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India Battles for Stable Cotton Prices

In an effort to protect itself from price volatility, India’s Textiles Ministry is pushing for the creation of a Cotton Price Stabilization Fund. The fund would be financed by a new tax imposed upon exporters and drawn from to build up inventory when output dampens and prices fluctuate.

Textiles Minister Kavuro Sambasiva Rao explained, “When exporters will get more prices outside the country, we are thinking in terms of collecting some amount, some percentage of the difference [of the price] to be kept in the fund. Later on, this money could be used for the benefit of cotton exporters only.” The fund will also come with the regulatory power to limit cotton exportation when the available supply fails to meet domestic demand.

The new proposal is still in the embryonic stage. Soon, it will advance to the Ministry of Commerce and then, ultimately,  to the  Cabinet Committee on Economic Affairs for  final approval. There is still a bevy of details to be worked out including how much to tax exporters and what governmental agency will administer the fund. Rao has already suggested that the program be managed by the Cotton Corporation of India.

Small and medium-sized exporters have been particularly vulnerable to variable cotton prices, especially in the wake of recent price spikes. Larger exporters hedge against the short and medium term unpredictability of cotton by purchasing futures and options contracts but smaller firms rarely have access to these sophisticated financial instruments.

According to Minister Rao, India produces approximately $85 billion worth of textile annually, exporting $35 billion of it.