Cotton arrivals in Gujarat have fallen sharply as farmers are holding on to inventories and this has resulted in an artificial supply shortage and rise in cotton prices. Gujarat is the largest producer of cotton in India.

Prices of the popular Shankar-6 cotton have gone up by about Rs 1000 per candy in the last three weeks. The adverse impact of demonetisation on disposable incomes and consumer spending has resulted in a slowdown in domestic demand for apparels and other end-products of the textile industry in the immediate term.

The inventory accumulation with retailers will, in turn, cause deferment of purchases from apparel or home textile manufacturers in the near term, besides resulting in stretched payments. This, will affect the cash flow in the textile industry and is likely to drive a constraint in the demand for the entire textile value chain.

The harvest season for cotton begins in October, with major cotton arrivals happening till March. New cotton arrivals are typically accompanied by softening of cotton prices from the levels during April to September. The impact is expected to be pronounced on the unorganized segment, which forms a large part of the domestic textile sector where cash transactions are more prevalent, as a reduction in currency circulation would temporarily affect their routine business transactions.

However, the slowdown in cotton arrivals is a short-term phenomenon, which has already started to correct. Farmers have gradually started accepting alternate modes of payments.