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Bittersweet tidings

Sugar, to mix one’s metaphors, is heading for a perfect storm. And this is being made because of our own policies, write Ashok Gulati and Tejinder Narang.

india Updated: Nov 06, 2009 09:04 IST

Sugar, to mix one’s metaphors, is heading for a perfect storm. And this is being made because of our own policies. By the year-end, retail prices of sugar in Delhi and Mumbai may cross the Rs 40 per kg barrier — an almost 150 per cent increase in less than 15 months. And no, you can’t blame climate change or monsoon failures for this.

So, what triggered the sugar crisis? In 2006-07, India harvested 355 million tonnes of sugarcane breaking all records. This resulted in 28 million tonnes of sugar production. With the ratoon crop, the 2007-08 performance — harvesting 348 million tonnes resulting in 26 million tonnes of sugar — was almost repeated. India’s domestic consumption of sugar hovers around 20-22 million tonnes. The international price of raw sugar in 2006-07 and 2007-08 hovered between 15 and 18 cents per pound, not very attractive for exports of white sugar.

Sugar stocks at home peaked at 10-11 million tonnes at the end of the sugar seasons 2006-07 and 2007-08. India exported roughly 8 million tonnes of sugar during 2007-08 and 2008-09 for around $2 billion and liquidated much of the sugar stocks by giving a freight subsidy (Rs 1,350-1,450 per tonne) for exports. It was clear by June-July 2008 that sugarcane production will drop significantly in the 2008-09 season, while continuation of export scheme till September 2008 remains puzzling. Was it an error of judgement? Or was it simple ignorance? Only policy-makers can explain.

It was only in February 2009 that imports of raw sugar were permitted. Import duty on refined white sugar was lifted (from an earlier 60 per cent) in a kneejerk reaction in April 2009. But it was already too late and global prices of white sugar spiked from 15-18 cents per pound in 2006-07 and 2007-08 to 25 cents per pound now. The futures for the month of December 2009 and March 2010 show no respite. The sugar storm, in all probability, will hit India in November-December when temporary relief from the de-stocking drive subsides.

It will continue on its rampage for much of 2010 when sugar price in retail will remain above Rs 40 per kg. What can help bring it down is the strengthening of the rupee against the dollar, or a huge import subsidy on government account to protect the retail consumers, or minimising cane usage for gur (or liquor) or ethanol, etc. Imports of 5-7 million tonnes of sugar seem imminent, especially for bulk consumers. But today, imports on private account have slowed down as the de-stocking drive by the government to hold the price line at festive season has marginally brought the domestic price under check. But with import supply lines being half empty it can suddenly erupt into a price inferno.

Can we take pre-emptive policy action to avoid such situations? In 2006-07 and 2007-08, sugarcane farmers in Uttar Pradesh were getting a State Advised Price (SAP) of about Rs 120 per quintal against a Statutory Minimum Price (SMP) of Rs 80 per quintal, which led to a swing of area in favour of sugarcane over wheat and rice. Farmers had difficulty in selling their cane and cane arrears amounted to more than Rs 1,000 crore. Here the gur industry came to the rescue of farmers by making prompt payments. Today, virtually the entire quantity of gur is being used to make alcohol.

Also, India fell short of wheat and imported about 6 million tonnes of wheat during 2006-08, which made policy-makers nervous about food security. As a result, they started raising the SMP of wheat and paddy substantially to attract more sowing. No wonder then that by 2008-09, farmers in UP switched back from sugarcane to grains. Result: a shortage of sugar and abundance of grains.

Today, there is demand for SMP of cane to be raised to Rs 200 per quintal. If agreed, two years from today, India will again have a glut of sugar and shortage of grains. Policy-makers need to break this three-year cycle by reforming the administrative price regime, making it market-friendly and forward-looking. Not the stuff of kneejerk reactions and complying to political considerations.

Ashok Gulati is Director, Asia for the International Food Policy Research Institute.

Tejinder Narang is a freelance specialist on commodity markets. The views expressed by the authors are personal.