Econometric modelling of the Indian cotton sector: disaggregate analysis

Abstract

Keeping in view the magnitude, importance, interlinkages among the variables and the high involvement of a large number of decision makers and the government intervention in Indian cotton sector, this study aims at understanding and quantifying the interrelationship among the important variables of this sector through an econometric simulation model. This model explains interlinkages among cotton farming, spinning and weaving sub-sectors through 27 equations. The estimated model performs satisfactorily in terms of goodness of fit, sign, significance of the coefficients and short-and long-term predictability. Forecasts were made for the period 1992-93 through 2001-2002. The trends indicate that the production of cotton would grow slightly slower growth rate than its consumption. The production of long staple cotton will increase faster than that of medium staple cotton. In the spinning sector, the export of cotton yarn will increase substantially. Therefore, the production of cotton yarn will increase at a higher growth rate than its consumption. The growth rates in the production of medium and coarse count yarn will be almost same. The demand for and production of decentralised fabric will increase at the growth rate of 3.63 per cent. However, the demand for and mill fabric will increase but the export of decentralised fabric will grow faster. The demand, production and price of khadi fabric will remain more or less stagnant. The simulation results of two different policy variables namely, export of cotton and yarn show that the promotion of export of yarn is more beneficial for the Indian cotton industry and raw cotton export does not have any impact on fabric export.