To bring the sugar prices down the government has
allowed its import. However, the delayed decision making is not
expected to achieve the objective. Rather the import of refined sugar
in bulk will add to the problems of the mills, due to over supply when
the mills commence crushing. On top of this, the landed cost of sugar
is far higher than the price at which the government intended to sell.
Import of sugar can be a burden on depleting foreign exchange reserves
but cannot help in bringing down its price.
The prevailing situation demands deeper probe to
avoid such bad decision in the future. The first point to probe is why
there was disparity between the quantity to be imported and the actual
imports? According to industry sources soon after the end of last
crushing season it became evident that at least 300,000 tons sugar had
to be imported. The government was also advised to allow import of raw
sugar by the mills only, to be refined by them. Initially there was
some reluctance on the part of the government but when stocks reached
alarming levels first import of raw sugar was allowed by the traders
and then refined sugar also. The natural outcome has to be delayed
arrival and sale of raw sugar in the domestic market, the first factor
being adverse for the industry and the second being hazardous for the
The second point to deliberate is was the import of
raw sugar by the traders a correct decision? This cannot be understood
without finding the difference between raw and refined sugar. The
simplest explanation is that raw sugar cannot be consumed unless it is
refined. Therefore, only the mills should have been allowed to import
it and allowing traders to import it was a bad decision.
The third point to explore is why there was a
sudden shift in government policy? Apparently when the stocks reached
an alarming level fear and greed started influencing decision making.
With the holy month of Ramzan getting closer the pressure started
building up on the policy makers. The greed also enabled the rent
seekers to solicit more concessions. They promised prompt delivery of
refined sugar after convincing the government to abolish duties on
imported sugar. They also demanded from the government not to allow
the Trading Corporation to sell its locally procured sugar in the
The immediate question which comes to mind is why
the TCP is being stopped from selling its sugar stock? It is on record
that TCP had bought sugar from the mills on the instructions of the
government to ensure liquidity for the mills to facilitate payment to
sugarcane growers. It is believed TCP has at least 300,000 tons sugar
in stock. Therefore, TCP must be given the priority over the
importers. The decision is also justified because the TCP had bought
sugar around Rs 17/kg. It may be true that financing and other costs
have to be added to the cost of purchase to determine the selling
prices. However, it would still be cheaper than the imported sugar.
It is understood that the landed cost of imported
sugar, despite being exempted from duties, would be around Rs 25/kg.
Therefore, the importers know that they could not compete with TCP and
the only way out is to stop TCP from selling its stock in the domestic
market. To be honest, importers have no reason, whatsoever, to raise
this demand. And if this demand is accepted, it would open the Pandora
box. When the government instructed TCP to buy sugar from the mills it
was clear that it has to be sold in the local market, being
incompetitive in the international markets. TCP has acted as
intervener to facilitate the mills in making payment to the sugarcane
growers. Therefore, it has the first right to sell its stock, which it
has been carrying for months.
Even the preliminary probe shows that 1) there was
inordinate delay in allowing import of raw sugar, 2) permission to
traders to import raw sugar was a bad decision, 3) allowing duty free
import of refined sugar was worse and 4) the worst decision would be
to stop TCP from selling its stock in the open market.
According to a sugar industry expert the prevailing
situation is an outcome of complete lack of understanding about the
industry dynamics. The mills crush sugarcane for 120-160 days,
depending on its availability and the sale of stock is spread over 365
days at least. During the crushing season they have to pay the growers
out of the sales proceeds as well as by borrowing funds from banks,
through pledging the stocks. The mills also do not have any control on
cost of production because sugarcane price is fixed by the government.
And above all, mills at an average operate at 50% capacity
utilization, which hikes cost of production.
Import of sugar may help in meeting temporary
shortfall in supply but cannot provide a viable and permanent
solution. If the government is really serious in making the industry
strong enough to face the global competition, it must first understand
the industry dynamics and then come up with proper policies. Unless
the issue of poor capacity utilization is resolved the issue of higher
price and off and on shortfall cannot be overcome. Sugarcane output
can be increased by improving yield, which is almost half of the yield
achieved in India. However, for ensuring crushing of all the available
sugarcane, it is also necessary to facilitate sugar export, not by
providing any incentive but by reducing cost of production. If the
tips are known what is holding the policy makers to come up with a
policy, which is good for the country and also for the people?