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The Journal of Cotton Science 7:65–74 (2003)
http://journal.cotton.org, © The Cotton Foundation 2003 65
ECONOMICS AND MARKETING
Assessing the Competitiveness of Indian Cotton Production:
A Policy Analysis Matrix Approach
Samarendu Mohanty*, Cheng Fang, Jagadanand Chaudhary
ABSTRACT input subsidies such as fertilizer, power, irrigation,
In the next decade, India is likely to witness and credit. Since cotton is produced under a wide
changes in its cotton and textile sectors as many range of heterogeneous conditions in India, this
of the constraints on production, marketing, and study attempts to measure the competitiveness of
trade of cotton and textile products are set to be cotton production by state. Interestingly, the results
eliminated. Some of the internal constraints in- indicate the second largest cotton producing state
clude export constraints on yarn, government fix- in India, Maharashtra, does not have a comparative
ing of cotton ginning and pressing fees, and sub- advantage in cotton. This is consistent with the
sidization of raw cotton production. Similarly, one standard Hechscher-Ohlin model that would predict
of the most important external constraints in- that Maharashtra would have a comparative
cludes export restrictions on textile products to advantage in labor-intensive crops, such as
developed markets through the Multifiber Ar- groundnuts and sugarcane, because of its large labor
rangement. In light of these impending changes, endowment rather than in cotton, which is a more
this paper examines the efficiency of cotton pro- capital-intensive crop. In 1996-97, per hectare man-
duction in five major producing states in India hours used for cotton were 866 compared with 1765
using a modified policy analysis matrix (PAM) for sugarcane and 1066 for groundnut. These
approach. The results indicate that cotton is not findings indicate that Indian policies directed at
efficiently produced in the second largest cotton maintaining the availability of cheap cotton for the
producing state in the country. Without govern- handloom and textile sectors have induced major
ment interventions, it is likely that acreage in this allocative inefficiencies in the cotton sector and that
state will move away from cotton to more profit- significant improvements in productivity will have
able crops, such as sugarcane and groundnut. It to take place for cotton to be competitive in states
is also concluded that cotton is not the most effi- such as Maharashtra.
ciently produced crop in the other four states; India is the third largest cotton producer in the
however, there is at least one crop in each state world behind China and the United States, account-
that is produced less efficiently than cotton. These ing for 25% of the world acreage but only 14% of
findings suggest that Indian policies directed at world production (USDA 2001a). Despite histori-
maintaining the availability of cheap cotton for cally being one of the largest cotton producers in
the handloom and textile sectors have induced the world, India has been more or less nonexistent
major inefficiencies in the cotton sector. on the world cotton market. Following a series of
unilateral economic reforms undertaken by policy
his study is an application of a Policy Analysis makers in the early 1990s, India has started to re-
TMatrix (PAM) to assess the competitiveness of emerge as a major player in the world cotton market
Indian cotton, which is produced under a complex accounting for an average of 6% of the world im-
set of policies including price supports, and various ports since 1999 and for 5% of all U.S. cotton sold
in 2000 (USDA 2001b). During the calendar year
2001, India accounted for an extraordinary 11.2%
of all U.S. cotton sold for exports. Although the
Samarendu Mohanty and Jagadanand Chaudhary, policy reforms were primarily directed towards in-
Department of Agricultural and Applied Economics, Texas dustry and the international trade regime, the reemer-
Tech University, Lubbock, TX 79409; Cheng Fang, gence of India as a cotton importer can be partly
Economist, Food and Agriculture Organization, Rome, Italy. attributed to the reduction in input subsidies. More
*Corresponding author (sam.mohanty@ttu.edu) recently, the Government of India announced its in-
MOHANTY ET AL: COMPETITIVENESS OF INDIAN COTTON
66
tent to reform the cotton and textile sector(s), but (Karnataka, Tamil Nadu, and Andhra Pradesh) (Fig-
specifics of what and when the reform would be done ure 1). The Northern region is the primary producer
were not provided. of short and medium staple cotton and the southern
Despite ongoing government efforts to reform states primarily grow long staples. The central region
the cotton and textile sectors, severe external and produces mostly medium and long staples.
