Econometric Modelling of the Indian Cotton Textile Industry

Keeping in view a large number of variables and their interlinkages among them, involvement of a large number of decision makers and the government interventions in the Indian cotton textile industry, this study aims at understanding and quantifying the interrelationship among the important variables of this industry through an econometric simulation model. The model characterizes cotton farming, spinning and weving sectors and interlinkages among the variables in these sectors through 18 equations. The estimated model performs satisfactorily in terms of goodness of fit, signs, significance of the coefficients and short and long term predictability and specification of the model. The short and long term multipliers of the exogenous variables of the model have theoretically consistent signs and magnitudes. The system is of oscillating convergence nature and can be used for long term forecasting and policy simulations. Forecasts have been made for the period 1995-96 through 2000-2001. The baseline forecasts indicate that the domestic consumption of cotton will increase at a rate higher than the total supply and production of cotton. In the spinning sector, the export of cotton yarn will increase at a high rate (11 per cent per annum). Therefore, the total demand for cotton yarn is expected to increase at a rate higher than its supply. As a result, the deflated price of cotton yarn would experience an increasing but spiral tendency. The demand for, production and price of mill cotton fabrics are expected to decline. However, the export of mill cotton fabrics will increase at a rate of 2.4 per cent per annum. The consumption, production and price of decentralized fabrics will increase at a low rate. The export of decentralized cotton fabrics will increase at a rate higher than that of mill cotton fabrics (6.7 per cent per annum). Simulation results show that the area under hybrid cotton appears to be one of the important variables in the system through which the desired production of cotton as well as accelerated growth of cotton yarn can be achieved. Promotion of the export of cotton yarn at a high rate will lead to undue increase in the price of cotton yarn which will have an adverse impact on the decentralized weaving units. Hence, appropriate measures are required for accelerating the production of both cotton and yarn if India has to sustain high growth rate of the export of yarn and accelerate the production and the consumption of decentralized cotton fabrics.