEGIC PLAN (2011-2016)

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