PROS AND CONS OF 2MILLION TONS SUGAR IMPORT
On 29th August 2017, Government impliedly confirmed tightness in sugar stocks by limiting inventories of mills by end of September and October2017 with specified percentage as 21% and 8% of total sweetener available with them in sugar season 2016-17. Maharashtra mills were requested to commence early production, immediately after Diwali—but they have expressed their inability due to absence of required labour strength and low recovery issues. Now UP millers are promising to start mills promptly after Diwali. Industry has further suggested that transport subsidy be given to mills in UP and Maharashtra for despatches to Karnataka and Tamilnadu to obviate imports. All this activity is meant to ensure that sugar prices in the local markets do not flare up beyond existing wholesale price of Rs40/kg vs same prices of Rs 26/kg in 2015. (See chart). Retail values are Rs43-45/kg vs Rs28-29/kg in 2015
Government has been considering additional imports of sugar especially for the mills in South to contain demand pressures after import of first tranche of 0.5 million tons (mt) of raw sugar of Apr-June 2017. The Indian Express article of Mr. Harish Damodaran (24th August 2017) stated that “Cane-starved southern mills want duty-free raw sugar imports, which the industry particularly in UP is bound to resist”. He called this a north-south divide. Duty hike in July2017 from 40% to 50% was done to completely rule out possibility cheaper imports (that would cost Rs 27-28 pkg without duty ex- mill). Thus local prices have ruled firmer.
Irrespective of North-South divide, let this issue be considered upon data available on record. Issues are—First, whether additional imports are justified and secondly, what has been the price behaviour of sugar in last two years.
Are the carryover stocks of 4 mt sufficient when next year anticipated output is 25mt and consumption is also about 24-25mt? Thumb rule is that country should have minimum three months stocks of annual consumption. If India’s annual usage is 24-25mt —we need atleast 6 mt carry in or import of (6-4) =2 mt next year for ensuring three months stocks.
Other empirical formula is “stock to use” ratio to be higher than 20%, say atleast 25%, if prices are required to be moderated. Currently carry in stock/use ratio is 4/25x100=16% that will make values more bullish. If sugar prices are required to be tapered down somewhat, 24% stock/use ratio can be attained by 6mt carry in (or 6/25x100). In both cases logical answer is same-- import of 2 mts next year. Stock to use ratio have been 32% to 42% in previous years (see chart). Psychologically lower inventories give ideas of stockpiling and speculation for better returns.
For example FCI is using the similar matrix while determining wheat stocks. As of 1st April, the beginning of marketing year, minimum inventory level is fixed at 7.5 mt and usage in PDS is 30 mt-that gives stock to use ratio of 25%.
Policy profiles of last two years have aided higher prices of sugar that have helped both farmers and mills which indeed is welcome. If imports are completely blocked by high duty, sugar values would ascend further to the detriment of consumer.
If the matter is assessed on the basis of sugar inflation of 39% in 2016-17 and 8.44% as of July in financial year 2017-18(Economic Advisor report date 14th Aug2017) then there is a case of relaxing terms of import for 2 million tons of sugar to moderate prices.
Basis of the current retail prices around Rs 43-45/kg is the FRP of sugarcane of Rs 230/qtl of 2016-17. When FRP is Rs 255/qtl in SS2017-18, which is 11% higher and given the fact other matrixes remain unaltered, sugar retail values may also elevate pro-rata.
The plea of the stakeholders that Indian sugar has to be much higher than international prices because of FRP/SAP etc. is logical up to a point but not under current domestic scenario. Continued choking of imports is bound to inject inefficiency in the industry because profits are secured under closed market mechanism.
It is well admitted that cost of production of sugarcane in India is higher by about 30% compared to other competing origins--and this % can be rechecked. If true, than duty protection beyond this point may be reviewed. This will ensure that principle of comparative advantage is not abandoned or deserted which is fundamental to national and international trade.
Right now international prices are supportive and thus imports with viable duty can soften domestic values. Government needs to take a call on moderation of sugar prices, act in the interest of all stake holders and avoid sugar inflation to double digit level, when wholesale national inflation is just 1.8%. Facilitating minimum imports of 2mt is the sole prerogative of the authorities.