BITTERNESS OF INDIAN SUGAR SUBSIDY AND ITS LEGALITIES

20TH MAY 2014
Tejinder Narang

Government notification of 7th May 2014 on raw sugar exports has curtailed the incentive by 31% from Rs. 3330/metric ton (mt) to Rs 2277/mt for April/May 2014 shipments. Incentive of Rs.3330/mt was notified on 28.02.2014 for February/March 2014 period.

Sugar industry is right in calling this action “not as per the law” when the February’s order was specific about the methodology of calculation of the incentive/ subsidy for future months. Incentive amount was to be scaled up or down depending upon the average exchange rate of Rupee vs US Dollar during the last week of March, 2014.Based upon the appreciation of the rupee in end March 2014, subsidy amount should have been logically calibrated upwards. Exports made on the basis of anticipated disbursement of higher subsidy amount or even on the assumption that Rs 3330/mt are exposed to losses or loss of profit.

But there is a catch here. Incentive of Rs 3330/mt calculated by method of “viability funding gap” was approved by CCEA in mid- February 2014 under severely depressed international prices. While the computation of the viability gap accounted for international price of raw sugar based on futures quoted on the Intercontinental exchange, the methodology prescribed for revision ignored market volatility. It should have allowed higher subsidy if prices slump further, and should they rise, incentive could be pruned. CCEA applied only exchange rate variations; ignored incentive’s calibration with market trend and the order was notified on 28^th February 2014.

Dealing through Governments or doing business with their assistance always carries more risks, and industry knows it well. Even Reliance is facing the antics of the Government. Sugar sector deregulation, especially in its marketing sector was done in April 2013 by UPA2—but still the industry preferred to deal through Central Government for profitability by citing huge stocks, plunging international prices and irrationality of State Advisory Price (SAP) for sugarcane.

Markets are dynamic and volatile. A vigilant Ministry will definitely monitor market movements. The probable logic of lowering incentive could be substantive escalation in international and domestic prices of sugar by 10% or about $45-50pmt (about Rs 3000/mt) and Rs 4000/mt respectively in mid April2014. This has shrunk“viability funding gap” and therefore trimming the said incentive may be justifiable though it  violates February2014 notification.

 Subsidy involves accountability for disbursement of public funds by official agencies for private parties.  Industry may believe that authorities have erred but that may not be the case when a comprehensive assessment is made.

During NDA’s grain exports campaign of 2000—05 from FCI stockpiles, there were frequent changes in the notified release price of wheat/ rice without any prior intimation, based upon trading values abroad. Release from FCI’s stocks of a highly subsidized wheat variety called “lustre loss wheat” for exports was treminated without notice, though millions of tons of exports were outstanding against contracts entered into by the exporters. The reason-- FCI/Government is dealing with subsidized grains and that the loss of revenue needed to be contained if market conditions are supportive to check ‘undue enrichment’ of private entities. Somewhat similar situation exists in the case of raw sugar incentive.

Can the order of 7^th May 2014 setting a lower level of incentive for export of raw sugar be challenged in court? Certainly it can be. Will the court provide any relief? It is difficult to comment.  Any   judicial intervention implies much deeper analysis than done by the then CCEA prior to elections. The court will examine the very appropriateness of the marketing incentive out of Sugar Development Fund; whether it was rightly calculated/ applied; its future correlation to market prices overseas and pierce through political--bureaucratic –corporate veil.

Other issues that Court may examine — how a Government can abet in domestic inflation of sugar; why subsidy on finished product that is refined sugar was denied; why compliance to WTO is ignored exposing  country to huge liabilities through WTO dispute resolution process. If unreasonable SAP is the causative problem, can the Centre bail the wrongs of states in a deregulated environment in a federal set up?  Can any court ignore   undue enrichment of private entities through public funds?

The route to court may be cumbersome and dilatory. If sugar industry considers order of 7^th May 2014 arbitrary, then notification of 28^th February 2014 can also be deemed incomplete and inappropriate. Both the orders then become null and void. The best way is to “settle/accept” than to argue with the establishment.

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NCDEX--INDIAN SUGAR PRICES

NY ICE PRICES

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BUSINESS LINE 10TH JUNE 2014

PRESSURE FOR SUBSIDY CONTINUES BY THE INDUSTRY --PERHAPS WITH MAHARASHTRA STATE ELECTIONS IN MIND.TO WHAT EXTENT OBJECTIVITY IS RETAINED  IN THE NEW GOVERNMENT SET UP WILL EMERGE SOON.

Comment--over the years it is noted that if sugar industry makes profits --they are corportised.If sugar mills make losses, the government is forced to must step in to assist them or bail them out--otherwise mills will not pay to the farmers and sugarcane payment arrears will continue to addup. 

Succumbing to prssure of mills when sugar marketing is decontrolled is illogical.Privatization of profits and socialisation of losses cannot be a long term sugar policy--becasue vote bank of farmers is involved. By short term and adhoc solutions--long term reform of irrational state advisory price is deffered indefinitely.