SUGAR COATING SUBSIDIES--FINANCIAL EXPRESS 15.03.2014

SUGAR-COATING SUBSIDIES

FINANCIAL EXPRESS 15.03.2014

CLICK LINK BELOW

http://epaper.financialexpress.com/c/2558269
============================================================================

RAW SUGAR EXPORT WRONGLY INCENTIVIZED

Tejinder Narang

On 28^th 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 28^th February 2014, is retrospectively applicable from 1^st 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 27^th February raw sugar was not eligible for defrayments under SDF. On 28^th 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.


========================================================================
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.