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India imposes duty on cotton imports, how about the impact?

2021-02-09 09:24:25 CCFGroup

On Monday, Finance Minister Nirmala Sitharaman of India says in her budget speech in parliament that India will impose 10% duty on cotton import to help farmers. A levy on overseas purchases will potentially support local prices amid higher domestic production and prevent distress sales by the growers. There is no duty on cotton imports until now. After our analysis, this move is mostly to digest its domestic cotton inventory, improve Indian cotton prices and reduce the loss of CCI via cotton auction. In addition, cotton imports of India have decreased apparently. In short, this move may have limited influence on global cotton liquidity and prices. 

According to data traced by CCFGroup, cotton imports of India reach 161kt in Jan-Nov, 2020, a fall of 75.6% from the same period of previous year, to be a relatively low volume in recent years. Its import dependence (import/consumption) fell down to around 3%. A levy on cotton imports have limited influence on cotton consumption, but may have certain impact on the consumption structure.



In terms of cotton import structure, the major cotton suppliers change much. The major import origins were U.S., Egypt and Tanzania in 2007-2011, Australia, Cote d'Ivoire and U.S. in 2012-2016, and U.S., Egypt and Brazil in 2017-2020.



Currently, the U.S. cotton takes a relatively high proportion in Indian cotton imports, but according to the U.S. cotton weekly export sales data, the export sales and shipments of U.S. cotton to India have declined significantly this season and maintain low. It is expected that the imports of U.S. cotton may continue to decrease in the later period, which will also limit the total imports of cotton imports later. From the perspective of changes in Indian cotton imports, a levy on cotton imports may have small influences on U.S. cotton and its domestic market.

However, from the perspective of Indian cotton production and inventory, domestic cotton supply is ample, and cotton production and inventory maintains high. Among them, CCI’s inventory is relatively high. A levy on cotton imports may make downstream buyers purchase domestic cotton instead and reduce domestic cotton inventory.



In recent years, Minimum Support Price in India has been constantly increasing. Cotton Corporation of India has purchased large quantity of cotton under MSP, and sell its cotton inventory via auction at lower prices in 2020. Therefore, CCI faces large losses. Besides, farmers are protesting the Three Farm Bills and the government faces huge financial pressure. To impose 10% tariff on cotton imports is likely to ease the capital and inventory pressure, then to enhance the local cotton prices. But Indian cotton imports have reduced largely, and the final influences may be limited.
In summary, a levy on cotton imports in India is mainly purposed to reduce domestic cotton inventory and capital pressure, but Indian cotton imports have decreased largely, for import origins or the domestic cotton market, the influences may be limited in short.

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