With the commodity in short supply, DGFT in no mood to incentivise its export.
The lifting of the quota restriction on cotton yarn exports is unlikely to encourage exporters to supply any additional quantity of textile raw material overseas because of the ongoing uncertainty in the market and withdrawal of incentives.
The government had earlier imposed a cap of 720 million kgs on cotton yarn export for the financial year 2010-11, which was lifted effective April 1, 2011.
The entire cotton, yarn and textile market is facing uncertainty on two counts. Firstly, China which imports around 40 per cent of the global cotton production, has capped the price at 19,800 yuan per tonne. Traders fear the Chinese government may impose a price cap on cotton yarn and reduce the attaractiveness of exporting to the largest market. This also means they will not be able to set the price as per the market conditions for supplying to Chinese traders.
Secondly, India’s Directorate Directorate General of Foreign Trade (DGFT) has decided to withdraw the most encouraging duty entitlement passbook scheme (DEPB) with retrospective effect from April 21, 2010.
Hence, the lifting of the ceiling might not help much. “There will be no impact on the cotton yarn market in India,” said D K Nair, Secretary General of the Confederation of Indian Textile Industry.
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DGFT, in a public notice dated March 31, has said the export of cotton and cotton yarn shall not be entitled for DEPB benefit even under the product group “miscellaneous” with respect to shipments made on or after April 21, 2010. This means benefit under DEPB scheme, which encourages the export of the commodity concerned, has been withdrawn with effect from April 21, 2010.
When the intention of the government is not to encourage the export of a specific commodity, DEPB benefit for such that commodity would be contradictory to its intention. Since the commodity was in short supply, encouraging exports through incentives made no sense, a DGFT official said.
Accordingly, DEPB benefit on the export of cotton shall not be available. DEPB benefit on the export of cotton yarn was withdrawn effective from April 21, 2010, therefore, such a benefit on cotton (the basic raw material for cotton yarn) has been disallowed for exports made from the aforementioned date onwards, the DGFT notice said.
The withdrawal of incentives comes at a time when the government is opening up the export of cotton yarn. Traders across the country are considering dragging DGFT to court over the withdrawal of DEPB with retrospective effect.
DEPB allowed cotton exporters to avail 1.5 per cent tax refund from the government after the cash crop was exported. But, the withdrawal of this scheme would force traders to re-pay the incentive amount back to the government and the amount could be as high as Rs 200 crore.
“Traders have been meeting frequently to take a final decision in this regard. But, one thing is sure that over half a dozen traders are willing to file individual suits against DGFT for the decision,” said a veteran cotton trader in Mumbai.
Apparently, there will be a huge negative impact on the cotton trader fraternity. “We want the government to roll the move back,” said a trader.
“How can the scheme be withdrawn with retrospective effect?” asked another trader.
Meanwhile, the prices of cotton yarn have started firming up. Since April 1, the price of the benchmark 64 Counts shot up to Rs 1,780 per 5 kgs from 1,680 per 5 kgs earlier. Similarly, the price of another variety “seven coded” yarn perked up to Rs 1,410 per 5 kgs from 1,330 per 5 kgs earlier.
“With the government opening up exports, it is now sure that high prices would remain,” said Sunil Khandelwal, chief financial officer (CFO) of garment manufacturer Alok Industries.