India is the second-largest exporter of cotton in the world. Interestingly, it is also one of the largest importers of the product. An anomaly, you may think. But there are a multitude of reasons to explain this. The growth of the textile industry and the demand for extra long staple cotton has resulted in a massive increase in imports. In fact, implementation of GST is further expected to give its imports a boost. The Dollar Business investigates if now is a good time to start importing cotton.

By ANDRES M. MOLIER | August 2017 Issue | The Dollar Business

India, we all know is a major global player when it comes to textiles and apparels, especially those made of cotton. To put matters into perspective, in FY2017 alone, India’s exports of cotton and textiles & clothing clocked $6.63 billion and $36.66 billion, respectively. We also know that India is a major producer of cotton. What many of us may not know though is that India's textiles and apparel industry is highly import dependent. Of course, the usual reason applies – we consume more than we produce. But then, there's is another angle to it and that is India cannot grow a few varieties of cotton – especially a variety that is known as extra-long staple (ELS) cotton or ‘extra-ordinary cotton’.

And what is ELS cotton? It is an extra-fine cotton that is used for making superior cotton fabrics. In fact, it’s quite easy to identify ELS-made fabrics in the market because they look more white, smooth, strong and above all are expensive than others. But, other than ELS cotton, India also imports all other staple lengths of cotton. In fact, in FY2017, India’s total imports of cotton (of all staple length, combed or uncombed) witnessed a y-o-y jump of 142%. And, this indicates that importing cotton is a big business!

A seasonal affair

“India is the second-largest producer of cotton in the world. But, we must also understand that India is also the second-largest exporter of cotton in the world and our domestic consumption is also one of the largest,” explains G. Rathakrishna, Director of Coimbatore-based Shree MTK Textiles Private Limited. Rathakrishna continues, “Irrespective of our production, in the first half of each Market Year (MY), which is from November to March, India exports so much of cotton that there is not enough cotton to feed the domestic mills. So, in the second half, which is from May to September, we depend on imports to feed our mills.”

Sanjeev Kumar Mittal, Managing Director, Raghunath Agrotech Pvt. Ltd., agrees, “I have noticed that over the last few years, the export movement is high during the first half and slows during the second half.”

The trend is likely to continue as exporters know that the government is unlikely to impose a ban or limit on exports – and with production of textiles on the rise imports are destined to grow.

A giant leap

Over the last few years though the business of cotton imports has witnessed many ups and down, overall it has shown an upward trend. In fact, in FY2017, cotton imports leaped to $939.85 million – from $388.51 million in FY2016. Explaining the situation, Mekala Mallappan Chockalingam, Chairman & Managing Director, The Cotton Corporation of India Ltd., says, “Every year, our production exceeds the target amount. But in MY2017, production was not up to the mark. Our expectation was around 360 lakh bale whereas the harvest was only around 351 lakh bale. However, the main reason for growth in imports is because imported cotton can be at times cheaper, and there are some varieties that have huge demand in the Indian market like ELS that we hardly grow.”

Shashidhar Stalekar, Vice President – Cotton Division of Mumbai-based Sagar Group of Enterprises, echoes a similar opinion. “Last year, the yield was low. As a result, the prices of cotton went up in the domestic market, which naturally resulted in more imports,” he elucidates. But is the demand here to stay? Stalekar, and many other importers, believe that the imports will decline in FY2018 on the back of higher domestic production, but the dependency on imports will continue. Stalekar explains, “Demand for short and long stable cotton will drop. But, I am certain that the year-on-year demand for ELS will keep increasing.”

Extra-long niche

The world over, various types of cotton are cultivated. And, for any trader, the profits depends on the length of the cotton staple that they trade in. “There are three major types of cotton, short (up to 1-1/8-inch), long (between 1-1/8 and 1-1/4-inch) and extra-long staple (between 1-3/8-inch and 2 inches). The longer the fibre, the more durable and softer it is. This also means more profits for traders,” explains Chockalingam.

India imports all three types of cotton, but the demand is mostly for ELS. Chockalingam continues, “The scope for short and long staple cotton in India is low because India is one of the largest producers of these cotton staples. What India needs is ELS. As per our annual survey, India’s current requirement for ELS cotton is over 12 lakh bale, whereas our domestic production is less than 4 lakh bale per annum. So, I see a lot of opportunities in this space, especially when the textile industry is looking to grow.”

A drop in the ocean

History tells us that since the usage of cotton started, the short staple cotton variety has been the most used. But, once the long staple cotton was introduced it completely revolutionised the textile industry. However, in the 1990s, an even better variety of cotton, the extra long staple gained currency due to its superior quality and became the darling of the textile and apparel industry.

"India produces 4 lakh bale of ELS cotton against an annual demand 12 lakh bale"

Farmers in India soon began cultivating ELS, only to realise that the Indian climate isn’t suitable for ELS. Mittal says, “Indian soil and climate isn’t good for ELS cultivation. There are only some areas where ELS can be grown, and it has been reported that the geographic area under ELS cultivation has been shrinking over the years.”

Further, farmers too shy from growing ELS because of the duration it takes to mature. According to experts, it takes around 95 days to harvest short and long staple cotton, whereas ELS takes over 130 days to mature and the yield is comparable or less than other cotton types. “Farmers have started to look at ELS as a non-profitable crop. Thus, the year-on-year production of ELS is rapidly dropping in India,” affirms Chockalingam.

Concurring to the statements, a recent report submitted by USDA Foreign Agricultural Services explains that ELS production in India has been on a continuous decline since MY2012. It states that farmers prefer growing hybrid medium and long staple cotton because of better results. Records also reveal that India’s current production of ELS is only 1% of the total domestic production, while ESL consumption has been growing rapidly.

A new opportunity

That said, be it short and long cotton or ELS cotton, India will continue to import. And, going forward, what looks exciting are the opportunities that Goods and Services Tax (GST) has opened for new and small traders. Cotton imports are duty free. “Earlier, importers could store cotton in bonded warehouses up to 30 days without paying customs duty,” shares Mittal. And owing to frequent fluctuations in price, there were times when importers had to sell cotton at narrow margins to avoid crossing the 30-day limit. This gave a big advantage to large traders as they could afford to work on narrow or no margins, which a small trader would find difficult to do. But now, irrespective of the origin of cotton, all cottons attract a 5% GST, thus levelling the playing field. Rathakrishna explains, “Only big companies could trade cotton because it used to be a time-bound business and attracted indirect tax complications. Now, we have a 5% GST, but importers can adjust this tax against their output tax in the chain upward. And that way, they don’t lose any money while buying. The opportunity is now huge.”

Agrees Mittal, “GST will open many new opportunities, especially for budding and small traders. Importers can now think of stocking cotton, provided there is an opportunity.” Importers though have lost an advantage over domestic traders who earlier paid a Central Sales Tax (CST) of 2% that imports of cotton were not subject to.

The right time

While the 2% advantage has been erased, importers still enjoy an effective zero rate of duty. And the best part is that unlike other sectors, there is neither logistical nor infrastructural problems. The only thing that an importer needs to be careful about is the purchasing price of the commodity in international market as domestic consumers are price sensitive.

US Foreign Agricultural Services reports that ELS production in India has been on a continuous decline. 

Nevertheless, the fact of the matter is that cultivation of ELS cotton in India is on a continuous decline – while consumption is on the rise. Further, not to say, the special package of Rs.6,000 crore, which was announced last year, for the textile and apparel sector is bound to give a fillip to cotton consumption.

Well, all these facts point in just one direction – importing cotton seems to be an idea whose time has come!