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The time is not ripe

india Updated: Mar 11, 2012 23:30 IST

The UPA’s record of policy flip-flops endures. The latest instance is a ban on exports of cotton that seems headed for revocation less than a week after it was announced. The commerce ministry’s line that India has exported more cotton this season than it can afford to without hurting consumption at home does not wash with partners of the ruling alliance or with the political bosses of cotton growing states. Agriculture minister Sharad Pawar, leader of the Nationalist Congress Party that is a member of the UPA, is indignant at not being kept in the loop on the decision and finds it rather easy to drum up support for its revocation from Narendra Modi, the BJP’s chief minister in Gujarat. Congress-ruled Maharashtra and Andhra Pradesh, two other states in India’s cotton belt, are also cut up over a move that depresses prices on the farm.

The Commission for Agricultural Costs and Prices estimates farmers sold cotton cheaper to traders and mills in January 2012 than they did a year ago. This is on account of lower demand from millers for the fibre as the Indian economy slows down. Unlike 2010, the last time cotton exports were banned, cotton mills do not see a shortage even if exporters were to execute their entire pending orders of 12 million bales this year. Export curbs amid a record harvest not only push prices down this season, they limit the incentive for farmers to grow more cotton next year, when mills expect Indian demand for apparel to revive. Globally, too, cotton output is rising but consumption is weak, the US Department of Agriculture reckons, which ought to raise world stocks at the end of the season. Any move by India, the second largest exporter of cotton, to restrict supply naturally invites a litany of protest and arbitration from our trading partners. Cotton prices doubled in 2010 when India banned exports. China, which is stockpiling cotton as a buffer against price volatility, has objected to India’s second ban in two years.

The latest intervention in farm trade by a trigger-happy government will very likely lead to an outcome that it hopes to avoid. Cotton acreage globally, as in India, would have shrunk in the next season on the basis of price signals available today. This would have brought the market closer to equilibrium. By trying to second guess the invisible hand, officials in New Delhi could end up squeezing cotton acreage further, throwing the cotton market further out of kilter. Fortunately, opposition at home and abroad to a trade distorting move that has not been fully thought through prompted a review by Prime Minister Manmohan Singh. Finance minister Pranab Mukherjee will have to reconcile the views of Mr Pawar with those of commerce minister Anand Sharma, whose ministry invoked the export ban. Hopefully, the learning experience will not be lost: keep market intervention as a last resort.