Apr 29, 2012

Commodity prices and Trade Policy Challenges - Part II

In the last blog, I talked about how increasing global commodities prices might put pressure on government to lift the export ban in order to take advantage of international prices. We are seeing this pressure for cotton and sugar now a days. There is a meeting scheduled tomorrow, headed by Prime minister to sort out the issue.

Let's take up cotton as an example. We are one of the top producers. And second largest exporters of cotton in 2011, behind US. Interestingly, China absorbs all its domestic cotton in textile manufacturing. They even import from us and others. And China protested when we banned the cotton exports!

I would have loved to plot international price movement vs Indian spot prices for cotton. However, I see that though I can get time series for both Memphis and Cotton A index internationally, when it comes to India prices, it is difficult to obtain. The MCX spot prices are in rupees and I am not sure about the conversion to dollars per tonne, given the exchange rate fluctuations. So I leave it at that. Suffice to say, the international prices are attractive enough for Indian cotton growers and hence the demand to let them export cotton. Also, India's now-on-now-off policy has created havoc in cotton markets internationally, with financial times calling cotton, the new 'widow-maker'

Let's see the arguments. The textile industry, headed by the commerce minister Shri Anand Sharma, is batting to ban exports. They say, that the textile mills will not get enough cotton at low prices otherwise, and this would affect their profitability and existence. As textile industry is one of the biggest employment providers in India, it is difficult to ignore them (I consider the argument that mill owners are being fattened at farmers' expense as bogus). 
The agriculture minister, Mr Sharad Pawar, bats for farmers. He feels that the farmers deserve higher prices for their produce and exports would help in this direction. Again, there is question of livelihood. Let's ignore the middlemen for a while, and we see that once exports are on, the price eventually trickles down to farmers.
Then there are traders and exporters. They are the ones who stick their neck out. And no one talks about them. They source the cotton, liaison with importers and run around to get the good exported. A sudden ban leaves them at the mercy of various government and other agents, depending on what stage of export the goods were. Something next to the ship, without a let export order from customs, is stuck. It takes time to recover if the trader is small.

A very nice summary of cotton/sugar issue and the importance of having timely data for policy making can be found at Nidhi Nath Srinivas' article from ET.

This blog addresses a slightly different issue. I am trying to find out if we have a trade policy goal at country level which is beyond and above the self interests of various lobbies and ministries. I don't consider doubling the exports, gaining x% of world market and so on as policy goals, they can be indicators of success, not policy-intent.  I am talking of something like a goal of welfare maximization though trade, which might include employment, industrialization, livelihood, profit maximization of firms and various other factors of interest as parameters and variables. It must be aligned to overall strategy of national development. And that makes me wonder, do we even have a CGE model that's used by trade policy makers to simulate the policy effects? If the answer is no, where are we going? Shall we use common sense in the lack of it? If yes, whose common sense?

The ideal way to resolve the cotton issue, or any such issue, is to simulate the effect of cotton prices on textile industry and present the numbers to the ministers. It should include employment effects too. The effect of price on future agriculture production should also be simulated. Based on these two (I am keeping it simple for the blog), one can take a balanced call and get a broad direction. Finally it has to be a subjective call by the minister. However, the model and simulations would help in arriving at the conclusion in a scientific way. And for all this, you need data, and you need a dedicated team in commerce ministry that maintains the model. If such a team indeed exists, it is hidden from public for some unknown reasons. I couldn't get any whiff of it anywhere on the internet. In that regard, I must appreciate RBI for it's efforts and the models that they maintain for use in monetary policy making. And they are quite public.

As the prices fluctuate upwards and such pressures start coming in for various commodities at various times, one cannot go on with such inter-ministerial spats and prime minister helping them to compromise and agree. One has to set a high level trade policy goal(s), and establish a process of analyzing things scientifically. The goals can be tweaked based on the contingencies, but the process to arrive at the conclusions, based on the policy goals, must be kept scientific, in the light of data and simulations. The technology to do that is here, the people are here, but I guess, somewhere, what's lacking is the will. 
Will the real policy-maker, please stand up?