|Of course, farmers taxed|
|Wednesday, 11 April 2012 00:12|
Getting CCI to subsidise industry, export ban unfair
Textiles minister Anand Sharma may have scored a technical victory when, in response to Gujarat chief minister Narendra Modi’s mischievous statement about the government taxing cotton exports while subsidising meat exports, he said cotton exporters were not taxed and in fact got a 1% duty drawback while meat exporters got nothing. But if a ban on cotton exports is not a ‘tax’, and not just on exporters, what else is it? As one of the fastest-growth areas, cotton is very largely responsible for spurt in overall agriculture growth; and with 10% of agriculture GDP coming from exports, any move that puts a shadow over exports will tax the sector as a whole.
More important, since most political parties, including Modi’s BJP, are against exporting commodities where value addition can be done in the country—iron ore is a good example—it is important to demolish the myth of how cotton exports are hitting India’s export of textiles and clothing. If India is ceding export market share to Vietnam, Bangladesh and Indonesia, it is not because of high costs of cotton, it is because industry is inefficient. A study by ICRA Management Consulting Services clearly showed the Indian garment industry has a 15% cost disadvantage (see Back to the control raj, March 7, http://bit.ly/Il3GS9) over the industry in Bangladesh—given that cotton costs are just 15% of the final cost of a cotton piece of clothing, even a halving of cotton prices will only lower costs by 7.5%. And the reason why industry is inefficient has to do with the plethora of reservations for the small scale sector—in spinning, where 90% of the output is in the organised sector, India is the world’s second-largest exporter.
Instead of fixing the root problem of reservations, the solution proposed is a truly wooly one. To keep farmers happy, get the Cotton Corporation of India (CCI) to buy at high prices (assuming, incorrectly, that the export ban won’t depress prices) and sell cotton to industry later—presumably this will be at lower prices, else industry would have bought the cotton on its own anyway. Indeed, the reason why industry is not buying cotton, the Confederation of Indian Textile Industry told the textiles secretary last month, was because it was severely cash strapped and not because cotton prices were either high or that there were no supplies. If the government is going to be seen as banning cotton exports while subsidising the textiles industry, the message that goes out loud and clear is of an anti-farmer government—and it doesn’t need a Narendra Modi to interpret that.