The prevailing situation is an outcome of complete lack of understanding about the industry dynamics

Sep 12 - 18, 2005


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 people.

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 domestic market.

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?