Understanding Indian economic policies

You may not have heard of post like “Directorate General of Foreign Trade (DGFT)”.
Neither did I till I happened to read the following news on Mint. It recently issued a directive to ban further export of cotton until further notice.

In order to understand the implication of this directive, you have to list some of the key players involved in this decision and impact of the decision for each of them.

The first in the chain are cotton producers.
Textile mills and external export market buyers as primary consumers.
Textile mill products are consumed internally by Indian buyers and external buyers through export.
They constitute secondary consumers.

Cotton producers have incentive to get the highest price for their cotton. Textile mills have an incentive to get the cheapest cotton available in the market. They also have incentive to reduce cost of production. Increasing efficiency will help reduce cost, boost margin and increase competitiveness for the textile mills. How ever, the cost is always transmitted down the chain.

From the action of DGFT, it can be inferred that cotton producers have a preference to export over selling it to Indian textile mills. It is possibly due to better price or export policies that helps reduce other cost like taxes. Motive is hard to infer. In a healthy open market, cotton producers would receive best price for their effort.

But a directive like this pits cotton producers interest against the interest of Indian textile mills, which would have been forced to buy cotton at higher price in an open market. This would not impact textile mill’s production but will drive up the cost of end product.

In an open market, there would be a push to increase efficiency of production and absorb the increase in cost of raw material or risk reduced competitiveness  by pushing the cost to their consumers.
This open play benefits all players in the chain.

How ever, the directive aims to protect the interest of only one group, Indian textile mills.
It is no wonder that different lobby groups emerges to protect their interest in such policy making environment.

There is one group that suffers in silence while the game goes on. The consumers, almost never benefits from the policy interplay.


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