India’s sugar policy: Time to link cane prices to sugar prices

Updated: January 23, 2017 5:52:19 AM

sugarThis is quite in contrast with the now scrapped policy of export subsidies (and/or excise duty concession on ethanol) that Indian government relied upon a couple of months back for disposing excess sugar stocks.

Indian government has been trying hard to control sugar price rally through a series of measures including a 20% export tax, imposition of stock limits on sugar mills and traders, and change in metrology rule that empowers it to fix the retail prices of essential commodities such as pulses and sugar—though with not much success. Demonetisation provided some relief, but now with cash crunch no longer a problem, sugar prices are hardening again. Forecast of lower production in Maharashtra is adding to the problem.

This is quite in contrast with the now scrapped policy of export subsidies (and/or excise duty concession on ethanol) that Indian government relied upon a couple of months back for disposing excess sugar stocks.

Rising sugar prices have been troubling household consumers and manufacturers of biscuits, cookies, chocolates, soft drinks and sweets for quite some time, and may justify government action. However, knee-jerk reactions such as imposition of export duties and quotas often create problems for others, especially overseas buyers who rely on international markets to meet their requirements. It would be interesting to analyse if there can be a non-trade distorting alternative for India to deal with the problem of shortage or excess supply of sugar.

Export subsidy

Managing domestic demand and supply has always been the focus of India’s sugar policy. When the country was facing sugar glut and high cane arrears to farmers, government fixed a mandatory export quota of 4 million metric tonne for the sugar season 2015/16 (Nov-Oct) and provided a production-linked subsidy that was conditional on meeting export targets by individual mills. This helped to dispose of 3.2 million tonnes of sugar in overseas markets by July 2016.

Then, sugar prices started to rise over lower production forecasts because of drought conditions that affected cane planting in Maharashtra and Karnataka. Overseas shipments and diversion of more cane towards production of ethanol incentivised by excise duty concessions and expectation of lower output in Brazil, EU and Thailand further supported the hardening sugar prices.

As a result, sugar retail prices crossed R40/Kg in April 2016 from R20/Kg in July 2015—that forced the government to impose stock limits on traders in April, and withdraw export subsidies in May 2016. However, that didn’t help much. The government responded with imposition of a 20% export duty in June.

That was followed by withdrawal of excise concession on ethanol in August, extension of stock limits on sugar mills in September (now extended till April 2017), and change in metrology rule that authorised government to fix retail price of sugar in October. Even then sugar prices remained sticky. Demonetisation put a break on sugar prices, even if temporary. However, with cash no longer a problem, government will have to devise better measures to rein in sugar prices.

Export control

The export control measures such as export taxes make sugar costlier for importing countries and in response, they may ramp up domestic production or try to source from alternative suppliers. It’s not necessary that a buyer country imports from India or not. It’s enough that it imports as any rise in landed price of sugar of Indian origin (owing to imposition of export duty) will change the relative price of sugar exported by other countries assuming no movement in relative exchange rates, and will make it difficult for buyers.

That ultimately hurts India’s credibility in export markets. India doesn’t seem to have learnt from past when it banned rice exports in 2008 that continued till 2011. Absence of Indian rice forced the top buyers such as Indonesia and Philippines to accelerate domestic rice production through the use of minimum support prices and import quotas. That has acted against India’s rice export prospects for several years now.

Besides, discouraging exports through export duties or ban prevent sugar producers (or rice for that matter) to realise the best prices for their finished goods. That in turn, impacts their ability to pay for the raw material, i.e, sugar cane (prices of which are fixed on political consideration) resulting in mounting of cane arrears. Consequently, sugar mills rush to the government for loan waivers and subsidies. Loan recast demand is the latest such move by sugar mills.

Cane pricing

India’s cane prices are always higher than those in other sugar producing countries such as Brazil and Thailand. That’s not the only problem though. Even within the country, states such as UP, Tamil Nadu, Punjab and Haryana fix their state specific sugarcane price that are much higher than fair and remunerative price (FRP) fixed by the central government, on grounds of differences in cost of production, productivity and sugar recovery rates often with no regard to sugar prices.

No surprise, UP has raised state advised price (SAP) for cane to R305 per quintal, up 9% over last year’s SAP, and 33% higher than FRP (FRP) fixed by the central government for the ongoing crushing season—on grounds of recent surge in prices of sugar and by-products, and no change in SAP for the last three years. Punjab has raised it to R300 per quintal while Haryana to R320 per quintal. That cannot be sustainable given the poor financials of sugar mills as reflected by unpaid cane arrears at R5,700 crore, as in July 2016.

If the aim is to contain rising sugar prices on a sustainable basis, populist hikes in cane prices don’t make sense. It’s time we linked cane prices to sugar prices perhaps with the help of a cost- plus pricing formula. This has one limitation though. Farmers will oppose if cane prices are lowered in line with falling sugar prices. To deal with that government may consider compensating farmers directly on basis how much cane they have supplied individually to the mills. That will improve the financials of mills on a long-term basis and the sector will attract more investment and create many more new jobs.

Secondly, the government should remove both export and import barriers applicable to sugar to let domestic markets better integrate with international markets. That will automatically address the problem of shortage and glut without the need for any market distorting government action.

By, Prerna Sharma

The author is vice-president and head of agriculture, food and retail at Biznomics Consulting.
Views are personal

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