Pricing Management Assignment

Pricing Policy and Regulations of

Submitted to: Prof. Khyati Jagani

Agriculture is the backbone of Indian Economy. About 65% of Indian population depends directly on
agriculture and it accounts for around 22% of GDP. Agriculture derives its importance from the fact
that it has vital supply and demand links with the manufacturing sector. During the past five years
agriculture sector has witnessed spectacular advances in the production and productivity of food
grains, oilseeds, commercial crops, fruits, vegetables, food grains, poultry and dairy.

Cotton is one of the most important cash crops and accounts for around 25% of the total global fibre
production. Cotton is also one of the most important commercial crops cultivated in India. In the raw
material consumption basket of the Indian textile industry, the proportion of cotton is around 59%.
It plays a major role in sustaining the livelihood of an estimated 5.8 million cotton farmers and 40-
50 million people engaged in related activities such as cotton processing and trade. India has world’s
largest area under cotton cultivation that is about 35 percent of the total world area under cotton.
By improving the yield to match with the world yield of about 8 quintals per hectare, production of
9.9 million tonnes can be achieved under the present area coverage of 12.43 million hectares. With
this abundance of availability of its own cotton, India has potential to increase local and global
consumption of its cotton.

Demand-Supply Scenario
As per FAO estimates, world cotton production in 2017-18 is anticipated to reach around, 121.94
million bales. Domestic production of cotton has increased from 325.27 lakh bales in 2016-17 to
339.15 lakh bales in 2017-18. World projection shows increase in production from 106.8 million
bales in 2016-17 to 121.94 million bales in 2017-18. Increase in global production of cotton is mainly
due to China’s increase in production.

Pricing Policies

MSP
Wholesale prices of cotton from March 2016 to February 2018 have been ruling above MSP. There is
a marginal increase in estimated cotton production from 32.6 million bales in 2016-17 to 33.9 million
bales in 2017-18. As per USDA report, World’s cotton production has increased due to increase in
China’s production in 2017-18. According to International Cotton Advisory Committee (ICAC), China
is the largest cotton producing country, projected to increase its consumption by 1.5 percent.
Consumption is also expected to grow in Pakistan, Turkey, Bangladesh, Vietnam and Brazil. Also,
import of cotton by China is expected to increase in 2017- 18, whereas export by USA is projected to
decrease slightly.
The issue regarding MSP for Kala Cotton raised by the Government of Gujarat was discussed by the
Commission with Cotton Corporation of India (CCI). Kala cotton is grown in some states with
approximate production of 10 percent of total cotton production. Farmers bring Kala cotton with
ball. However there is no guideline to purchase this variety under MSP. Some cotton growing states
have declared MSP for Kala cotton except Gujarat due to which farmers of Gujarat are facing the
problem of marketing of Kala cotton. The Commission is of the view that the state governments
where Kala cotton is produced, in consultation with CCI should put a robust system in place for post-
harvest operations and purchase of Kala cotton from farmers.

The Government has fixed the MSPs for Kharif crops and Rabi crops of 2017-18. Cotton has been
raised by Rs. 160 per quintal and fixed at Rs. 4020 per quintal for Medium Staple and at Rs. 4320 per
quintal for Long Staple.

Cotton yield in India is likely to decline this year to hit a three-year low due to crop damage
following drought in its major growing states including Gujarat in Maharasthra, the two states jointly
contributing half of India’s cotton output.

To capitalise on benefits, such as procurement at minimum support price (MSP), offered by the
government, farmers had brought additional area under this natural fibre last kharif sowing season.
As a result, total acrea under the crop rose to 12.24 million ha from 10.83 million ha in 2016-17.

However, uneven distribution of monsoon rainfall in Gujarat -- deficient in cotton growing belts and
surplus elsewhere -- coupled with drought in major cotton cultivating areas in Maharashtra such as
Marathwada, is set to pull down India’s average yield this year.

