Sep 5, 2008

India - Good time to decontrol sugar

The Cabinet’s reluctance to approve the food and consumer affairs ministry’s proposal to decontrol sugar is hard to understand — especially when supplies are comfortable and set to improve further because of the dismantling of the sugar buffer of 5 million tonnes. Besides, the fresh crushing season is beginning next month, and will augment supplies. These realities seem to have made no impression on the Cabinet Committee on Economic Affairs (CCEA), which has opted for putting on hold the move to do away with the 10 per cent sugar levy and the monthly release mechanism.
The main worry when it comes to sugar decontrol is that it might lead to a rise in sugar prices, and this understandably is a sensitive issue when the government is fighting to bring down today’s double-digit inflation rate. But, in truth, this is the most appropriate time for sugar decontrol, as argued by the agriculture and food minister, Sharad Pawar. Sugar inventories are comfortable, thanks to the carry-over of 11 million tonnes of stock from the last season. Sugar production in the new season is expected to drop, because there has been a shrinkage in cane acreage, but even the most pessimistic estimates of production do not see it dropping below the annual consumption level of about 20 million tonnes — which means there will be comfortable carry-over stocks into the following season as well. These are indications of supply continuing to outstrip demand, and should help keep sugar prices in check. In fact, decontrol in this situation may well exert a downward push on prices as a result of the freedom that factories will get to offer for sale any amount of sugar that they wish to offload from their buffer stocks.
It will be argued that abolition of the sugar levy will force state governments to meet the needs of the public distribution system (PDS) through commercial purchases, and that this will entail higher costs. This issue has been addressed in the food ministry’s sugar decontrol proposal, by envisaging that the Centre compensate the states for any financial obligations on this count. What this boils down to is that the fiscal burden of the sugar subsidy for the PDS, currently being borne by the sugar industry by parting with levy stocks at concessional prices, will shift to the government, which is fair. A vital point to be borne in mind, though, is that the objectives of sugar decontrol will be served fully only if the contentious system of cane price fixation by the Centre and the states is also done away with. The fear that such a move will lead to the exploitation of cane growers by the sugar mills must be tested, and may prove unfounded since the mills need cane to crush, and the farmers who grow the cane have the option to switch to other crops.

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