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Cotton Price Instability Creates Internal Rift in India; Free Market Pitted Against Gov’t Regulation

India has been entangled in an internal debate about how to properly regulate its cotton exports, an increasingly important matter given the commodity’s recent volatility and the centrality of it to the nation’s economy.

In response to India’s rapidly accelerating cotton production, a Group of Ministers (GoM) has recommended that all governmental restrictions on raw cotton exportation be eliminated. Sharad Pawar, Minister of Agriculture, has forcefully advocated the creation of a free cotton export market, arguing that any restrictions at all ultimately redound to the farmers’ disadvantage.

In stark contract to the GoM view, the Textiles Ministry (TM) has called for a 10 percent export duty at freight-on-board or Rs. 10,000 per ton, whichever of the two turns out to be less. The TM contends that the only way to create a stable cotton market that remains consistently profitable for all interested parties along the entirety of the supply chain is such a regime of tariff-driven regulation.

The TM’s proposal was originally delivered to the Cabinet Committee on Economic Affairs (CCEA)  which them demurred, passing the buck along to the GoM.

This internecine dispute had attracted global attention given the continued expansion of India’s apparel and textile industry, which is slowly emerging as a potential, alternative exporter to ever more expensive China. Already, more than 25 percent of India’s manufacturing exports land on the U.S.’s shores.

Blessed with a enormous workforce of young, deeply discounted and currently underemployed labor, many believe India has unlimited promise. However, it has historically struggled to keep apace with China and Bangladesh, the region’s dominant players. For a nation of its dizzying size, its $32 billion worth of textile exports last year is an underachieving number. It can’t yet hope to reach China’s $260 billion yet, but comparatively tiny Bangladesh took in $21 billion in the same period.

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For India to draw business from China, it has to improve its often underdeveloped infrastructure and unwieldy labor regulations. As it stands today, India isn’t large enough to absorb the capacity of China or cheap enough to lure away bargain hunters from Bangladesh. But it does have a large enough population, and a skilled enough workforce, to become one of the world’s top exporters.

And there are portents of future success. India’s exports are expected to leap 30 percent over the next year, coming in close to $44 billion. The government has been revising its cumbersome oversight rules, erasing a limitation on how much money could be invested in garment factories. On the other side of the coin, their labor laws have become impressively more stringent.

And now India is reporting a considerable leap in its apparel exports to the US in August. Indian exports to the US rose by an astonishing 17.2% compared to August 2012, while textile imports rose 8.3 percent.

The dispute between warring parties within the Indian government is not new; for some time now, the TM has been pushing for a radical overhaul of the country’s regulatory regime regarding cotton. In an effort to protect itself from price volatility, India’s Textiles Ministry has been 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.

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.

India is the second largest producer and exporter of cotton in the world, with 70 percent of those exports landing in China.