Mumbai: Governments are known to do the most rational thing, but only exploring other possibilities. The Indian government is no exception. The country's sugar sector has by now become a classic example of how unwarranted, untimely or delayed Government intervention can distort the market rather than bring order.Concerned over a sharp decline in sugar output during the ongoing 2008-09 season, the Centre has imposed storage limits on the sweetener, and has allowed import of raw sugar duty-free with an export obligation to be fulfilled in 24 months (now extended to 36 months). These measures are expected to help contain rising sugar prices, especially at the time when general elections are looming.
Why did the Government take these precipitate steps at this point of time, when the state of 2008-09 cane acreage and crop conditions were clearly known as far back as September/October 2008? The Government merrily allowed exports until late 2008 despite early signals of an output decline.
Perhaps, New Delhi wants to project itself as a valiant fire-fighter; but those closely watching policy developments already know that the Government is the problem, rather than being part of the solution. Estimate of sugar production that was first placed at 22 million tonnes (mt) gradually shrunk to 20 mt and then to 18 mt by January, 2009.
Now, the Government is talking about a further decline to about 16.5 mt.
This represents a clear failure of commercial intelligence on the part of policymakers. Given the long crop cycle, cane gives advance signals about the crop size.
The competence of the government to estimate cane yields and output is suspect.
Given the long crop cycle, cane gives advance signals about the crop size. The competence of the government to estimate cane yields and output is suspect.
At the State level, the cane commissioners are not sufficiently qualified to undertake crop survey and come up with output estimate of any reasonable accuracy. They often depend on trade and other sources.
INSPECTION, LAX RULES
The second area of concern seems to be the yearly carry-in and carry-out stocks. Often, these numbers remain in the books, but actual inventory at warehouses much less.
This is the result of inadequate inspection and lax enforcement of rules. Indeed, irrational restrictions on marketing of sugar often force mills to suppress the real facts.
India is entering the world sugar market as an importer exactly at a time when global output is set to decline by over 10 mt and stocks would invariably be drawn down.
The world market has already taken cognizance of India's import needs and has perked up by about 25 per cent in recent weeks.
Among various major agricultural crops traded in the world market, sugar has perhaps the most attractive upside potential on current reckoning.
LOWER US CORN CROP
For 2009, corn acreage in the US (world's largest producer) is strongly expected to slip. Sugarcane from Brazil will have to compensate, partially or fully, the shortfall from lower corn crop as far as the US ethanol requirements are concerned. That is sure to push Brazilian sugar prices up, and in turn world sugar prices.
With a weak rupee, and no immediate prospect of a recovery, imported raw sugar when refined and sold in the domestic market would be about Rs 22000 a tonne. In addition, restrictions on sale of imported sugar area sure to add to tightness in supplies and defeat the purpose of imports.
Domestic prices that are currently at about Rs 2100 a quintal run a strong upside risk, with a spurt of at least 10 per cent from the current levels.
Storage restrictions and turnover restrictions are sure to create unhealthy market conditions, add to the uncertainty and revive the infamous inspector raj. Blending of cane-based ethanol is all but forgotten.
No one in the policy circles is talking about structural issues of the industry such as consolidation of fragmented capacities, modernization of mills, reducing the cyclical nature of cane output, quality related pricing for cane, and many more.
- G. Chandrashekhar
(The Hindu Business Line: 2.3.2009)
