Right now, international prices are supportive and thus imports with viable duty can soften domestic values
On August 29, the government impliedly confirmed tightness in sugar stocks by limiting inventories of mills by the end of September and October, with specified percentage as 21% and 8% of total sweetener available with them in sugar season 2016-17. Maharashtra mills were requested to commence early production, immediately after Diwali—but they have expressed their inability due to the absence of required labour strength and low recovery issues. Now, millers from Uttar Pradesh are promising to start mills promptly after Diwali. Industry has further suggested that transport subsidy be given to mills in Uttar Pradesh and Maharashtra for despatches to Karnataka and Tamil Nadu to obviate imports.
All this activity is meant to ensure that sugar prices in local markets do not flare up beyond the existing wholesale price of `40 per kg versus the same prices of Rs 26 per kg in 2015 (see chart). Retail values are Rs 43-45 per kg versus Rs 28-29 per kg in 2015.
The government has been considering additional imports of sugar, especially for the mills in South India, to contain demand pressures after the import of the first tranche of 0.5 million tonnes (MT) of raw sugar in April-June 2017. The article by Harish Damodaran in The Indian Express (“A tough balancing act: The new bitter North-South divide in India’s sugar industry,” August 24; https://goo.gl/stqMfH) stated that “cane-starved southern mills want duty-free raw sugar imports, which the industry particularly in UP is bound to resist.” He called this North-South divide. Duty hike in July 2017 from 40% to 50% was done to completely rule out the possibility of cheaper imports (that would cost Rs 27-28 per kg without duty, ex-mill). Thus, local prices have ruled firmer.
Irrespective of the North-South divide, let this issue be considered upon data available on record. The issues are, one, whether additional imports are justified and, two, what has been the price behaviour of sugar in the last two years.
Are the carry-over stocks of 4 MT sufficient when the next year’s anticipated output is 25 MT and consumption is also about 24-25 MT? The thumb rule is that a country should have a minimum three months of stocks of annual consumption. If India’s annual usage is 24-25 MT, we need at least 6 MT carry in or import of 2 MT (6-4) next year for ensuring three months’ stocks.
The other empirical formula is the “stock to use” ratio be higher than 20%, say at least 25%, if prices are required to be moderated. Currently, the carry in stock/use ratio is 4/25×100=16% that will make values more bullish. If sugar prices are required to be tapered down somewhat, 24% stock/use ratio can be attained by 6 MT carry in (or 6/25×100). In both cases, the logical answer is the same—import of 2 MT next year. The stock/use ratios have been 32% to 42% in the previous years (see chart). Psychologically, lower inventories lead to ideas of stockpiling and speculation for better returns.
For example, the Food Corporation of India uses a similar matrix while determining wheat stocks. As of April 1—beginning of the marketing year—the minimum inventory level is fixed at 7.5 MT and the usage in public distribution system (PDS) is 30 MT—this gives a stock/use ratio of 25%.
Policy profiles of the last two years have aided higher prices of sugar that have helped both farmers and mills. This, indeed, is welcome. If imports are completely blocked by high duty, sugar values would ascend further to the detriment of consumer.
If the matter is assessed on the basis of sugar inflation of 39% in 2016-17 and 8.44% as of July in the financial year 2017-18 (Economic Advisor report date August 14, 2017), then there is a case of relaxing terms of import for 2 MT of sugar to moderate prices.
The basis of the current retail prices of Rs 43-45 per kg is the fair and remunerative price (FRP) of sugarcane of Rs 230 per quintal of 2016-17. When FRP is Rs 255 per quintal in sugar season 2017-18, which is 11% higher, and given the fact other matrix remain unaltered, sugar retail values may also elevate pro rata.
The plea of the stakeholders that the price of Indian sugar has to be much higher than international prices because of FRP and state advised price (SAP) etc is logical up to a point, but not under the current domestic scenario. Continued choking of imports is bound to inject inefficiency in the industry because profits are secured under closed market mechanism.
It is well admitted that the cost of production of sugarcane in India is higher by about 30% compared to other competing origins—and this percentage can be rechecked. If true, then duty protection beyond this point may be reviewed. This will ensure that the principle of comparative advantage is not abandoned or deserted, which is fundamental to national and international trade. Right now, international prices are supportive and thus imports with viable duty can soften domestic values. The government needs to take a call on moderation of sugar prices, act in the interest of all the stakeholders and avoid sugar inflation to double-digit levels, when wholesale national inflation is just 1.8%. Facilitating minimum imports of 2 MT is the sole prerogative of the authorities.