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Wednesday, 07 March 2012 01:13
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Whether it’s fake disinvestment through LIC or banning cotton exports, govt displays contempt for market

The stock markets, which were sensing a return to reforms when the UP results began coming in on Tuesday morning, appear to have had second thoughts, and it wasn’t just the fact that since the SP doesn’t need the Congress’s support in UP, it may not play ball at the Centre. Between all the moves on fake disinvestment (LIC buying 87% of ONGC’s shares in an auction and PSUs being cleared to buy back their own shares) and banning exports of cotton to help the local textiles industry, the government continues to give out strong signals in just the last week that it strongly believes in the old command-and-control economy.

Apart from what the ban on exports will do to cotton farmers and to overall agricultural growth, which got boosted by the growth in cotton in the past, the larger problem with the ban is that most political parties seem to support it—that is, the on-off policy towards exports will continue. The overall narrative remains an appealing one: why export cotton to China, primarily, when we can make more money by exporting textiles and garments and earn more money in the bargain, apart from creating more jobs? This is the same logic that the BJP bought when, at the height of the Karnataka crisis, it said it was not in favour of commercial miners (who were exporting ore to China) and preferred to give mines to firms doing value add, that is to steel plants.

The problem with the logic is that while it sounds seductive, it doesn’t hold water for even a minute. For one, if the idea is to ban exports of raw materials, why stop at ore, why not ban steel exports if these can be used within the country, to make cars, refrigerators, washing machines? The more important issue, of course, is what it does to supply. If supply of cotton falls due to the ban, and all evidence from the past suggests there will be a slowdown, the economy will be a net loser. Two, in even the short run, there is no evidence that the domestic garments industry will even be able to benefit from the ban!

A study by ICRA Management Consulting Services (iMaCS) points out that the Indian garment industry has a 15% cost disadvantage over the industry in Bangladesh (14.2% for the industry in West Bengal to 18.1% for the industry in Tiruppur)—in the case of Tiruppur, 6% was due to higher costs of dyed fabric, 2.1% due to power costs, 7.9% due to higher employee costs, and so on; of the 6% due to dyed fabric, 4 percentage points was due to higher employee costs in dyeing and grey fabric manufacturing units. Given that the costs of cotton are just 15% in a final piece of clothing, even a 20% reduction in cotton prices due to the ban will mean just a 3 percentage point advantage. How do you take care of the rest? Hardly surprising then, that between 2006 and 2010, while exports of knitwear from Bangladesh to the US rose 8.4% each year, those from India rose just 5.1%. Obviously lower cotton prices, to the extent local supplies don’t get hit, will benefit garment exporters to a certain extent, but given the relatively lower efficiency levels of Indian suppliers, all that’s happening is that a part of the profits of cotton farmers are being taken away and given away to garment exporters.

What of the employment created by banning exports of raw materials like cotton and ore but stimulating production of value-added goods like clothes and steel? Or the much higher taxes the government can collect in the case of steel, for instance? Once again, there’s a fair degree of over-statement involved there. In the case of mining, for instance, while the government gets a lot less royalty from ore than it gets excise from steel, it gets a lot more corporate tax from mining firms that tend to be a lot more profitable than steel firms—in 2009-10, for instance, PSU mining firm NMDC gave the government 47% of its revenue as compared to around 12% for steel PSU SAIL.

As for employment, Commission for Agricultural Costs and Prices’ chief Ashok Gulati has shown a 1% hike in GDP growth has the greatest poverty-reducing potential if it is in the agricultural sector as compared to any other sector. And, if you’re looking at the last surge in agricultural growth, a substantial part of this emanated from growth in cotton, especially in Gujarat—which is why Narendra Modi has protested the move. Even more important, given that 10% of agricultural GDP today comprises exports, anything that hurts India’s reputation as a reliable supplier will hit agricultural growth. Imagine the irony if the government has to pump in more MGNREGA funds to provide employment to those rendered unemployed due to its farm policies!

Apart from making major corrections in subsidies, especially in the oil sector, it is this command-and-control syndrome that the Budget has to try to address to try and get investment back on track.


Last Updated ( Tuesday, 13 March 2012 06:09 )

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