Is cotton import duty a bad move?

And so, a major component of the PM’s textile package is being withdrawn just six months into its announcement: the government will be reintroducing customs duty and sales tax on the import of raw cotton at the rate of four percent and five percent, respectively, starting from July 15, 2017. The move is intended to encourage cotton sowing in Pakistan, which is currently ongoing until around the end of June.

Just yesterday, this column highlighted the declining area under cotton and the lower production in recent years (Read “Cotton outlook 2017/18,” published yesterday). To its credit, the government has been subsidising fertilizer, improved agricultural credit, and conducted special trainings and seed distribution. However, it appears that the cotton farmers’ confidence has still been wanting, and thus the latest remedial measure was to re-impose the sales tax and duty on imports.

As it stands, however, the measure appears to be a bit questionable. Firstly, why was this announced now and not in the budget, which is due a week from now? Secondly, last year saw a rebound in cotton prices and, going forward, the market is expected to be tight in the start of the season, as per cotton analyst Naseem Usman. Why did the farmers need this added protection when there is currently no crisis of price in sight?

One of the reasons cited in media reports has been an increasing amount of cotton imports in recent months. There does appear to be some truth in this; the monthly PBS numbers show skyrocketing cotton imports since January, with March seemingly touching an all-time high. It would appear that the zero-rating of cotton imports announced in January resulted in the enormous influx. However, recall that Pakistan’s annual consumption of cotton is around 15 million bales while production was around 10.5 million last season; and the season before that, just 9.8 million bales. As the increase in cotton production was not too drastic, the shortfall had to be made up for by importing, similar to last year. In fact, for the nine months ended of this fiscal year, cotton imports are actually lower by 13 percent year-on-year. So, although the recent months have seen an influx of cotton, it is not something unprecedented.

If the government’s intention is truly to encourage cotton cultivation (and not to earn Rs10 billion in revenues), then there are other ways to go about it. For one thing, stop promoting sugarcane by using a support price, or give cotton its own support price to make it equally attractive. Then, address the issue of yields and water availability, or subisidise the cotton farmer directly like in the Kissan Package. The restoration of duty on cotton import is just going to hurt the rest of the textile industry. So much for the textile package!