Cotton yarn exports: Spinning out of control?

• Endowed with an abundant supply of raw cotton, India is the largest exporter of cotton yarn in the world.
• India’s cotton yarn exports have plunged 35% in the first quarter of FY’20 to US$ 696 million compared to US$ 1.1 billion in the same period last fiscal.
• This is a result of external factors including weak international demand, tax sops to competing nations like Bangladesh & Vietnam as well as internal factors like higher prices in the domestic market & rising costs of Indian raw cotton.
• In order to arrest these challenges, India can consider expanding the scope of RoSCTL and negotiating for matching tariff structures. Exporters will also have to also look towards diversifying their markets.


Blessed with favourable geographical conditions including a tropical weather (24 degrees celsius), saline soil and ample rain (600-1000 cm), India is known all over the world for its excellent quality of cotton.  In fact, back in the day, the popularity that India’s fine cotton enjoyed in the niche markets of Europe not only filled the coffers of British East India Company, but also made it one of the richest and most powerful corporations in the 18th century. India still maintains its supremacy as a fine cotton producing region and is one of the largest cotton producers in the world.

Producing 4 varieties of cotton, India accounts for around 25% of the total global fibre production and has the largest area under cotton cultivation on the planet i.e. about 11 million hectares. India also has the second largest cotton spinning infrastructure in the world.

Top cotton yarn exporters in the world Value exported in 2018 (US$ million) Quantity exported (tons)
India 3,840.6 1,220,425
Viet Nam 2,263.3 764,667
China 1,272.3 275,450
Pakistan 1,202.2 457,573
USA 1,105 384,310
Uzbekistan 720.6 273,618
Indonesia 505.2 170,636
Turkey 502.2 150,810
Hong Kong 411.6 98,757
Taipei 207.1 97,203

Source: ITC Trade Map

Endowed with an abundant supply of raw cotton, India was indubitably the largest exporter of cotton yarn in the world in 2018 and exported 1,220,425 tons of cotton yarn amounting to US$  3,840.6 million. However, the situation is likely to be unpleasant in the coming years. According to the Confederation of Indian Textile Industry (CITI), India’s cotton yarn exports have plunged 35% in the first quarter of FY20 to US$ 696 million compared to US$ 1.1 billion in the same period last fiscal.

This has been the result of a string of domestic and international factors which are closely knitted. For starters, in Indian markets, cotton yarn fetches higher prices than in international ones, leading to a slide in the exports. Further, the government’s farmer-friendly policies have proved detrimental for the cotton exporters. For instance, the decision of the government to go ahead with a 28% hike in MSP has led to the distortion of prices in the global markets, thereby dealing a blow to India’s competitiveness.

Further, India has also started losing out its share in its traditional export markets like China to competition from other countries like Bangladesh, Pakistan & Vietnam. This is because China has given duty-free access to countries like Pakistan and Vietnam since April 1, 2019. On the other hand, Indian yarn attracts duty of 3.5-4%. This has significantly brought down the cost of their cotton yarn at a time when Indian raw cotton price is touted as the highest in the world. At the same time, be it India or international markets, there is a general dip in consumption amidst the global slowdown and weak employment growth. Exports to both EU and China have fallen by 25% over 5 years.

This has fanned fears in India that if this trend goes unchecked, it may lead to the closure of many factories and mass layoffs. Given the fact that 40-50 million people in India are engaged in cotton processing and trade according to the Ministry of Textiles, this development is quite disturbing. In order to arrest this situation, the government has already set up an inter-ministerial committee of secretaries. One of the things that the committee can consider is to widen the ambit of the Rebate of State and Central Taxes and Levies (RoSCTL) scheme to yarn and fabrics as well (presently for garments).

This will allow reimbursement of duties on export inputs and indirect taxes via freely transferable scrips (i.e. incentives that can be used to pay duties). Cotton yarn exports currently attract 5-6% of embedded taxes such as agricultural cess, mandi tax, power and fuel surcharge. There is also a demand from the industry to devise a scheme along the lines of Merchandise Exports from India Scheme (MEIS), which provides tax sops to cotton yarn exporters in a manner that does not infringe on WTO norms. The government could also switch to other modes like direct benefit transfer in order to raise the standard of living of Indian farmers instead of increasing the MSP of crops.

Moreover, India is still exporting a lot of raw cotton to markets with zero duty, which is not getting converted to yarn or fabric. This leads to a considerable loss of foreign exchange and employment generation. Exports of cotton reached US$ 2 billion in 2018-19, so adequate incentives for value addition are the need of the hour. Given the tariff disadvantage in cotton yarn and fabric exports, the industry should consider the option of diversifying its markets. Cotton yarn exporters could explore the markets of Turkey, Portugal, Japan & Germany, as they would have to pay low tariffs in these markets.

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