internal constraints remain in place. One of the ex-
ternal constraints was imposed by the Multifibre Punjab
Arrangement, which included import quotas in the 6%; 7%
developed European and North American markets
in contravention of the General Agreement on Tar- Haryana
iffs and Trade principles of open and non-discrimi- 6.2%; 7%
natory trade rules. The internal constraints are more
important. They include a mandate to sustain the Gujarat
small-scale traditional handloom sector, export con- 17%; 32%
straints on yarn, government fixing of cotton gin-
ning and pressing fees, subsidization of raw cotton Maharashtra
production, and an overvalued exchange rate, which 35%; 21.5%
held domestic producer prices below world prices.
During the next decade, both the internal gov- Andhra Pradesh
ernment interventions and the external trade con- 13.8%; 2.2%
straints originally imposed under the Multifibre Figure 1. Cotton Producing States in India with area of pro-
Agreement will terminate. The Uruguay Round duction and national share of production in 98/99 (source
Agreement set a deadline of 2004 for returning tex- www.theodora.com/maps).
tiles and apparel to disciplines of the World Trade
Organization (WTO) that govern other commodi- In the last decade, cotton acreage in each of the
ties. India is also removing its own import restric- regions has increased by nearly 2 million hectares
tions in order to meet its WTO obligations, and some from 1990 to 1997. Although the acreage in each of
changes are likely for textile and cotton production the regions grew in the last decade, the changes in
in both India and the rest of the world as this wave yield have been erratic. For example, from1981 to
of unilateral and multilateral liberalization overturns 1994, growth in the northern and southern regions
long-established patterns of production and trade. increased at an annual rate of 6.6 and 4.2%, respec-
In light of these forthcoming external and inter- tively, compared with negative (–0.7%) growth in
nal changes, it is important to examine the competi- the central region (Chakraborty et al., 1999). Since
tiveness of the Indian cotton sector. Brief descrip- then, yields in the northern region have declined sig-
tions of cotton production in India along with poli- nificantly from 470 kg/ha in 1992 to an estimated
cies affecting cotton production are presented, fol- 282 kg/ha in 2002/03. During the same period, yields
lowed by a description of the PAM technique. The in the other regions have been stable or rose slightly.
third section provides a discussion of the data used Due to stagnant yield in the central region in the last
and the modeling assumptions. The final section decade, Maharashtra with 35% of the total cotton
presents results with a discussion of the implica- area only accounted for 21.5% of total production
tions of the findings. (Figure 1). Overall cotton yield throughout India is
Indian cotton production and policy. Indian one of the lowest in the world mainly because of
cotton production has been concentrated in the west- out-dated technology, inconsistent delivery of qual-
ern half of the country and can be broadly divided ity inputs, including seed and poor management
into three major regions based on climatic differences practices. In addition, rising incidence of leaf curl
and regional heterogeneity in the availability of wa- virus and insect resistance to pesticides has also con-
ter and other natural resources that influence the mix tributed to the low yields.
of crops in various parts of the country. These re- Cotton production policies in India have histori-
gions are the Northern Region (Haryana, Punjab, and cally been oriented toward promoting and support-
Rajasthan); the Central Region (Maharashtra, Gujarat, ing the textile industry. The government announces
and Madhya Pradesh); and the Southern Region
JOURNAL OF COTTON SCIENCE, Volume 7, Issue 3, 2003
67
a minimum support price for each variety of seed MATERIALS AND METHODS
cotton (kapas) on the basis of recommendations from The PAM is a computational framework, devel-
the Commission for Agricultural Costs and Prices. oped by Monke and Pearson (1989) and augmented
In all states except Maharashtra, where there is state by Masters and Winter-Nelson (1995), for measur-
monopoly procurement, the government run Cotton ing input use efficiency in production, comparative
Corporation of India (CCI) is entrusted with market advantage among commodities, and the degree of
intervention operations in the event that prices fall government interventions. The basis of the PAM is
below the minimum support price. In Maharashtra, a set of profit and loss identities that are familiar to
cotton cultivators are prohibited from selling seed any businessman (Nelson and Panggabean, 1991).
