By Pradeep S Mehta
International trade gives the producers opportunities to gain when global price is higher than the price under autarky, that is, absence of international trade. This is surely the case of cotton where locally used varieties are priced lower than those internationally traded.
There are other opportunities from export as well—a bumper crop under autarky implies a price fall as supply becomes very large compared to demand. Excessive supply implies that producers have to bid prices down to sell their produce. In the presence of international trading opportunities, producers do not find themselves pushed into such a corner—after all an increase in the supply from just one country does not constitute much of a change in international market conditions, affording producers the opportunity of selling their larger produce at an unaltered price.
Thus, while in autarky we can have the paradox of ‘poverty in plenty’, by contrast abundance leads to prosperity for farmers when the economy is open to international trade. However, during crop failures, the government can always step in to alleviate the adverse effect of a lower produce sold at a steady international price through procurement at a minimum support price that exceeds this international price. Given that opening up the cotton sector to exports can produce higher incomes for farmers in good times and not be the cause of unavoidable harm in bad times, my submission is that we should not ban exports.
This argument can be backed up by statistical facts. There has been a quantum jump in cotton production and productivity in the last 3 or 4 years. As a consequence, India has been able to export increasing amounts of the standard international variety (medium staple) of cotton over time. The production of cotton rose by 23% in 2006-07 over 2005-06 to reach 22.7 million bales, out of which more than half was exported during that year. This has generated valuable foreign exchange for the government and higher incomes for farmers.
The Technology Mission on Cotton (TMC), launched in 2000, has undertaken a variety of measures to raise production and productivity of cotton; the yield rates have improved significantly, though they still remain much lower than average global rates. The fact that productivity might increase further implies that the Indian cotton farmer might see a further increase in his export incomes—a possibility that strengthens the case for continuing openness. With measures like TMC taken, it would be a pity if exports were banned. All these efforts would then yield a negative result as excess supply in the market would drive prices down to such an extent that farm revenues might fall instead of rising.
Exporting cotton has never looked this lucrative; the average global price of cotton jumped from Rs 47 per kg in 2005-06, to Rs 53 per kg in 2007-08, an increase of over 11%. Instead of banning the exports of cotton, we should eliminate intermediaries, thus facilitating larger gains for the farmer from each price rise in the international market. One way of doing this is to promote contract farming, where much needs to be done.
Our opinion is not based on any blind adherence to the principles of free trade. For example, we do advocate a ban on both iron ore and steel exports, given the need for augmentation of domestic supplies. An export ban on steel will bring relief to millions. But in the case of cotton it is the producers and not the consumers who need policy assistance. Continuation of cotton exports makes sense, now that the going is good.
To sum up, we support continuation of cotton exports because the prices from the international trade of cotton are definitely much higher than what farmers would get if they traded domestically. Given that cotton farmers have experienced very low incomes in the not so distant past, we should not remove the provisions for export at the present when international markets are booming. Rather exports should continue but precautionary steps such as a policy of yield insurance and a minimum support price should be combined with a greater spread of irrigation facilities and availability of cheaper inputs to boost productivity. Make hay while the sun shines.
The author is Secretary General, CUTS International, a leading research, advocacy and networking group and can be reached at psm@cuts.org