Lessons not learnt

The sugar industry is in crisis for no fault of its own. Being under total government command, it is slipping into the red largely because of ill-conceived and ill-timed policy interventions. While the Centre's policies (like banning exports when price realisations were at their peak) are focused on lowering domestic sugar prices so as to tame overall inflation, state governments are moving the other way and hiking cane prices, thus pushing up production costs and eroding margins. Caught in this pincer, the industry is forced to operate at a loss. The repercussions on farmers, who got the wrong price signals when they decided to plant cane, will now follow, as surely as night follows day. Expect more political interventions, which could range from offers of subsidy (reportedly being considered by Andhra Pradesh) to penal action against the sugar mills.

All this has happened at a particularly unfortunate time. In the past few years, an additional investment of over Rs 10,000 crore is reckoned to have gone into this sector for creating fresh capacity, making India the world's second-largest sugar producer, next to Brazil, which, however, continues to enjoy a significant cost advantage over India. That agro-based industries will go through cyclical ups and downs is a fact of life; what is avoidable is an accentuation of the cyclicality through official interventions.

Thus, an upswing in sugar production could be visualised a while back, because of higher cane plantings. But the industry was not allowed to export sugar and get rid of stocks, and thereby missed the opportunity to capitalise on the global sugar price boom that lasted till July. The ban was lifted only in January, when global prices had fallen sharply and made exports unattractive despite the matching slump in domestic prices. As a result, sugar inventories have grown to unsustainable levels, creating a financial squeeze that will jeopardise timely cane payments. The production of sugar this year may touch a record 25 million tonnes, against a consumption of no more than 19 million tonnes. With an opening stock of 4 million tonnes, the sugar season could end in September with a carryover inventory of 10 million tonnes, or six months' consumption. With the next year's cane crop also likely to be substantial, a scenario where frustrated farmers resort to burning their standing sugarcane crops should not be ruled out.

What defies logic is why sugar is counted among the essential items of mass consumption for constant government intervention in terms of price management. More than half the total sugar output goes to bulk users, notably the soft drink manufactures, and is not consumed by the household sector. Also, the per capita expenditure on sugar is lower than on pulses, vegetables and edible oils. Still, sugar has been given a higher weighting of 3.61 per cent in the computation of the wholesale price index, against only 0.6 per cent for pulses, 1.45 per cent for vegetables and fruits and 2.7 per cent for edible oils. This is perhaps what draws undue attention to sugar when the focus is on prices.

With Uttar Pradesh headed for elections, the issue has a political immediacy, but it is hard to see what the government can do to change the medium-term outlook for the mills and for farmers. And it seems too much to hope that the lessons of this latest mis-intervention will be remembered the next time someone in authority starts getting fidgety about sugar and cane prices.