cotton to any buyer other than the Maharashtra State The basic format of the PAM is a matrix of two-way
Cooperative Marketing Federation. With market accounting identities (Table 1).
prices above the minimum support level (on aver- The data in the first row provide a measure of
age 50 to 70% during 89/90 to 94/95), the role of private profitability (N), defined as the difference
the CCI in cotton procurement has declined substan- between observed revenue (A) and costs (B+C). Pri-
tially over the years. In order to compensate cotton vate profitability demonstrates the competitiveness
farmers for low support prices, the Indian govern- of the agricultural system, given current technolo-
ment has supplied inputs to the farmers at highly gies, prices for inputs and outputs, and policy. The
subsidized rates. The important production inputs second row of the matrix calculates the social profit
that are subsidized by the government include fer- that reflects social opportunity costs. Social profits
tilizer, power, and irrigation. Fertilizer subsidies, the measure efficiency and provide a measure of com-
largest input subsidy, have more than doubled in the parative advantage. In addition, comparison of pri-
last few years, increasing from 30 billion rupees in vate and social profits provides a measure of effi-
1988/89 to 75 billion rupees in 1996/97. ciency. A positive social profit indicates that the
Marketing of cottonseed and lint is done by three country uses scarce resources efficiently and has a
major groups: private traders, state level coopera- static comparative advantage in the production of
tives, and the CCI. Of the three groups, private trad- that commodity at the margin. Similarly, negative
ers handle more than 70% of cottonseed and lint social profits suggest that the sector is wasting re-
followed by cooperatives and the CCI. Normally, sources that could have been utilized more efficiently
Indian farmers sell their cotton in the form of kapas in some other sector. In other words, the cost of do-
or seed cotton mostly in a regulated market, which mestic production exceeds the cost of imports, which
was established under the State Agricultural Prod- indicates the sector cannot survive without govern-
uct Markets Act (Chakraborty, 1999). The cheap ment support at the margin. The third row of the
cotton pricing policy is pursued at the border by matrix estimates the difference between the first and
announcing yearly export quotas for quantity and second rows. The difference between private and
types of cotton lint depending on the local supply social values of revenues, costs, and profits can be
and demand. In addition, a minimum export price is explained by policy interventions.
also established to act as a disincentive to export.
z
Table 1. Policy analysis matrix for measuring efficiency of using inputs in production, comparative advantage among crops,
and the degree of government intervention
Value of output Value of input Profit
Tradable Domestic factor
Private prices A B C N
Social prices D E F O
Policy transfer G H I P
Private profit N=A−−(B+C) Input transfer H=B−−E
−− −−
Social profit O=D−−(E+F) Factor transfer I=C−−F
−− −−
Output transfer G=A−−D Net policy transfer P=N−−O
−− −−
z
Developed by Monke and Pearson (1989).
MOHANTY ET AL: COMPETITIVENESS OF INDIAN COTTON
68
The PAM framework can also be used to calcu- One of the main strengths of this approach is that
late important indicators for policy analysis. The it allows varying degrees of disaggregation. It also
nominal protection coefficient (NPC), a simple in- provides a straightforward analysis of policy-induced
dicator of the incentives or disincentives in place, is effects. Despite its strengths, the PAM approach has
defined as the ratio of domestic price to a compa- been criticized because of its static nature. Some do
rable world (social) price. NPC can be calculated not consider the results to be realistic in a dynamic
for both output (NPCO) and input (NPCI). The do- setting (Nelson and Pangabean, 1991). One of the
mestic price used in this computation could be ei- ways to overcome this limitation is to conduct sensi-
ther the procurement price or the farm gate price, tivity analysis under various assumptions.
