For a country that relies on textile exports to make up the majority of its export revenues, it is disturbing to see cotton production going down. The shift in crop cultivation towards sugarcane has left the value-added textile segments to face shortages of their basic raw material.
Recently, the Economic Coordination Committee (ECC) approved the withdrawal of sales tax and customs duty on imported cotton. When it comes to clarity in economic policymaking, it has been nothing short of a disappointment in the present regime.
Despite extremely poor cotton harvest for the past three years, the imposition of a 4 percent customs duty and 5 percent sales tax which had been in effect till January, 2017 was only counterproductive.
However, after a brief period, duties were lifted under the PM textile incentive package only to be re-imposed at the behest of the Finance Division. This illogical move only serves to increase the cost of business for an already struggling textile industry.
For if the local supply is insufficient to cater to the demand by the spinning sector, which it is, then imposition of duties only serves to drive up the price of both local and imported cotton. Lint prices touched a seven-year high level at Rs7,800 per maund in the local market recently in anticipation of a shortage.
Quality is also another factor at play. The local cotton is unable to be utilised in the production of higher yarn count thread which needs imported long staple cotton. Local cotton is plagued by poor seed quality as well as out-dated cultivation practices with weather change also adding to harvesting losses.
The area under cotton has declined by 14.2 percent year-on-year—the lowest since 1986! The latest Pakistan Economic Survey notes “exceptional losses from previous year’s pest infestation and low domestic prices at the sowing time that pushed growers away from cotton to other competitive crops (sugarcane and maize).”
As sugarcane cultivation was incentivized, cotton production took the backseat, resulting in the mess that the country finds itself in today. The graphs above illustrate the situation quite clearly. Cotton production in FY11 stood at 11,460 million tons and subsequently declined by 7 percent till FY17.
The Cotton Crop Assessment Committee (CCAC) expects cotton crop for FY18 register an increase of 16 percent at 12.6 million bales of 170 kilograms each. However, as the previous year was an especially disastrous one for the crop, the growth will not be able to help the shortage of cotton in any way.
It is no secret that the sugar industry in the country is a cartel with heavy political influence behind it. This has resulted in flawed economic policies to spur the production of sugar-cane which in turn has created a supply glut.
As this column has highlighted before, it is a lose-lose scenario. The government has to provide a subsidy if it is hoping to export sugar because of the differential between international and local prices.
At the same time, cotton production has suffered while even farmers who cultivate sugar-cane are left at the mercy of sugar mill owners owing to a supply glut because of the imposition of a minimum support price of the government. Policymakers need to get their act together!