Column: Sugar-coating subsidies

Updated: Mar 15 2014, 08:21am hrs
On February 28, 2014, the government notified an export incentive/subsidy of R3,300 per metric tonne (pmt) or $53 pmt for 4 million tonnes raw sugar out of the Sugar Development Fund (SDF). The total implications are of $212 million or R1,300 crore. This will stimulate demand expansion and better price

realisation by shipping out excess stockpiles during 2013-14 and 2014-15, helping to partially clear the arrears payable to farmers. About 1.3 million tonnes of raw sugar has been shipped out this marketing season. The target

has been set at 2 million tonnes by end-September 2014.

The gazette notification of February 28, 2014, is retrospectively applicable from February 1, 2014. Whenever an order is backdated, corporate organisations that are privy to the details before notification become the preferred beneficiaries. Refined sugara value-added productis excluded from this policy prescription for unknown reasons! This incentive ensures cheaper supplies abroad while locally, raw sugar becomes expensivea defiance of WTO commitments.

The government, in its decision, was guided by the fact that prices of raw sugar bottomed out at 14-15 cents/lb or $320-343 pmt in the New York exchange. Therefore, exports were not viable without the incentive calculated at R3,300 pmt. Commodity markets have violent fluctuations. In the recent past, the price band of raw sugar has been rather elastic, at 14-30 cents/lb. Policymakers cannot be oblivious of this fact. (A variation of 1 cent/lb changes the price by $23 pmt.) Potentially, the price can easily swing between $320-$690. Therefore, the incentive needs benchmarking with prices abroad. Put simply, higher prices of the commodity should lead to corresponding reductions in the subsidy and vice-versa. Dispensing a 'fixed' subsidy without considering inherent market volatility is grossly erroneous and questionable.

Pursuant to the incentive, the global prices should have further declined. But negating logic, raw sugar values immediately climbed up by $70-75 pmt (3c/lb), assuring better realisation for the Indian traders. The conditions existing a month ago have radically mutated for bullishness. Dry weather in Brazil and the possibility of the El Nino effect on crops may provide additional boost to a rising market. This doubly reinforces the rationale behind pegging the incentive to international quotes. Thus, the lacuna requires immediate official correction, even though the sugar industry may support the status quo.

Another selective dispensation and discrimination is accorded to the few holders of the advance authorisation licences (AAL). Only AAL-holders can export refined sugar with duty draw back benefit by sourcing subsidised raw sugar from other mills.

The price of raw sugar in India (after discounting subsidy) has also moved up from R22,000 pmt to R24,000 pmt. Importers are willing to absorb even this demand-driven rally. Higher values of white sugar will stoke domestic inflation. Fuelling inflation locally via the export incentive route makes for an ill-conceived policy package.

This action of the government was unprecedented because the marketing of sugar was deregulated in April 2013. Instead of taming the monster of state administered price (SAP), the government continues to micromanage the industry on a case-to-case basis.

Media reports reveal that the food ministry opposed this selective incentive for raw sugar and also the calculation of the subsidy at R3,300/mt. The commerce ministry, too, objected given the setback to WTO-compliance. Nevertheless, the Cabinet Committee on Economic Affairs, in its superior wisdom, cleared the incentive as notified.

Will CCEA extend a similar relief to the Food Corporation of India (FCI) for wheat exports given 20 million tonnesan excess of three times the current requirementare stockpiled with government Probably not, the reason perhaps being that the FCI cannot push the government like the sugar industry does for such a relief. Unfortunately, the government suffers massive losses on the account of wastage of wheat with no questions asked, year after year.

Incredibly, the government, on the plea of the industry, also gave its approval to make raw sugar marketing and promotion services eligible for defraying expenditure from SDF. Till February 27, raw sugar was not eligible for defrayments under SDF. On February 28, it was. If the industry demands that electricity expenses or labour cost be also defrayed from SDF, will the

government acquiesce SDF is funded by the Indian consumer and is meant for the benefit of the consumer. But export incentives debited to SDF make sugar expensive, to the detriment of the consumers.

The net effect of the incentive packet is distorting. It provides short-term benefits while the long-term pains remain. The manner of subsidisation is, on principle, ill-conceived given the absence of linkage with international prices even as refined sugar stands excluded and SDF is misapplied. Further, it is anti-consumer and anti-WTO. Such distortions should be set right, even if it means approaching the Election Commission.

Tejinder Narang

The author is a grains trade analyst. Views are personal