Following initiatives are being taken for effecting smooth MSP operation for the benefit of farmers:

i) During current cotton season for the convenience of farmers, CCI has opened 348
procurement centres to ensure remunerative prices to the cotton farmers.
ii) With a view to enable the cotton farmers to avail the full benefit of MSP, CCI has
disseminated information about MSP through advertisements in newspapers,
 distribution of pamphlets to individual farmers and displaying banners in APMCs in order
to avoid distress sale of cotton by farmers.
iii) All payments to farmers are made through Real-time Gross Settlement Systems (RTGS)
to ensure that the benefit of MSP goes directly to the concerned farmers.
iv) Awareness campaign has been taken up in a big way including display of Minimum
Support Price (MSP) rate and quality parameters in local languages.
v) Purchases under MSP operation are monitored daily through ERP system of the CCI. In
addition, video conference – twice a week is also conducted by the corporate office with
the various branch heads of the Corporation, to ensure that all issues are sorted out
without delay and to keep the MSP operation smooth.
vi) To address the grievances of farmers, Grievance Cell has also been opened at Zonal and
Headquarter Offices.

Yield Gap

In case of cotton also, state average yields fall well short of both potential and realized yields. In all
the states, realized yields exceeded the state average by more than 50 percent. Highest gap was
observed in Karnataka (76.1 percent) while, lowest was observed in Punjab (64.2 percent). Yield gap
(B) was also very high across India. Yield gap (B) was highest in Karnataka (79.9 percent) followed by
Maharashtra (77.3 percent). High yield gap in Individual states has manifested itself in the form of
high yield gaps at all-India level as well. At the all-India level yield gap (A) and yield gap (B) were 71.5
percent and 75.5 percent, respectively. A fraction of such high yield gaps can be attributed to the
high level of pest infestation in the cotton crop in recent years due to which yields in respective
states have seen a declining trend. In view of this worrying trend, it is important to develop efficient
production strategies for cotton along with contingency planning and capacity building to bridge the
widening yield gaps. From calculations, it is observed that such yield gap abridgement facilities can
lead to increase in production by as much as 17 million tonnes.
Quantitative restrictions

Quantitative restrictions (QRs) on export of cotton were removed by the Government in July, 2001
and its exports were placed under OGL. To curb the rising price trend in the domestic market,
government imposed export duty of ` 2500 per tonne on raw cotton in April, 2010 to avoid
disruption in supply chain of cotton in the country till the end of cotton season 2009-10. Cotton
export was placed on restricted category in May, 2010 but export was allowed at zero export duty in
August, 2010 with the restrictions that the contracts for exports are registered with DGFT prior to
shipment. Cotton export is currently free and the registration requirement for export of cotton has
been dispensed with vide notification dated 08.12.2014. Import of cotton was placed under OGL in
April 1994. Import duty of 5 percent was levied on import of cotton in March 1999 which was
increased to 10 percent in January 2002 in order to avoid import of cheaper cotton. However,
import duty was reduced to zero in July 2008, and it continues to be at the same level. India is the
second largest exporter of cotton in the world. During the period from 2006-07 to 2016-17, India’s
export of cotton fluctuated between a low of 4.4 lakh tonnes in 2008-09 to a high of 19.9 lakh
tonnes in 2012 -13 (Chart 4.24). Exports of cotton declined to 18.6 lakh tonnes in 2013-14 and 10.9
lakh tonnes in 2014-15 but increased to 13 lakh tonnes in 2015- 16 and again declined in 2016-17 to
9.1 lakh tonnes. The main reason for decline in exports of cotton in 2014-15 was steep decline in
import demand from China due to slowdown in Chinese economy and their consequent intend to
reduce cotton reserved stocks.

Price Support Scheme

The Department of Agriculture, Cooperation and Farmers Welfare implements Price Support Scheme
(PSS) for procurement of oil seeds, pulses and cotton through Central Nodal Agencies at the
Minimum Support Price (MSP) declared by the Government. This scheme is implemented at the
request of the concerned state government which agrees to exempt the procured commodities from
levy of mandi tax and assist central nodal agencies in logistic arrangements including gunny bags,
provide working capital for state agencies, creation of revolving fund for PSS operations etc. as
required under the Scheme guidelines. The basic objectives of PSS are to provide remunerative
prices to the growers for their produce with a view to encourage higher investment and production
and to safeguard the interest of consumers by making available supplies at reasonable prices with
low cost of intermediation.