while the world reference price is the international Data and modeling assumptions. The data re-
price adjusted for transportation, marketing and pro- quirements for constructing a PAM include yields,
cessing costs. The other two indicators that can be input requirements, and the market prices for inputs
calculated from the PAM include the effective pro- and outputs. Transportation costs, port charges, stor-
tection coefficient (EPC) and domestic resource cost age costs, production subsidy, import/export tariffs,
(DRC). EPC is the ratio of value added in private and exchange rate are also required to calculate so-
prices (A-B) to value added in social prices (D-E). cial prices. In this study, a PAM will be compiled
An EPC value of greater than one indicates that gov- for cotton and its competing crops in five major cot-
ernment policies provide positive incentives to pro- ton-producing states for 1996/97. These five states
ducers, while values less than one indicate that pro- account for more than 85% of cotton production in
ducers are not protected through policy interventions. India and also represent the various types of cotton
Domestic resource cost, the most useful indica- grown in India (Chakraborty et al., 1999). Most data
tor of the three, is used to compare the relative effi- are available from 2000 Cost of Cultivation of Prin-
ciency or comparative advantage between agricultural cipal Crops in India, published by the Ministry of
commodities, and is defined as the shadow value of Agriculture & Cooperation, Government of India.
nontradable factor inputs used in an activity per unit The survey is a comprehensive scheme for studying
of tradable value added (F/(D-E)). The DRC indicates the cost of cultivation of principal crops that is based
whether the use of domestic factors is socially profit- on a three-stage stratified random sampling design
able (DRC<1) or not (DRC>1). The DRC values are with tehsils (a group of villages) as the first stage
calculated for each commodity in each state. The com- unit, village/cluster of villages as the second stage
modities can be ranked according to the DRC values unit, and holding (individual farm) as the third stage
and this ranking is used as an indication of compara- unit. Each state is demarcated into homogenous agro-
tive advantage or disadvantage within that state. A climatic zones based on cropping pattern, soil types,
state will have a comparative advantage in a given rainfall, etc. The primary sampling units are selected
crop if the value of the DRC for that crop is lower in each zone with probability proportional to the area
than the DRC for other crops grown in that state. Al- under the selected crops.
though the DRC indicator is widely used in academic The most difficult tasks for constructing a PAM
research, its primary use has been in applied works are estimating social prices for outputs and inputs,
by the World Bank, the Food and Agriculture Organi- and decomposing inputs into their tradable and non-
zation, and the International Food Policy Research tradable components (Yao, 1997). For computing so-
Institute to measure comparative advantage in devel- cial prices for various commodities including both
oping countries. The DRC may be biased against ac- outputs and inputs, world prices are used as the refer-
tivities that rely heavily on domestic nontraded fac- ence prices in the study. The U.S. FOB Gulf prices
tors such as land and labor. A good alternative to the are used as reference prices for wheat, corn, and sor-
DRC is the Social Cost/Benefit (SCB), which accounts ghum. The canola cash price Vancouver, cotton A-
for all costs (Fang and Beghin, 1999). The SCB is index CIF Northern Europe (a trademark product of
calculated as the ratio (E+F)/D. Land is a more re- Cotlook Limited, which represents an average of the
stricted than other domestic factors in India’s crop cheapest five types of cotton offered in the European
production. Therefore another indicator, the SCB market), raw sugar price FOB Caribbean, and U.S.
without land-cost (LSB) is used to measure the re- runner, 40 to 50% shelled basis CIF Rotterdam are
turn to this fixed factor. Higher values of SCB and used as the representative prices for rapeseed, cotton,
LSB suggest stronger competitiveness. sugar, and groundnut, respectively. These world prices
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