Imports tough in already stressed sugar industry

The government’s decision to impose stock limits on sugar and liberalise imports is ill-advised (because there is enough domestic supply), and mistimed (because world sugar prices are ruling firm, and much higher than in India). Aimed rather obviously at softening the domestic prices of sugar, the imports will make the going all the more tough for an already stressed sugar industry, without providing any tangible benefit to cane growers. In fact, the area under sugarcane is shrinking because of farmers’ waning interest in the cane crop. Lower prices, coupled with reduced sugar production in the current season, will further limit the sugar mills’ capacity to make timely cane payments, leading to building up of cane payment arrears—the farmers’ main bugbear. The current downturn in the sugar economy will therefore get accentuated, and then make imports unavoidable. This is the last thing the country needs, when global sugar output is on the decline and prices hardening. The anticipation of India’s entry into the global sugar bazaar as a buyer has already pushed up prices by some 20 per cent.

There have been mis-steps through the year. Those in charge of sugar policy failed to anticipate the drop in sugar output this year, despite the shrinkage of cane acreage being known at the beginning of the season. They continued to believe that sugar production would match the annual demand of 22-23 million tones, and that the opening stock of 10 million tonnes would keep sugar inventories in good shape. But even with the government dropping the sugar production estimate to just 16.5 million tonnes, there is no danger of any shortage. Even with lower production, the total sugar availability during 2008-09 (the sugar season runs from October to September) will be about 26.5 million tones, which is enough to meet the estimated demand and allow some stocks to be carried forward to the next season. The move to encourage raw sugar imports at this juncture, at zero duty (with the obligation to re-export the same quantity of refined sugar within three years), will only swell inventories, depress prices and indirectly encourage farmers to shift away from cane.

There is, in any case, far too much official concern with sugar prices. Two-thirds of all sugar is bought by confectionary makers and by soft drink companies—industrial consumers who need no price protection. Retail demand accounts for the rest, of which barely 10 per cent is sold at a subsidy to the poor. And since sugar accounts for a small part of any family budget, the government’s price sensitivity with regard to sugar is hard to understand. The real reason may be that outdated weights in the wholesale price index (which give sugar more than twice its legitimate weight) encourage excessive concern when inflation is ruling high. That not being the case today, it is hard to understand why sugar prices should be seen as a sufficiently sensitive issue to prompt irrational import decisions.

source: BS