Food inflation at nearly 16.5 per cent remains a point of national concern. But the continuing fall in the retail sugar price is giving some comfort to the otherwise beleaguered agriculture minister Sharad Pawar. The very smart rise in cane planting, the benefits of which will be available in the next sugar season starting October 2010, has encouraged Pawar to say that “India will definitely be an exporter of sugar in 2010-11”.
The two triggers of sugar price fall are: India going to finish the current season in September with production of 18.5 million tonnes or more and not 15 million tonnes or less as feared earlier and forecasts by International Sugar Organisation that 2010-11 will see the end of deficit phase in the world sugar economy. If sugar prices stayed at disturbing high levels during December-February period, the prices since April have barely allowed factories to recover the cost on cane head alone. This is after providing for revenue realisation from by-products such as power and chemicals. The country’s sugar industry lacks stability and is prone to radical changes in its fortunes mainly because cane prices that factories are obliged to pay are based on state level politicians’ proclivity to placate growers. That economic logic plays no role in cane price fixing here unlike in many other countries became sorely evident when New Delhi under pressure from cane growing states had to do away with the requirement that if the state advised price (SAP) exceeds the centrally fixed fair and remunerative price (FRP) then the difference will have to be borne by the concerned states.
By caving in to the state pressure, New Delhi has laid to rest the Thorat committee recommendation that growers should only get FRP and no state recommended premium on that. An agro-based commodity like sugar will unavoidably see fluctuations in production depending on the behaviour of monsoon and land under cane in a season. But as an industry official says, the “violent swing in production from a record 28.33 million tonnes in 2007-07 to a distressingly low of 14.6 million tonnes in 2008-09 followed by a modest recovery to 18.5 million tonnes this season is mostly due to unscientific cane pricing.”
Sugar in this country is destined to remain in this “vicious cycle” of very high and very low production at short intervals till the political bosses in Delhi muster the courage to deny the states a role in cane price fixing. Arguably, a wise course for the government will be to consider the merits of the global practice of deriving cane price from sugar and its by-products price realisation. The government needs to consider the suggestion of Indian Sugar Mills Association (Isma) that “60 per cent of realisation from sugar and its by-products should be the cane price, including all state taxes. The formula will provide for appropriate adjustment in cane price depending on sugar recovery rate.”
The underlying consideration of FRP is to ensure that farmers are adequately rewarded for their efforts. But now that sugar prices in the world market are on a free fall making imports cheaper than domestically produced sugar, millers are struggling to find enough buyers for the May release of 1.9 million tonnes of non-levy sugar. Isma committee member Om Dhanuka complains that bulk consumers accounting for 70 per cent of total sugar consumption are buying little here as they are taking full advantage of duty free imports and price arbitrage.
On the basis of average cane price of Rs 250 a quintal, the cost of production of a quintal of sugar works out at Rs 3,095 while the average realisation for the free portion (90 per cent of output) is around Rs 2,800 a quintal. Forget about the loss local mills are incurring at the moment, importers of raw sugar are offering whites after processing at Rs 21,600 a quintal. This will explain poor demand for locally made sugar. The scene does not bode well for the Indian sugar economy.
It is in this context that the demand is rising for imposition of 60 per cent duty on imports of either raw or white sugar. Because of the late surge in production and large imports of around 4.5 million tonnes, the country will start the next season with stocks of 4.7 million tonnes, if not higher. Indian cane plantation is up over 20 per cent. A normal monsoon is forecast. The combination of two positives is to see India producing 25 million tonnes of sugar during 2010-11. Rabobank says production here could climb to 30 million tonnes. So India could once again be an exporter of sugar.