Sugar not an essential commodity, says KPMG

Research firm KPMG has prepared a ten-year roadmap to assess the transformational opportunities in the Indian sugar industry.

The report questions the logic of having sugar as an essential commodity and the higher weight given to it in the wholesale price index. It also suggests reforming the cane pricing formula by linking it to sugar prices, doing away with the levy on sugar and the monthly release mechanism.

As a part of the report, a study by AC Nielsen has established that more than 61.5 per cent of the free sale sugar is consumed by industrial and small business segments, while high income households (with a monthly income above Rs 5000) account for 12.8 per cent of consumption. This leaves the lower income group with 25.7 per cent; this group consumes 2-3 kg a month a household.

"Therefore, in terms of price sensitivity, a ten per cent increase in sugar price means less than one per cent increase in monthly food expense," said Arvind Mahajan, executive director, KPMG Advisory Services.

"The industry will need a regulator to formulate and streamline various regulatory changes that will enhance the competitiveness of the industry and reduce its cyclical nature that costs both the miller and the farmer," he said.

The KPMG study was commissioned by ISMA and the National Federation of Cooperative Sugar Factories. The report comes at a time when the sugar industry is going through the worst crisis due to a glut in output (up 45 per cent to 28 million tonnes) and drop in realisation (from Rs 2000 to Rs 1350 a quintal). Sugar is a commodity covered under the Essential Commodities (EC) Act, 1955 and is subject to controls under provisions of the said Act.

The government regulates the sale of sugar through a monthly release mechanism and it also sources sugar for its public distribution system (PDS) from the industry at a concessional rate. Every sugar producer has to give 10 per cent of his output to the government for PDS requirements.