Bollgard technology
Bt. Cotton is the only transgenic crop approved in the country for commercial cultivation. The
Genetic Engineering Appraisal Committee (GEAC) of the Ministry of Environment, Forests and
Climate Change is the nodal agency for grant of permission for environmental release of Bt. Cotton
hybrids under the Environment Protection Act, 1986 in the country. At present, about 1400 Bt.
Cotton hybrid seeds are available for cultivation in the country. These Bt. Cotton hybrids are grown
in ten (10) States i.e., Gujarat, Madhya Pradesh, Maharashtra, Andhra Pradesh, Telangana,
Karnataka, Tamil Nadu, Haryana, Punjab and Rajasthan. The area under Bt. Cotton has increased
from 29073 ha in Kharif 2002 to 85.29 lakh ha. in 2016-17 (81% of total cotton area) The Department
has issued Cotton Seed Price Control Order, 2015 under Section 3 of the Essential Commodities Act,
1955 for regulating the Maximum Sale Price (MSP) of Bt cotton hybrid seeds. The Price of Bt Cotton
seed was fixed at Rs. 635/- per packet of 450 grams for BG-I and Rs. 800/- per packet of 450 grams
for BG-II for the year 2016. Similarly, the Department has notified the MSP of Bt. Cotton for 2017-18
(vide SO No. 802(E) dated 10th March, 2017) in which Rs. 635/- per 450 grams of Bt. Cotton seed
plus 120 gram of refugia for BG-I version Bt. Cotton and Rs. 800/- for BG-II version of Bt. Cotton
Hybrid. There is no trait value for BG-I version, however, the MSP of BGII includes Rs. 49/- as trait
value.Cotton seed associations, which have been asking the government to increase seed prices, so
that they will not be able to sustain their businesses and supplies might be hit this year.
Price Control Initiatives

Recommendations

 For identification of genuine farmers, some state governments have introduced bar coded
identity cards. In case, this has not been done, a system may be set up in the purchase
centres whereby the sellers are clearly identified based on an electronic database of farmers
containing inter alia their photographs, Aadhar details, land holding, area in which cotton
grown and bank account numbers. At the time of purchase, i.e. generation of takpattis, the
farmers may be photographed through a webcam and the information retained in a digital
database for further verification, if required.
 CCI has tentatively identified a total of 348 procurement centres based on past need for
MSP operations. These centres are mostly located at APMC Market Yards. It may, however,
be convenient to the farmers, if the purchase centres are relocated to Ginning & Pressing
factories by providing necessary infrastructure there. This will require advance notification
of the Ginning & Pressing factories as Market Yards under APMC Act indicating clearly the
villages attached to them for MSP purchases and establishment of requisite facilities.
  Awareness campaigns amongst farmers may be launched exhorting them to bring
contamination free, good quality cotton with nominal moisture content of 8% at the notified
Market Yards which will fetch the best price. Although, the CCI will purchase cotton with 8-
12 percent moisture at proportionately reduced price.
 Most of the other States have exempted CCI from paying 2% commission to the APMC
during the MSP operations because the purchase is done directly by the CCI to avoid distress
sale by the farmers. In such operation, actually, no bidding takes place. Therefore, the
APMCs need to be advised to allow CCI to purchase directly from cotton farmers without the
involvement of any commission agents. This would ensure uniform system in MSP purchases
across the country and also reduce losses arising out of MSP operations.
 While recommending minimum support price (MSP) for crops, the Commission used to
consider the cost of production, overall demand-supply, domestic and international prices,
inter-crop price parity, terms of trade between agricultural and non-agricultural sectors, the
likely impact of the price policy on rest of the economy. However, Union Budget for 2018-19
has announced the pre-determined principle of offering to farmers a threshold MSP of
atleast one and half times the cost of production (CoP) for all mandated kharif crops.
 Cotton farmers face huge risks since the cotton seed market is not regulated and poses
higher risks to the farmers’ produce in terms of quantity and quality. Therefore, to increase
the yield and compete in global market, there is an urgent need to regulate the cotton seed
market in light of growing cotton industry and to safeguard our farmers

Conclusion

Cotton farmers in India benefit from debt forgiveness and fertiliser subsidies from their government.
India also provides some backing in the form of subsidies for crop insurance, although the value of
this support is unknown. In addition, the government of India provides support to cotton production
through several programs, such as the development of infrastructure facilities for production and
distribution of quality seeds. Under the government’s Technology Mission, support was provided for
the modernisation of ginning and pressing units and the improvement of cotton marketing in recent
years. No information on these programs is publicly available. In addition, the government supports
the textile sector with a number of programs that provide direct support and soft loans.