December 7, 2016 9:00 pm JST
Prerna Sharma

India's flawed sugar trade policies leave bitter taste

New Delhi should drop damaging interventionism and rely on global markets

Just seven months after it stopped trying to use export subsidies to clear a glut of domestically produced sugar, India is employing a hefty export tax, along with retail price controls and stock limits on mills and traders, to deal with soaring prices caused by a shortage.

The rise in sugar prices has hurt consumers, as well as companies that manufacture biscuits, chocolates, soft drinks and sweets. That may justify government action, which appears to have had some impact. However, unthinking policy responses of this kind often create as many problems as they solve.

A better approach to dealing with swings in sugar supplies would be to remove import and export barriers and link India more closely to international markets. That would help to remove the volatility in prices without the need for market-distorting government intervention.

India's inwardly oriented sugar policy focuses on active management of domestic demand and supply. To deal with a domestic sugar glut, the government fixed a mandatory export quota of 4 million tons for the sugar season from November 2015 to October 2016, together with a production-linked subsidy that was conditional on individual mills meeting export targets.

As a result, India had exported more than 3 million tons of sugar by July 2016, becoming the world's fourth-largest exporter, with a global export share of 6%. However, sugar prices have risen following falls in production estimates for the 2015-2016 sugar season, reflecting the impact of droughts that affected cane planting in Maharashtra and Karnataka, two of the big sugar-producing states.

The problem was compounded by forecasts of a global supply shortfall caused by falling production estimates for the European Union and Thailand, and harvesting disruptions in Brazil, the world's leading sugar producing country. There has also been a greater than expected diversion of Indian cane toward ethanol production, in part because of excise duty concessions.

When retail sugar prices hit 40 rupees (59 cents) per kilogram in April 2016, from 20 rupees in July 2015, the government imposed stock limits on traders. That was followed by the withdrawal of export subsidies in May. Yet sugar prices continued to rise. In June, the government imposed a 20% export duty to discourage exports and improve domestic availability.

To stop sugar prices from rising further, especially during the August to October festive season, India adopted a multi-pronged strategy that included the withdrawal of the excise concession on ethanol, the extension of stock limits to include sugar mills, and changes in regulations authorizing the government to fix the retail price. The imposition of stock limits was later extended through April 2017.

Lesson not learned

The export control measures could create problems for sugar importing countries, and for India's future export prospects, by raising global prices and encouraging increased domestic production in other countries. This was what happened when India banned rice exports from 2008 to 2011, prompting buyers such as Indonesia and the Philippines to ramp up domestic rice production, using price supports for local farmers and fixed import quotas. India does not seem to have learned this lesson.

Moreover, discouraging exports through duties or bans affects the margins of domestic producers of sugar (or rice, for that matter), who are not allowed to realize the best prices for their finished goods. That adversely affects their ability to pay for raw materials, specifically sugar cane -- the prices for which are fixed by officials with political motives -- leading to arrears in payments and demands for loan waivers and subsidies by sugar mills.

Bizarrely, one of the top sugar producing states, Uttar Pradesh, has raised the state-advised price for cane by 9% above the "fair and remunerative price" set by the federal government for the 2016-2017 crushing season, citing the recent surge in sugar prices and a lack of change in the state-advised price for the past three years. The real purpose behind the move, however, could be an upcoming state election. The ruling Samajwadi Party cannot ignore the farmers, who form a majority of voters in the state.

Clearly, India's sugar policy is not well thought out. If the aim is to contain rising sugar prices, increasing the price of cane does not make sense. High raw material costs -- due to populist hikes in cane prices -- and restrictions on the ability of sugar mills to realize favorable market prices in both domestic and export markets will ruin financially troubled mills, even though cane payment arrears fell to 56.95 billion rupees in July 2016 from 220 billion rupees in March 2015.

To combat rising sugar prices, India needs to reduce or eliminate its 40% duty on imports to increase domestic availability. Such a move would check rising domestic prices without the need for market-distorting action. It would also integrate India's sugar market with the international market and discourage over-production of cane, which is supported by unreasonable hikes in government-regulated prices mired in political influences.

Policies such as this would help India's sugar industry to deal effectively with overproduction or shortfall without the need for government intervention and its related costs. Additionally, sugar mills would learn to base their production decisions on commercial considerations and market dynamics, rather than unpredictable government actions.

Prerna Sharma is vice president and head of agriculture, food and retail at Biznomics Consulting, a research and policy advocacy specialist in Mumbai. The views expressed are those of the author.

 

 

Government Actions

Month/2016

Stock limit on traders

April

Withdrawal of export subsidy

May

Imposition of export duty

June

Removal of excise duty concession

August

Stock limit on mills/traders

September

Change in rule to fix retail prices of sugar

October

Extension of stock limits on sugar mills up to April 2017

October

Compiled from various sources

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