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In India, Costly Cotton Import Tax Meets ‘Liquidity Crisis’

India might be the world’s biggest cotton exporter, but the nation’s garment manufacturers are facing an increasingly dire predicament.

Last week, industry representatives petitioned textile minister Piyush Goyal to repeal the 11 percent tax on imported cotton or risk the sector’s implosion.

“In today’s scenario, cotton supplies are not in hand. It takes six months to get new cotton—and there are no stocks for spinners to run. The only way is to import the cotton. For this, the Indian government needs to remove the 11 percent import tax on cotton,” Muthu Rathinam, president, Tirupur Exporters and Manufacturers Association (TEAMA), told Sourcing Journal. “Their response is that they will consult with the prime minister and take necessary measures.”

“Cotton prices have increased by 50 percent since December,” he said. “While garment prices have gone up by 15 percent, now with the sudden increase we couldn’t ask buyers for a higher price over a certain level.”

With an increase in exports from India and a rapidly growing domestic market, the demand for cotton this year is on track for 360,000 bales, compared with approximately 300,000 bales last year.

Some in the industry have been calling the situation so dire that the factories may shut down, as cotton prices in India are now far higher than international rates.

Overall Indian exports have been strong this past year, crossing the coveted $400 billion barrier, with garment and textile exports returning to pre-Covid levels at an anticipated $40 billion for 2021-22—a 67 percent increase over the previous year.

Concerns over competition from neighboring countries which already enjoy duty free benefits for garment exports, including Bangladesh and Vietnam, are also increasing as nation’s scramble to increase business after the decline as a result of Covid-19 over the last two years.

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Members of the industry across India have come together to take up the issue under the umbrella of the National Committee on Textiles and Clothing, citing the steep increase in cotton prices. Many have seen costs increase by almost 60 percent over the last six months.

A variety of cotton like Shankar 6, for example, has risen from 59,500 rupees or $783 a candy in October to 95,200 rupees or $1,253 a candy as of this month.

A candy amounts to approximately 2.09 bales, or 356 kilograms.

“Manufacturers are reeling under the liquidity crisis,” Raja Shanmugham, president of Tirupur Exporters Association, said. ”The price hike impact on this industry has been huge. For example, if one could buy 1 kg of yarn for 200.18 rupees or $2.63 some 18 months back, now only half a kilogram can be bought.”

Part of the problem is the death of cotton in the Indian market as “farmers don’t have cotton stocks at this time,” he said.

Shanmugham said that the minister’s delegation was reaching out for help in a rapidly deteriorating situation. “It is the duty of the government to save the existence of the industries and more particularly the medium and small manufacturers which are unable to handle the impact,” he added.

The government position is normally to protect farmers, but he pointed out that in this case they were not being impacted by the 11 percent import duty, which would help the value chain of industries to survive. “Otherwise, a few vested interests will amass the wealth at the cost of farmers, of the industries and the economy of the country itself,” he said.