Traders pocket bulk of subsidy on cotton sale

The majority of the Rs 2,200 crore of government subsidies on sale of cotton by state-owned trading firms like Cotton Corporation of India have gone to traders.

After the government increased the minimum support price (MSP) for cotton by 40 per cent in 2008-09, farmers sold most of their produce to CCI and the National Agricultural Co-operative Marketing Federation (Nafed) of India.

However, these two state procurement agencies were unable to sell the cotton, as their selling price was higher than market rates. Domestic firms started importing cotton, as they found it profitable.

This forced the government to sell at a discount in the domestic market, aiming to benefit the end-consumers — the textile mills — and also reduce inventory cost for the state-run agencies.

As the discount offered was linked to the quantity of purchase, industry sources say the scheme introduced by CCI has benefited traders, as a majority of the mills do not buy bulk quantities — they have limited requirements of cotton, which they have to use over a small period of time.

Therefore, instead of directly procuring from the agencies, mills buy from traders, who can afford to buy in bulk. They sell it to various mills at the market price, which does not transfer the benefit of the discount the traders received.

“The major quantity of the cotton is sold to traders because they supply to various mills. Around one third of the cotton is bought by individual mills,” said a CCI official, requesting anonymity.

Of the 6.6 million bales CCI sold at a discount, around 67 per cent was bought by traders. CCI offered the lowest discount of Rs 250 per candy (1 candy = 356 kg) on a purchase of 3,000 bales of cotton and the highest discount of Rs 650 per candy on a purchase of 200,000 bales and above.

Before the discount scheme was announced, CCI had managed to sell around 13 per cent of the 8.94 million bales it had procured from farmers. Currently, it has only around 1 million bales left for sale.

“Even for larger mills it’s not viable to continuously buy in bulk, so they end up buying cotton from traders as and when required. Moreover, the process of the sale is not transparent enough and the agencies and their policies are trader-driven,” said the managing director of a leading domestic mill, who declined to be identified.

Moreover, domestic cotton prices have constantly been on the rise since February. It was at Rs 21,000 per candy on the day CCI started sales, which steadily increased to Rs 23,900 per candy. This resulted in traders selling the cotton, procured at a discounted price, at a much higher market price to small mills without transferring the benefit of the discount.

“The increase in the base price of cotton after announcement of discount has also benefited traders, who unduly profited by selling procured cotton at higher prices. The mills who bought from the traders got cotton at much higher prices,” said D K Nair, secretary-general of the Confederation of Indian Textile Industry (Citi).

CCI, which has incurred an estimated loss of Rs 2,200 crore due to MSP operations, states that bulk sale helps them lower their losses. The loss will be subsidised by the government.

“The discount on bulk purchase is aimed at off-loading the procured cotton and also to check our losses. The sooner we sell our cotton, the more we save on carrying and other costs. The bulk discount is aimed at bringing down our estimated loss,” said another CCI official.

Citi had appealed to Nafed to extend the discount scheme to all buyers instead of bulk buyers. However, Nafed has also decided to give discount on bulk purchases only.