SUBSIDY FOR EXPORTING INDIAN SUGAR UNCALLED FOR

Please click on the following link to read the item ECONOMIC TIMES DATE 4TH FEBRUARY 2014:

http://epaper.timesofindia.com/Repository/ml.asp?Ref=RVRELzIwMTQvMDIvMDQjQXIwMTQwMQ==&Mode=Gif&Locale=english-skin-custom

TEJINDER NARANG

1.“Government is not a charity shop”—President of India, Republic Day Speech-- 25^TH January 2014.

2. Bailing out sugar sector without taming SAP is like feeding a tiger and let it roam as a man eater! 

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To augment export of Indian Raw/White Sugar up to about 4 million tons in next two years, Government is considering subsidy of Rs.2000/- to Rs.3500/mt or $32-$55/mt for two years. This subvention is being justified because of availability of money in Sugar Development Fund (SDF). Firstly, SDF is the excise duty collected by the Government from the mills like any other revenue that lawfully accrues to the central exchequer. Subsidy payments out of SDF means, revenue earned and foregone. Secondly, the subsidy benefits more the coastal mills or those near the port towns.  It therefore amounts to discrimination to the mills situated in the interior, unless local freight component up to port is provided in addition to this subsidy for factories in U.P and land locked states..  The caveat should be that the disbursal has to beneficial to all concerned. This, in any case is not an all-inclusive initiative. Export subsidy also implies cheaper sugar for overseas consumers and expensive for Indian users that contradicts WTO rules.

  

Sugar prices have fallen by $100/mt on year to year basis. World sugar supply demand mismatch (ending stocks on raw value basis) is 44 million tons, about 17% of annual availability of 270 million. Price decline is further exacerbated by deep depreciation of “Brazilian Real”. Apparently, the subsidy will be neutralized by continuous plunging prices of Brazil.  Even additional depreciation of Indian rupee may not be sufficient as economies of competing origins Thailand and Brazil are equally fragile and USA’s Federal Reserve “tapering effect” is bearish for the commodity prices in general. Efficacy of the subsidy will be less than marginal.

International sugar trade is also highly volatile. Recent raw values are 15cent/lb and in next two years they can either be 12-13c/lb or 20-25c/lb. and each cent moves the price up or down by $23/mt. How the subsidy will be pegged and assessed once the price moves up the trajectory to say 20c/lb in the next two years remains vague.

In deregulation notified in April 2013, GOI decided to keep its hands off in marketing of sugar. It looks highly odd that despite declared policy, Union Governments gift such sops, which are also in contravention to WTO guidelines. This amounts to outright arbitrariness while the right way forward is to disconnect the socialism of cane prices—called State Advisory Price (SAP) and let them be aligned with decontrolled market values of sugar.

Due to unrealistic sugarcane prices applied by U.P. Government and backlog of arrears to the farmers, Central Government agreed to give interest relief from SDF to the industry for the loan amount of Rs 6600 crores drawn from the banks. Any relief beyond this issue is totally uncalled for. There are procedural issues of disbursal of this loan amount that need to be taken care of rather to find quick fix solution of demand expansion by unworkable subsidies and exposing the country to severe criticism at WTO.

 Also, the very act of subvention of sugar for export evokes some fundamental collateral and controversial issues.  These could be --Why compensatory support is not made for minimizing the domestic losses of all sugar mills directly or out of sugar development fund? Why financial support is limited for export only when the industry is distressed due to disparity in production cost and sugar cane value? Why similar dispensation is not accorded for maize and soybean meal where the exports are also lagging? In fact the pace of exports of maize/meal will be much faster and more remunerative.

Administered price regime of SAP brings Industry and farmers back to the Government for bailing them out of the crisis. In years of profitability, the consumers pay higher prices, while stakeholders of sugar sector benefit.  Privatization of profits and socializing the losses—cannot be the generalized economic policy prescription. Ad-hocism of export subsidy/ interest free loans etc are ostrich like approach and the problem gets deferred for coming years. Bailing out sugar sector without taming SAP is like feeding a tiger and let it roam as a man eater!