India : Proposal to Scrap Import Duty On Raw Cotton Under Consideration

In a move that is of great benefit to the textile industry, and could become a useful bargaining chip for India at the WTO, the government is actively considering a proposal to scrap the import duty on raw cotton.

The textile ministry has finalised a proposal to this effect and it is likely to be implemented in consultation with the finance ministry. The customs duty on raw cotton now stands at 10%. Scrapping the customs duty on raw cotton would bring import prices close to domestic prices and give a boost to manufacturers of cotton yarn, particularly EoUs (export-oriented units). Producers of cotton fabrics and garments would also benefit due to lower prices.

According to a textile ministry official, the move to remove the import duty is prompted by the higher international prices. Global cotton prices for various varieties currently rule at 40-50% higher than last year. Besides, there is a drastic fall in domestic output for the current season ( October-September ‘02-03). As per the estimate of the cotton advisory board (CAB), cotton output during the current season would be just 136 lakh bales, as against 158 lb a year ago.

“The farmers would not be affected by the removal of import duty as most of the domestic stocks have already been sold off, and new arrivals are expected only by December,” the official added. Removal of import duty on raw cotton would force the CAB to revise the import projections for the current season upward. Given the higher global prices , the CAB had earlier said that imports this season would not cross 16 lakh bales, down from last season’s imports of 25 lakh bales. However, sections of textile industry appear to be not so keen to buy the government’s arguments. Cotton yarn exporters operating from the domestic tariff area (DTA) apprehend that they would lose significantly on the duty entitlement pass book (DEPB) benefit if the import duty was knocked off.

These units believe that cotton yarn EoUs would gain from the move, at their cost. The DEPB available to cotton yarn exporters is in line with the import duty on this key raw material which does not suffer excise since it is a natural fibre. Currently, DTA units which account for 55% of the country’s total cotton yarn exports of over $1,500m, avail of the DEPB benefit even while they don’t actually import cotton. Given the fact that about 60% of the cost of yarn production is cost of cotton, a 10% import duty would work out to be 6% in the overall cost of yarn and that much they stand to lose if the duty goes as far as DEPB benefit goes.

The proposed import duty waiver could lead to more imports from the US, West Africa, CIS countries and Egypt, industry sources said. Consumers of yarn, fabrics and garments are likely to support the government’s move. The only opposition that may arise is on behalf of cotton growers who might face lower realisation if imports increase sharply. The Union agricultural ministry, which is likely to be consulted by the finance ministry before taking a final decision, might oppose the move.

Given the fact that Australia witnessed a huge drop in cotton output this season, the proposed import duty waiver could lead to more imports from the USA, West Africa, CIS (Commonwealth of Independent States) countries and Egypt, industry sources said. India could use removal of effective duty on raw cotton as a bargaining chip in its trade talks at the WTO as well.