Prolonged bull grip on sugar likely

Even as the rate of inflation continues to decelerate — and deflation seems imminent — the government is grappling with an unfolding crisis in regard to sugar, an essential commodity and to whose price movements, the political establishment is unduly sensitive.

Much to the discomfiture of officialdom and at a most inopportune moment — the elections are scant weeks away — the price of this sweetening agent is on a bullish course.

The wholesale price index for sugar has soared from 149.6 in April 2008 to 175.4 in February 2009 or by over 17%; on a year-on-year basis, the sugar index has hardened by nearly 22 per cent by mid-March.

At the retail level, the price spiral in sugar is even more marked. In Kolkata, which is traditionally deficit in this commodity, the jump is the maximum at 56% over the year, 47% in Delhi, 42% in Chennai and 37% in Mumbai, according to the Price Monitoring Cell of the Union ministry of consumer affairs and public distribution.

Sugar has already tested the Rs 25 per kg — mark but, with the festive months coinciding with lean supplies, sweet sugar may increasingly taste bitter. The government is already embarked upon fire-fighting operations. It has decided on stockholding and turnover limits that will take effect in a matter of days.

It has permitted imports of raw sugar at nil customs duty for refining by sugar mills against advance licences subject to an export obligation of refined sugar within 36 months.

Now, there is a proposal to do away with this export obligation while allowing duty-free imports of raw sugar. This is not all. The question of allowing imports of white sugar at nil duty is to come before the Union cabinet, with the Food ministry already in favour of this move to combat rising sugar prices. So, barring any hitch, imports of both raw and white sugar at nil duty are likely soon.

Whether this will douse the inflationary fire raging in sugar is problematic. For one, the global sugar market has factored in the possibility of India emerging as a major buyer and this may harden the sentiment.

Moreover, with the London price for May delivery ruling around $393 per tonne for white sugar and at nearly 13 US cents per pound for raw sugar, freight costs and other incidentals plus the depreciating rupee suggest that  sugar is unlikely to be cheaply available to the consumer — at least cheaper than the ruling price of around Rs 25 per kg.

Indications are that soaring sugar prices are here to stay till at least the next season is underway. The outlook for the 2009-10 sugar year that runs from October to September is none-too-rosy. The cane crop harvest is anticipated to be  low key which may drag the sugar production to around 200 lakh tonnes.

With less than two months’ inventory as carry-over, the total availability may be just about equal to the annual consumption of around 230 lakh tonnes. India again tapping the world market is a real possibility. A prolonged bull grip may be in prospect. Much depends on the policy stance and, in particular, the quantum of imports.

Seen in context, soaring sugar prices have much to do with demand-supply fundamentals and no amount of policy fine-tuning — such as imposition of stock limits and higher monthly releases of free-sale quota — can change this reality.

What is this reality? The 2008-09 season has been plagued by a setback in sugar cane production. The recovery rate has also slided. As a result, there has been a precipitous fall in sugar output to an estimated 155 to 162 lakh tonnes from 263 lakh tonnes during the preceding season.

Even with an opening stock of between eight to ten lakh tonnes and raw sugar imports of 15 lakh tonnes, the total availability would be only modestly higher than the projected consumption of 225 lakh tonnes.  Therefore, pressure on prices is only to be expected. In the Darwinism of the market place, prices are influenced by demand-supply factors.
Unfortunately in India, the transition to a decontrolled regime is still being talked about and the journey is conducted more with the brake than with the accelerator.

The government is having a vice-like grip on the industry with a levy quota stipulation to be sold by mills to the government at below the cost of production and even the so-called free sale quota subject to curbs in the matter of allocations. Ad hocism has supplanted considered policy responses and has pushed to the background pivotal issues like rational pricing for cane, upgradation of mills, economies of scale, better use of by-products, quality improvements and the like.