SUGAR-COATING SUBSIDIES
FINANCIAL EXPRESS 15.03.2014
CLICK LINK BELOW
http://epaper.financialexpress.com/c/2558269
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RAW SUGAR EXPORT WRONGLY
INCENTIVIZED
Tejinder Narang
On 28th February2014, Government
notified export incentive/subsidy of Rs.3300 per metric ton (pmt) or $ 53.00
pmt for 4 million tons (mts) Raw Sugar (raws) out of Sugar Development fund
(SDF). Total implications are for $212 million or Rs 1300 crores. This will stimulate demand expansion and
better price realization by shipping out excess stockpiles during 2013-14 and
2014-15 to partially clear arrears of farmers. About 1.3mts raws have been
shipped out this marketing season and targeted at about 2 mts by end September
2014.
Gazette notification of 28th February
2014, is retrospectively applicable from 1st February 2014. Whenever
an order is backdated, corporates privy in advance of details become preferred
beneficiaries. Refined sugar—value
added product-- stands excluded from this policy prescription for unknown
reasons!! This incentive ensures cheaper supplies abroad and expensive
availability locally that defies commitments to WTO
Link incentive to market price
Government was guided by the fact that prices of
raws bottomed at 14-15c/lb or($320-343)
in New York exchange.
Therefore exports are not viable without incentive, which was calculated at Rs
3300 pmt. Commodity markets have violent fluctuations. In the recent past “price
band” of raws has oscillated between 14 to 30c/lb. Policymakers cannot be
oblivious of this fact. (One cent/lb variation changes price by $23.00 pmt.)
Potentially price can easily swing between $320--$690. Incentive needs
benchmarking with prices abroad. Put simply, higher prices should lead to
corresponding reduction in subsidy and vice versa. Dispensing “fixed” subsidy without
considering inherent market volatility is grossly erroneous and questionable.
Pursuant to the incentive, world market should have
further declined. But markets generally negate logic. Raw values immediately climbed up by $ 70-$75
pmt (3c/lb), assuring better realization for Indian trade. The conditions
subsisting a month back have radically mutated for bullishness. Dry weather in Brazil/ possibilities of El
Niño may provide additional boost to rising market. This doubly reinforces the
rationale of pegging incentive to international quotes. This inadvertent lacuna requires official
correction immediately, though industry may support status quo.
Another selective
dispensation and discrimination is accorded to a few holders of Advance Authorization Licences (AAL).
Only AAL holders can export refined sugar with duty draw back benefit by
sourcing raws with subsidy from other mills.
Inflationary
Indian raw values
(after discounting subsidy) have also moved up form Rs 22000 pmt to Rs 24000pmt.
Importers are willing to absorb even this demand driven rally. Higher values of white sugar will stoke
domestic inflation. Fuelling inflation locally through export incentive is also
an ill-conceived policy package.
This action of Government was unprecedented because
marketing of sugar was deregulated in April 2013. Instead of taming
monster of State Advisory Price (SAP), Government continues to micromanage
industry on case to case basis.
Media
reports reveal that Food Ministry opposed this selective incentive for raws and
also calculation of amount of Rs3300/mt. Commerce Ministry too objected
on lack of WTO compliance. Nevertheless CCEA in its superior wisdom cleared
incentive as notified.
Will CCEA extend similar relief to FCI for wheat
export where 20 million tons is stockpiled with Government/Bank funding-- excess
of 3 times of current requirement? The difference being that FCI cannot push
the Government like sugar industry for such a relief. Unfortunately Government
suffers massive losses on wheat account with no questions asked year after
year.
SDF misapplied
Incredibly, Government on the plea of the industry
also approved that “raws marketing and promotion services” will be considered
for defraying expenditure from SDF. Till 27th February raw sugar was
not eligible for defrayments under SDF. On 28th February it is made eligible. If industry demands that
electricity expenses or labour cost be also defrayed from SDF, will Government
accede? SDF is funded by Indian consumer and is meant for the benefit of
consumers. But export incentives debited to SDF makes sugar expensive to the
detriment of consumer.
Net effect of incentive packet is distortive. It
provides short term benefit while long term pain remains. Manner of subsidization is principally
ill-conceived due to absence of linkage with international prices while refined
sugar stands excluded and SDF is misapplied. Further it is anti- consumer and
anti-WTO. Even if Election Commission has
to be approached such distortions should be set right.
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RESPONSE TO THE ARTICLE BY ISMA ON 19.03.2014
http://epaper.financialexpress.com/c/2575215
COMMENTS TO ISMA REJOINDER
1. The
thrust of raw sugar article of 15.03.2014 was that the subsidy amount is not
linked to the volatility of Raw Sugar values, to which no response has been
offered.
Deemed exports are permissible for Raw Sugar by virtue of supplies made to refineries--standalone refineries--but not for white/refined sugar. The policy per-se is not on even keel. Further subsidy is made available to intermediate product. Next in the line by extended logic could be subsidy for the export of Molasses!!.
2. Prices of raw sugar and white sugar have moved
up by Rs 2500/ton after this announcement of this interventionist subsidy. It would
have been different if market forces are allowed to operate for balancing the
price. No Government should be consciously acting to increase the sugar price
to a consumer by subsidizing the industry from its own pocket.
3. Though
the industry is suffering losses in the production of White Sugar, it is
incredible that for last four years the overall output has not declined.
Normally a loss making industry should be producing significant lesser
tonnages. (Yet a number of new sugar mills/capacities are also on the anvil.)
4. Regarding
order being retrospective from 1st February 2014, there is an ambiguity which
needs to be set right. Government order states that Sugar Development Funds
(SDF) 2014 shall come into force from the date of publication in official
Gazette which is 28th February 2014. However para 4 reads-- “incentive shall be
@ Rs.3300/- per metric ton for February/ March 2014”. Likewise Form 10, Para 3
Claim period February-March 2014. There is a contradiction requiring correction.
5. Sugar
inflation is part of food inflation. The Industry/Government cannot be
unconscious of this fact.
6. The
industry may have its own arguments for the said incentive but their own
controlling ministry (Food Ministry) remained unconvinced of the necessity of
formulating the incentive package and even the workability of the calculations.
Neither any comment on the lack of WTO compliance is furnished by ISMA.
7. Industry
has already been granted interest free loan of about Rs. 6,600 crores for
payment of cane arrears from the Sugar Development Fund (SDF). Defrayment
of Raw Sugar incentive for payment of cane arrears out of the SDF is yet
another helping hand.
8. Two
questions arise, first why Sugar industry is selected as an exclusive
manufacturing conglomerate for the bail out plans whenever losses are
projected. Secondly, in the years of profitability does the industry
share any profits with the Government?
9.
All commodities /industries have their cycles and live through a periods of
profit and losses and survive with their own ingenuity. That is the business. However sugar industry and Government claim
special intimacy in the name of farmers.
