Let's Ban Export Banning - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 10 March 2012
PRINTER FRIENDLY | ARCHIVES
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- By Asad Dossani, Author, The Lucrative Derivative Report

Asad Dossani
Earlier in the week, India banned the export of cotton for the second time in the last two years. The rationale was to ensure lower prices and abundant supply for domestic purchasers of cotton. There have been numerous calls for the ban to be lifted primarily from farming lobbies, and some reports suggest this may occur in the near future.

One of the first questions to ask is why they instituted the ban, and what benefit did they believe it would create? Unfortunately, there was no information on this. The ban came as a surprise, and the lack of explanation for the ban was even more surprising.

So does a ban on cotton export benefit the country as a whole? Of course, it does benefit textile producers, but this comes at the expense of farmers growing the cotton who receive lower prices. The ban not only affects farmers negatively, it has a negative impact on the country's macroeconomic situation.

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If we look at most emerging economies today, most of them have experienced rapid growth through increasing exports. China and other East Asian countries have growth by exports, as has India. Indian IT exports have been a major factor in creating higher growth rates.

So they why on earth would we want to ban cotton exports, when exports are clearly a good thing. Exports provide us with foreign currency reserves, reduce our current account deficit, and increase our GDP growth rate. They help us pay for crude oil imports. In the case of cotton, they also provide income for farmers.

Unless there is a very good reason, we should not be trying to reduce our exports. Sometimes there are good reasons. In the case of food shortages, it may be justified if parts of the population can't afford the higher food prices. But this is not about poor people and food prices. This is about textile companies and cotton prices.

After the cotton export ban was put into place, there was an article in an Australian newspaper, where the Agricultural minister said that the ban was good news for Australia. It was an opportunity for Australian cotton producers to increase their exports and fill the gap left by the lack of Indian exports. Good news for Australia, bad news for India. Our poor performance against Australia extends beyond Test matches.

The right thing to do is the end the export ban on cotton. That would be a good start. A great thing to do would be to ban export bans altogether. But that is just wishful thinking at this stage.

is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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13 Responses to "Let's Ban Export Banning"

GUDIVADA SRINIVASA RAO

Mar 23, 2012

HI

Like 

Vineet Kumar Gupta

Mar 13, 2012

It depends how you look at it ? If regulating LPG, Natural Gas and crude prices is bad, then it is bad. otherwise it is not so.

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Naveen

Mar 12, 2012

Cotton business in Hubli in Karnataka is one large market. Farmers do not get the benefit directly from exports. however, the industries turn these cotton to finished good here (elsewhere in TN and KAR) it has always been that farmers have benefited due to local market (between finished good and cotton growers including middlemen) economics. Farmers get the direct benefit.
It is a fallacy that farmers get more when exports is increasing..

IT consumers were and also will be more abroad than within india. So, its product specific.

The Australian labour party is making big of any small news now a days to win over to stay in power.

Australian announcing this cotton story is not new. may be we read it this time around..

However i disagree of total ban as there are some middlemen and traders who do buisness on behalf of some farmers in few states who will be impacted due to this.
However, like yester years they are ready to network and get the stock cleared down the south ...

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T MASILAMANI

Mar 11, 2012

Dear Dossani,
I strongly feel that Mr Anand Sharma's decision to ban Cotton exports is right and he had given clear explanations 1)projected export Target crossed2)He is having doubts whether vested interested doing export from here, later on get the same material sold in India @ High price.

Raw cotton is raw material for textile goods.Value added good like yarn, fabric,garments can be exported

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Qrious

Mar 11, 2012

If there was no ban on export of cotton, farmers would look to increase cotton production. Why would they want to increase production if exports are banned! Does the government want to ensure that our cotton production stagnates?

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srinivas

Mar 11, 2012

Your thinking is too simplistic. Exports are good thing, no doubt. But not the export of raw materials, only finished goods. GDP growth will be much better then. China is hoarding cotton and imports more than it needs. It is a set back to Indian textile industry. Please read history, British made India a source of raw material for their industries and a market for their finished goods. And India became an underdeveloped country, because scarcity of cotton destroyed Indian industry and caused unemployment.

Like 

Mahadevan Subramanian

Mar 11, 2012

It is indeed surprising the author, supposedly an expert, has very conveniently missed a very important point. If domestic textile makers do not get adequate supply of cotton at the right prices and at the correct time, their production and exports will decline. That will cause exactly the same effect of reduction in cotton exports, perhaps at a larger scale. It is a fundamental point that the more value added a country's export is, the country gets more economic benefit.

In this case garments exported will get more dollars and will create more jobs locally than exporting raw cotton. Of course it is to be studied if the additional benefit of curtailing exports compensate for the lower price realised by cotton growers. In any case, it also needs to be ensured that the growers get internationally competitive prices. One should also consider the indirect price realisation to farmers (and textile makers) from various subsidies.

All this needs careful study and policy calibration, but the author very conveniently has entirely ignored the other side of the coin and has made a rather simplistic and superficial point.

Like 

Balakrishnan, R

Mar 11, 2012

Next to agriculture, major industry is Textile industry. It gives employment to a lot of people. Next only to agriculture. For textile industry cotton is raw material. Instead of exporting raw cotton, if we export garment we shall get value of minimum 4 times of cotton used in it. Hence government should help textile industry to export value added items such as garment instead of raw cotton. In cotton exports, most of the time only merchants are getting benefited and not the farmers.

Like 

K P Nair

Mar 11, 2012

Govt.must have a major reason for banning export of cotton.It should be understood before we can side with the farmers.It is true that the farmers get less money from domestic sales.It is also true that the consumer of cotton clothes will pay more if it is made out of imported cotton by the textile mills.Generally it is wise to use all our domestic produces for our own use and excess may be exported.Do not permit export only to get one sector richer and another suffers. K P Nair.

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R Verma

Mar 11, 2012

India should be exporting finished (value added)goods and not raw material. Our effort in this case should be directed towards the export of textiles and not raw cotton.

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