Cotton yarn prices have risen very steeply in India and in overseas markets in the recent past. There is a huge shortage of yarn globally, with capacities shrinking and acute power and labour shortages in geographies where there is good quality spinning capacity.
Cotton prices remained very low over the two cotton seasons. This has brought down the cotton grown across the globe, except in India. In India the Government in the last year of the previous UPA Government announced various schemes to improve inclusive growth. One among them was a 40 per cent increase in support price for cotton. This made cotton farming a very lucrative operation so much so that even in a year when the cultivated land came down due to delayed monsoon we saw acreage under cotton actually grow. Nonetheless, as cotton export is freely allowed, and rightly so, this makes the domestic cotton prices follow the international prices very very closely. Cotton accounts for 65-70 per cent of the yarn cost and a 35 per cent increase means a 20 per cent increase in yarn prices.
Power constitutes the second most important element of cost. This has effectively gone up by 30-40 per cent due to power cut and the need to buy power from the open market or generate it using liquid fuels. For mills paying fully for power the cost of power on yarn cost under normal conditions is 15 per cent and in today’s situation it is as high as 20/21 per cent – a six per cent increase in costs.
Labour costs too have gone up as mills are forced to pay a wage much higher than NREGA to get workers. Minimum wages which was not implemented implementable has become a reality, thanks to NREGA, and most mills are forced to pay the minimum wages of 200 plus against 110/120 that they were paying earlier in spite of minimum wages being in force. Wages have gone up from 4 per cent on costs to 6 per cent now (mills are rapidly adopting technology to reduce worker dependence and therefore a less than proportionate increase in costs).
The profitability of mills was minus 7 to 8 per cent during the last 18 months (thanks to incentivised exports of cotton done during that period, coupled with weak sentiments which made the pipeline stocks deplete and provide additional quantities of yarn). This has today gone up to plus 5 per cent, the pipeline is dry. Sentiments are getting better, closed capacity during the last 18 months is not getting revived. Huge shortage of labour in China, gas shortage in Bangladesh, political instability in Pakistan are factors that will keep yarn prices moving north for some time to come until new capacity gets created.
Capacity imbalance
There is today a shortage of capacity and poor utilization of the existing capacity. There is an urgent need to create additional capacity in India. India has surplus cotton of 60 lakh bales and has a very high number of unemployed workers in certain pockets close to cotton-growing areas and a very good culture of high productivity and quality in yarn manufacture (India is the world’s largest player in international trade in yarn). However with profits at 5 per cent on turnover no new investments will happen. Profits will have to go up to at 10 per cent on turnover (the turnover to investment ratio for good spinning mills is less than one).
There is going to be increased shortage of yarn in the days to come as the per capita consumption of textiles both India and China are growing rapidly with the per capita income rising above the threshold, triggering higher per capita consumption of textiles. China, the largest producer of yarn, is suffering from acute labour shortage and very high labour costs. Bangladesh, though a small player in yarn manufacturing, is suffering from non-availability of gas for power generation and huge capacity is idle. India which has surplus cotton is best placed to increase its production to fill up the gap in demand supply
Solutions
It is important to understand that we need capacity addition of very high quality to take advantage of the global yarn shortage. Understand that unless it becomes economically viable no new investment will take place. If we have this clear understanding, then we should allow the forces of market to operate without interference to increase the profitability of spinning mills to at least 10 per cent on turnover in order to attract new investments for capacity addition. One metre increase in India’s per capita consumption of fabrics will need an addition of 15 lakh spindles and will consume 11 lakh bales of cotton.
Today we are getting disturbed by the high decibel protest by the most inefficient sector of the textile industry, namely, the export garment manufacturing sector, as it is unable to cope up with international competition from countries with cheaper and much more productive labour (yarn price increase which applies to all garmenting factories across the globe is only an excuse).
There are enough national and international studies done, and they have found our garmenting sector internationally non-competitive as the labour productivity is far less in Indian garmenting companies when compared to countries which have much cheaper labour cost. (Labour cost in India is around Rs. 150 per day against Rs. 50 in Bangladesh; therefore a much higher labour productivity is a pre-requisite to remain competitive). This weakness robs the sector of the huge advantage of “yarn at door step” advantage.
The large and modern garment factories in different parts of India which have cutting to packing with all stages of value addition in-house and which have modern machines CAD, CAM good material handling, adopt good industrial engineering practices, etc., are all doing well and growing in size and profitability despite higher labour costs.
Whereas a vast majority of them where the investment in cars and offices far exceed the investment in machines and manufacturing technology are all suffering currently with wage costs steeply going up in India, coupled with continued poor labour productivity.
We will be well advised to encourage the growth of inherently efficient and internationally competitive sectors, (spinning is the most internationally competitive sector with labour and machine productivity even better than China), work with the inefficient and not cost competitive sector (garmenting sector), improve the technology absorption, increase labour productivity substantially to be more productive than Bangladesh by benchmarking them with good factories within and outside our country and make them see reason and the compulsion to improve. Discount complaints from an inefficient sector, irrespective of the decibel of noise they make in the interest of creating employment for crores of unemployed uneducated persons in the long run in a sustained manner, and not kill the goose laying the golden egg.