India raises minimum cotton price; may hurt industry

MUMBAI, Sept 4 (Reuters) - A sharp rise in the government-set minimum support price (MSP) for cotton for the new year may hurt some Indian textile firms and is likely to boost imports of cheaper cotton, senior industry officials said.

MSP is the minimum price that must be paid to the farmers to procure their produce. India raised the minimum support price (MSP) by up to 40 percent for medium staple cotton, a senior official in ministry of textiles told Reuters on Thursday.

"The notification regarding the hike in MSP was made on Sept 1. The raise became necessary due to increased input cost and an overall rise in cotton prices," J.N. Singh, joint secretary in the ministry of textiles, said on Thursday.

"The hike is very, very steep and it will certainly lower the competitiveness of the textile companies and may even push some firms into red," P.D. Patodia, chairman of Confederation of Indian Textile Industries, said.

The MSP of the medium staple cotton, which includes the popular Shankar variety, has been raised by 39-43 percent to 2,500 rupees per 100 kg. The MSP last year was 1,750-1,800 rupees.

Similarly, the MSP for long staple fibre has been raised to 3,000 rupees per 100 kg from about 2,250 rupees.

"The prices were already higher than the MSP but a steep rise may further push up the prices, which may raise imports despite a healthy supply," Patodia said.

The prices in the spot market will again rise and undo the government's earlier moves to tame prices, a trader in Gujarat said.

In July, India scrapped import duty and removed export incentives in an attempt to increase supplies and lower prices, which had touched 28,000 rupees per candy.

"The rise in the MSP will lead to cost escalation and will put margins of textile firms under pressure. The decision to raise MSP in cotton will adversely affect textile firms," B.S. Pandit, chief financial officer of Aarvee Denims and Exports Ltd (AADM.BO), said.

However, some firms said the market price for cotton was already higher than the MSP and that a rise would not impact the industry much.

"I don't think this will cause any upward trend in cotton prices as already cotton prices are at a high level," Sunil Khandelwal, chief financial officer of Alok Industries (ALOK.BO), said.

The benefits of the recent depreciation in the rupee against the dollar was partially offsetting the adverse impact of high cotton prices on margins of Indian textile companies, said ICICI Securities analyst Nishant Bhargava.

India is estimated to have produced a record 31.5 million bales of cotton in the year ending Sept 2008. Despite a rise in output, prices rose sharply on higher exports and lower supplies in the world market.

(Editing by Harish Nambiar)