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Nothing is sweet here

Sugar prices need a deeper fix than imports. This is a good time to act on it.

india Updated: Jan 12, 2010 21:12 IST

A bigger window for duty-free imports of white sugar should temporarily tame prices that have doubled in the past year and threaten a bitter political harvest for the Manmohan Singh government. With Uttar Pradesh banning the processing of imported raw sugar in November after cane growers agitated for better prices, mills in the country’s largest sugarcane producing state are idling nearly half their crushing capacity as stocks of imported raw sugar pile up at ports. The country’s sugar output in the first three months of the season from last October is estimated to be 8 per cent lower than a year ago, which, in turn, was a jaw-dropping 44 per cent fall from 2007-08, and imports of both raw and white sugar in the year to September 2010 can only mount.

Lower acreage and poor rains could keep India’s sugar output 7 million tonnes short for the second year running. After three years of good crop, the fall in cane acreage in 2008-09, and the resultant increase in sugar prices, owes itself to the rickety price-discovery mechanism in India’s sugar industry. Imports essentially benefit farmers in Brazil, where, as in most parts of the world, cane prices are linked to the market price of sugar. Lower capacity utilisation at Indian mills feeds the global price of sugar as the world’s largest consumer shops abroad. Administered pricing does not seem to be benefiting the cane grower, the consumer or the mill.

Much before sugar prices become bad politics, they are bad economics. Cyclicity in India’s sugar output is largely man-made: the superstructure erected by the government to keep prices in check works to the contrary. The experience of the last five years bears this out. On the other hand, market mechanics offer tempting solutions in dealing with commodity cycles. Mills have a built-in interest to retain parity between sugar and cane prices if they do not want idle capacity on their hands. The government would do all the stakeholders a favour by paying out an explicit subsidy on sugar for the poor than by attempting to control prices at every stage. If it does not have the stomach to free the sugar industry from pervasive state intervention, it must consider setting up an independent regulator that can de-risk pricing from the politics that surrounds it.