Cotton is, undoubtedly, the most common raw material for the textile industry in India. The Indian textile industry employs nearly ten crore people, ranging from technically skilled workers to illiterate farmers working in the fields. Changes in raw material prices make a huge difference. Thus, when the cotton fabric wholesale price gets affected, the whole industry takes notice.
In the past few months, multiple events have kept the industry on edge, looking for updates that may impact the 2022 prices. The article discusses some events and their impact. However, to fully understand the impact of these events, one needs to understand the magnitude this one commodity has on the overall market.
The textile industry follows a 4-step production process. Raw material from its source (farmers in the case of natural fibers and manufacturers in the case of synthetic fibers) get converted into yarns. The yarns are then processed to produce fabrics. These fabrics are, in turn, used to develop final products. Price changes in any of the steps are sure to have an impact on all subsequent steps.
When one looks at the cotton fabric wholesale price, it is affected by the price of cotton, conversion into yarn (accounting for about 60% of the cost of fabric), and finally to the transformation into cotton fabric. With these facts in mind, this article analyzes some events that have taken place.
It is impossible to mention any events of the past few months and not talk about the impact of the Covid-19 pandemic. Several factors, which are a direct effect of the pandemic, have affected the supply chain and hence the cotton fabric wholesale price. The unavailability of farm laborers and shortage of farming equipment and other inputs like pesticides had impacted the output of cotton production, resulting in a rise in the price of cotton. Production, however, has caught up, and per the latest reports, the overall production of cotton season 2021-22 is expected to be marginally better than last season.
The other impact of the pandemic had been on the transportation of cotton from farms to the mills. Again, the unavailability of transport and the rise in prices have a cascading effect on cotton fabric wholesale prices. The global supply chain has also been affected, leading to fluctuations in the international price of cotton. This affects the domestic cotton price.
The largest consumer of finished cotton products, the retail industry, was one of the first to close down due to the pandemic. Also, as a precautionary measure, it has been the last to open and is still vulnerable to the changing situation. The retail industry is still operating somewhere between 60-65% of its pre-pandemic level, decreasing demand. Although, online channels have become more significant in the past two years and are driving an upward sales trend, offsetting the decrease in demand.
The GST Council announced an increase in tax rates from the existing 5% to 12% on fabrics in its notification on November 19, 2021. This increase will come into effect from January 2022 and is expected to increase prices. The tax rate of 5% on cotton and 12% on fabrics is expected to impact the cotton fabric wholesale price significantly.
The industry made several representations to the government earlier in the year when the GST Council announced its intentions of increasing the tax rate. However, with the notification, the change is now official. Industry bodies like the Textile Committee of the Indian Chamber of Commerce, Southern India Mills’ Association (SIMA), and Clothing Manufacturers Association of India (CMAI) have urged the government to reconsider this decision.
According to CMAI, the pandemic has already led to the closing of 15-20% of garment units, and the higher cotton fabric wholesale price will make it unsustainable for more units. In an industry where nearly 80% of the units are MSME, this is a significant impact. The government, on the other hand, is not yet ready to reconsider the tax hike. Thus, the increase in cotton fabric wholesale price for 2022 is imminent.
With the increasing prices of raw cotton due to several factors like reduced export, unavailability of cotton in international markets, increase in agricultural expenses, disturbances in supply chain logistics and other natural and political disturbances, the spiraling effect on cotton fabric wholesale price seems inevitable. In such a situation, the increase in GST for cotton from 5% to 12% will undoubtedly push the prices further upwards.
There are already industry discussions about a section of the supply chain stockpiling crops, waiting for prices to hike. This adversely impacts both the sellers and the consumers. Thus, the industry is asking for a government intervention to stabilize cotton prices. They are asking for a reduction in import duty from the current 10% and supporting the Minimum Support Price.
The Cotton Corporation of India (CCI) has predicted that, with a high price already available for the farmers for raw cotton, they may not be intervening for the 2021-22 season. The CCI comes into the picture only when the cotton prices fall below the MSP. Currently, this doesn’t seem a likely scenario. Thus, there is no probability of the cotton crop or cotton fabric wholesale price reduction shortly.
In the current market scenario, where the cotton fabric wholesale price isn’t likely to come down, it is unavoidable for the cost of finished cotton goods to also increase. This has a direct bearing on the overall apparel and fashion industry. Consumers are already grappling with an increase in prices for numerous essential items.
Combined with the price increase in other products, the consumer is likely to defer their purchase decision if the apparel prices also increase—a matter of great concern for the entire fashion industry. While there is an increase in overall consumption and demand, the supply side is impacted by the increasing cotton fabric wholesale price. Thus, the industry is closely watching any updates in this regard.
Many MSMEs are already facing rises in labor costs affecting their overall working capital. A surge in the cotton fabric wholesale price will further stress their already stretched resources. The same can be balanced only by increasing the final product cost -- not an ideal situation.
Cotton fabric wholesale prices are going to rise in 2022 unless the government accedes to industry demands. Yet, there is still some time for the increased tax rates to be applicable. The representatives are hopeful of being able to convince the GST Council to de-notifying this increase.
Whether it is an update on the cotton fabric wholesale price or its impact on the business, Fashinza is the best platform to find what is needed. An end-to-end platform for the different fashion industry players to come together. Fashinza is as much about finding buyers and suppliers as it is about finding out things that impact the business directly.