A major crisis is brewing in the cotton sector in India, with a bumper harvest coinciding with a drastic cut in imports by China, the biggest buyer of the crop. And with global cotton prices plunging, farmers here are a worried lot as the huge investments they made in expanding the area of cotton cultivation in recent years would fail to pay off.

Last week, key ministers of the government were busy in meetings, trying to evolve a policy to bail out millions of farmers whose livelihood is suddenly threatened by the global cotton crisis. Agriculture minister Radha Mohan Singh, together with Santosh Gangwar, the textiles minister; Nirmala Sitharaman, the commerce minister; and newly-appointed labour minister Bangaru Dattatreya, were interacting with bureaucrats in trying to find a way out of the crisis.

With a record cotton harvest, the government is worried that farmers may resort to distress sales of the crop if prices continue to tumble. Cotton prices in India have started falling, even dipping below the minimum support price (MSP) of around Rs4,000 a quintal. The ministers directed the Cotton Corporation of India (CCI) to boost its purchases from farmers, which would hopefully ensure there would be no distress sales.

With China cutting down its imports of cotton, India hopes to step up exports to other countries including Pakistan, Bangladesh, Thailand, Indonesia and Vietnam

Four Indian states including Maharashtra, Gujarat, Telangana and Andhra Pradesh account for the bulk of cotton production in the country. (Maharashtra and Gujarat alone account for 80pc of the total cotton grown in India).

Unlike many other crops, cotton does not require much water and even if the monsoon rains are delayed — as happened this year — late sowing of cotton can be done. The Cotton Advisory Board estimates that cotton production in 2014-15 (the cotton year is from October to September), will add up to 40m bales (each bale equals to 170 kg).

India has in recent years emerged as the second-largest producer and exporter of cotton, but could now be the world’s largest cultivator of the crop in the new cotton year. In 2013-14, India’s cotton production was 39.8m. Domestic demand, however, is pegged at 30m bales, leaving behind a huge surplus.

Last year, the country exported nearly 11.5m bales, with about 70pc of it being sold to China. The CAB estimates exports will fall by more than a fifth to around 9m bales, but industry sources estimate it will decline to less than 8m bales. With China cutting down its imports of cotton, India hopes to step up exports to other countries including Pakistan, Bangladesh, Thailand, Indonesia and Vietnam.

Falling exports and a sharp decline in global prices have affected sentiments in the domestic market as well. Prices have tumbled over the past few months, breaching record lows. Last year, cotton fetched farmers as much as Rs5,000 a quintal. Cotton prices had soared to Rs6,500 about three years ago.

The government has set an MSP of Rs3,750 a quintal for medium-staple cotton and Rs4,050 a quintal for long-staple cotton in the current year. But with prices falling steeply, there are fears that many distressed farmers would prefer selling it below the MSP level, exacerbating the crisis.

The government has directed the CCI not to impose any ceiling for procurement and facilitate farmers by buying all their stock.

IRONICALLY, cotton has been a miracle crop for many farmers and in recent years has helped them earn record revenues. The average price of cotton has gone up from around Rs2,200 a quintal more than 10 years ago to about Rs5,000 last year.

Better price realisation has encouraged farmers to enhance cotton acreage over the years. According to CARE Ratings, the area under cotton cultivation in India has increased from 8.57m hectares in 2000-01 to 11.55m hectares in 2013-14. (This year it is expected to touch a record of 12.66m hectares). The yield has grown from 278 kg a hectare to 518 kg during the same period.

“About a decade ago, India was barely self sufficient to meet its cotton requirement but is now poised to overtake China to become the world’s biggest producer of cotton this year,” says a report by CARE Ratings. “Since the year 2000, the country has achieved substantial growth in yield and production on the back of a slew of measures such as development of high yield varieties, appropriate transfer of technology, improved farm management practices and increased area under cultivation of BT cotton hybrids among others.”

This has resulted in cotton production soaring from 14m bales in 2000-01 to almost 40m bales in the current year.

With cotton prices falling sharply, some lawmakers from the southern state of Telangana are demanding that the MSP be increased further to help bail out farmers. They are demanding that the MSP be hiked from Rs4,050 to Rs5,000, a suggestion unlikely to be accepted by the government.

Farm leaders and many politicians cite the example of governments even in the developed world, who subsidise farmers by offering them higher prices when global prices fall.

Agriculture minister Singh last week asserted that the government’s first priority was to protect farmers. Textiles minister Gangwar says that CCI has been asked to step up its procurement operations by opening more centres, especially in areas where prices have fallen below the MSP. “The CCI will pick up all the cotton brought by farmers, irrespective of the quantity,” he adds.

CCI has about 300 procurement centres across the country. It has already begun purchase opreations in states including Telangana and Andhra Pradesh.

Slackening demand from China is attributed to the government’s move to slash import quotas; next year, it will allow imports of less than 900,000 tonnes. Non-quota imports are subject to a 40pc tariff. The Chinese government hopes to stockpile domestic cotton under a three-year programme to enhance better returns for its farmers.

Published in Dawn, Economic & Business, November 17th, 2014