In a bid to gain level playing field with traders for purchase of cotton, textile mills have sought several benefits from the Textile Ministry. Apart from a 5% interest subvention, mills have demanded extension of credit limit from current 3 months to 9 months in order enhance their cotton inventory holding capacity.
Mills are of the view that except for a few large players, almost the entire industry ends up buying a very small portion of cotton during the peak season of November to March, while rest is bought by wealthy traders or exported to competing countries like China and Pakistan, among others.
"Mills are not in a financial position to stock cotton for the entire year. Hence most of the good quality cotton is either exported or land in the hands of large global traders. If the demands are met by the Textile Ministry, then the cotton stock keeping capacity of textile mills would increase," says Sanjay Jain, managing director of TT Limited.
Recently, a representatives of Confederation of Indian Textile Industry (CITI) and South India Mills Association (SIMA) had met the Union Minister of Textiles, KS Rao to present the industry's demands.
"Currently, textile mills can avail credit for buying cotton at 14 per cent. Also, the credit limit is only for three months. Add to that, banks ask for a margin money of 25 per cent, while only the rest of 75 per cent is financed by banks. If the textile mills get a 5 per cent interest subvention, apart from an extension of credit limit to nine months and reduction in margin money to 10 per cent, their cotton buying and stocking capacity increases tremendously. Moreover, the textile ministry has been assuring towards our demands," said K Selvaraju, secretary general at SIMA.
For instance, TT Limited is currently able to hold cotton stock of one and a half to two months. If the demands are met, the company estimates its capacity to increase to six months.
At present, the textile industry is not able to buy cotton for the entire year which in turn brings down cotton prices during the peak season. However, later when their stock depletes and demand for cotton increases among textile mills, the commodity's prices rise substantially leading to price fluctuations in the market.
"Since last few years, at the peak arrival season when 75 per cent of crop arrives, there is a glut in the market leading to decline in cotton prices. Hence, neither the farmers get the deserved prices for their cotton, nor are the textile mills able to procure enough cotton. Moreover, the government's minimum support price (MSP) comes into the picture. Last year, CCI had to procure 2.5 million bales under MSP which results in losses for the government," said DK Nair, secretary general at CITI.
In turn, Nair added, if the ministry ensures enough liquidity for the industry by meeting its demands, textile mills will be empowered to buy more cotton. "Moreover, the farmers will get better prices as the glut reduces. Moreover, the government doesn't incur losses since it will not be required to buy cotton from farmers at MSP," said Nair.
In their proposal, the textile industry bodies have stated that by meeting their demands, the five per cent interest subvention will cost the exchequer around Rs 3700 crore for five years. However, in return, the central and state governments will be able to generate additional revenues worth Rs 10,000 crore and Rs 2,500 crore, respectively, through additional customs, excise and other taxes due to increased cotton purchases by textile mills.
The MSP this year is estimated to be around Rs 3700 per quintal for medium staple cotton and Rs 4000 per quintal for long staple cotton. Industry estimates cotton production and domestic production in the upcoming season starting October 1, 2013 to be around 36.5 million bales and 29 million bales, respectively.