Over the past few weeks, cotton prices had been rising rapidly. Government was under tremendous pressure from the domestic textile industry to ban exports of cotton. Only a fortnight ago, government had scrapped 14 per cent import duty on raw cotton and additionally withdrew 1 per cent export incentive (duty drawbacks). Even after these measures, cotton prices were heading north. So, to arrest the rising domestic cotton prices, government has placed an export restraint on cotton by stipulating mandatory registration of contracts with the Textile Commissioner before their shipment. Moreover, the Directorate General of Foreign Trade has also made it mandatory for the Customs authority to verify the contracts before clearing the cotton consignment. The restriction covers exports of cotton, cotton waste and yarn waste.
The current move is expected to have a dampening effect on cotton exports. But, if we look at the fundamentals then, this step will have a moderate effect on the cotton prices. Prices may come down initially as this will put psychological pressure on exporters. But, in the long run prices will reflect the demand and supply situation in India. India exported about 6.5 million bales of cotton in 2007-08. Cotton exports grew from 4.7 million bales in 2005-06 to 5.8 million bales in 2006-07. Exports this year are estimated to touch 8.5 million bales.
It is alleged that only about 0.4 million cotton bales are available for consumption by the domestic industry, while multinationals companies are hoarding about 2.5 million bales. With monsoons getting delayed in most of the western states in India, production is expected to take a dip. Hence, even after these measures cotton prices are expected to rule firm in near future. Therefore, to end this uncertainty government can fix a quota on exports so that domestic prices are stable.
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