Econometric modelling of the Indian cotton sector: regional perspective

Abstract

In this study, an econometric model has been developed for understanding and quantifying the magnitude of influence of major variables of this industry with the regional perspective of cotton production. This model explains interlinkages among the major variables of cotton farming, spinning and weaving sub-sectors through 16 equations. The estimated model performs satisfactorily in terms of goodness of fit, signs, significance of the coefficients, specifications and short and long term predictability of the model. The system is of oscillating convergence nature. The short and long term multipliers of the exogenous variables of the model have theoretically consistent signs and magnitudes. Forecasts have been made for the period 1995-96 to 2000-2001. The baseline forecasts indicate that the domestic consumption of cotton will increase at a rate higher than the total supply and the total production of cotton. Region-wise forecasts of cotton production show that the production of cotton in the central region will increase at a rate lower (1.5 per cent per annum) than those in other cotton growing regions. The growth rates of the production of cotton in other regions are also not very high. Weather variables, technology, lagged prices of cotton and competing crops, prices of pesticides and fertilizers have been identified as important variables in determining the production of cotton in different regions. In the spinning sector, the export of cotton yarn will increase at a substantially high rate. 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 will increase substantially during this period. The total consumption and the total production of cotton fabrics will remain almost stagnant. However, the export of the total cotton fabrics will increase at 4.36 per cent per annum.