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India to Allow Existing Export Contracts, Uphold Ban

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India sought to relieve some uncertainty about its recent cotton ban by finalizing its position on existing export contracts. The country faced harsh criticism for the ban, which immediately halted all cotton exports from the country, including shipments that were already contracted. They have been accused of protectionism and of introducing new volatility into world cotton markets. Around 2.5 million bales have been contracted but not shipped, against 9.5 million bales already shipped in 2011/2012. Another 1 million bales were waiting in customs at the time of the ban. They will be released.

India is expected to have a record cotton harvest this year of 34 million bales, against domestic demand of 25 million bales. With the exports booked, Indian mills were concerned about rising prices and possible shortages. Their lobbying likely led to the ban.

Since the ban was implemented, India has repeatedly changed its position in response to international and internal pressure. Initially, it was apparent that the Ministry of Commerce, which announced the ban, had failed to consult with the Ministry of Agriculture or with the Prime Minister. This oversight led to contradictory statements and highly public disagreements, as the Agriculture Minister urged the Commerce Minister to undo the ban, fearing the damage it would do to India’s farmers, and the Prime Minister attempted to mediate.

Initially, it seemed India would lift the ban outright. Later, they reversed direction, indicating that they would maintain the ban and refuse to fill export contracts. Now, in what may be the final word on the subject, they have agreed to honor existing export contracts while upholding the ban moving forward.

This is likely a political decision, as the economics of cotton agriculture and domestic ginning and milling do not support a ban. In 2010-2011 when India first banned cotton exports, domestic demand for cotton was not sufficient to utilize available supply, leading to falling prices and serious economic problems for Indian farmers. India rapidly reversed that ban.

The situation today is more nuanced, but India still produces far more cotton than its mills need. Global market prices are also quite low compared to 2011. Indian agricultural policy requires the government to begin subsidizing cotton when its price falls below approximately 84 cents. As of April 10, the world futures price is 89.36 cents.

The ban was implemented in response to news that India’s cotton growers had already exceeded export estimates, amid fear that a cotton shortage would cripple Indian milling operations. Ironically, the continued ban makes an India-only cotton shortage more likely, as farmers will exit the market when the crop is no longer profitable to grow. Globally, cotton supplies are tight, but many producers were able to shift to other suppliers, such as Bangladesh and the United States. At the same time, China has been stockpiling cotton since 2011 and has accumulated 3.5 million bales. This mercantilist approach to global trade runs the risk of creating an artificial environment of scarcity and inflating prices.

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