It is not often that a commodity other than gold and oil remains in the news for days on end. Indian sugar has achieved that distinction of late. For a vast majority of Indians, the sweetener is turning increasingly bitter, with its prices rising sky-high on the back of supply shortage aggravated by deliberate mismanagement. Retail prices are knocking at the psychological level of Rs. 50/kg, and may soon breach it. Worse, there is no respite in sight for hapless consumers. 

At the heart of the problem is the huge gap between domestic consumption and production. Sugar prices are expected to remain high as lower sugar production for two consecutive years has depleted inventories completely. In the previous sugar season (October 2008-September 2009), sugar production declined by over a fifth to about 200-210 lakh tonnes. In the current season, following poor monsoons and a drop in crop area, even optimistic estimates of sugar production place it at 160 lakh tonnes, whereas consumption, even by conservative estimates, is placed at 220-230 lakh tonnes.

Large scale imports may ease the supply crunch, but cannot bring prices down as international markets have already firmed up. The trend is not surprising, given that two of the world’s largest producers (India and Brazil) have reported a sharp drop in output. The global deficit for the sugar season (October 2009 to September 2010) is estimated to be 8.45 million tonnes, mostly comprising Indian deficit. Notably, the global sugar inventory to consumption ratio, at around 33-35 per cent (about four months of consumption), is the lowest in nearly 20 years.

Left to free trade, we would not even have noticed the blip. India routinely imports 6 million tonnes of cooking oil each year and nobody gives it a thought. And cooking oil is more critical to our diet than sugar. Oil supplied to ration shops is imported by the government itself.

In the case of sugar, however, bureaucratic bungling vastly aggravated the consequences of the shortage. The supply crunch had been visible for over a year. Yet it took the government several months to act. The initial response of official circles was a plain refusal to recognise a production decline. The Government allowed exports to continue merrily with incentives, although it knew of the looming shortage. Although the Food Ministry had been steadily reducing its estimates of sugar production since October 2008, exports were banned as late as December 2008. Then there was inordinate delay in allowing sugar imports, again despite solid evidence of a serious shortage. Meanwhile, precious time was ticking by.

By March 2009, when it allowed zero duty imports, the international market had already wised up to India’s desperation to import one-fourth of its sugar needs of 230 lakh tonnes and jacked up prices of both raw and white sugar sky-high.

With inadequate import, local prices started climbing. So, state governments were urged to impose stock limits on wholesalers and dealers. When wholesalers stop ‘hoarding’, government figured market prices would drop. But that never happened because the trade never had any sugar.

Then, stock limits were imposed on makers of processed food, biscuits, confectionery and soft drinks, as they buy more than half the sugar sold in India. This created the ridiculous situation of these companies selling their ‘excess’ stocks while simultaneously placing orders for imported sugar at higher prices to meet their requirements.

Another major reason for the latest surge in retail sugar prices has been the decision of the Uttar Pradesh government to ban processing of imported raw sugar. The government claims the decision has been taken to control law and order in the state in the wake of violence during the sugarcane growers’ agitation for getting a better price for cane. The agitation is now over, but the ban continues.

UP’s ban has not only locked up almost 1 million tonnes of raw sugar in ports, but has also discouraged private millers from entering into fresh import contracts. Another side effect of the ban is that several sugar mills which had contracted imports of raw sugar are opting for “washout” settlements i.e. selling back the contract to the supplier in return for a cash settlement.

Thus the mandarins in the Food Ministry have ensured that sugar is no longer the cheapest source of calories for Indian consumers. Legitimate supply chains have been declared criminal. In fact, each sarkari decision has only raised the cost of doing business in sugar without dealing with the real problem of shortage.

What merits a special mention, however, is the most dubious role played by Union Agriculture Minister Sharad Pawar. Instead of dousing the fire of rising prices, he has been fanning it with his words and actions. Pawar seems to have a knack for sending commodity prices through the roof whenever he wants; he did it earlier with onions, wheat and pulses; now he is doing it with sugar.

The minister who is supposed to take steps to augment supplies and cool inflationary expectations has been actually warning consumers that sugar prices will remain high for at least another year! He has blamed sugar mills and cooperative societies for feeding him inflated estimates of production, asked cane farmers to raise productivity, and criticised cooperative mills for inaction in importing raw sugar.

The message was not lost upon traders dealing in the commodity. Just a couple of days later, sugar prices took a fresh jump.

This is what happens when the government, either misguidedly or maliciously, uses non-tariff trade barriers against its own people.

However, not everyone is unhappy with the current turn of events. Kulaks and sugar barons are not complaining. Cooperative sugar factories, mostly owned by politicians, and traders, never had it so good. With sugar prices scaling new heights, prospects of sugar producing companies have only turned sweeter. As the December quarter results of Bajaj Hindustan have demonstrated, most of them are bound to report bumper profits for the current fiscal. With investors sensing this, prices of sugar stocks have firmed up in the last six months.

In the larger perspective, the government policy on sugar is so faulty that everyone - growers, millers and consumers - is unhappy. What explains this extraordinary state of affairs? The short answer is: government interference and control. Everything from the price of cane to the quantity a sugar mill can sell in the so-called open market is decided by some law or fiat of the government. Instead of addressing structural issues of the sector - cyclical nature of cane output, wide inter-state yield variations, fragmented crushing capacities, dis-economies of scale, lack of technology absorption and investment for modernisation - New Delhi has been tinkering with trade and tariff measures.

The sugar industry has for long been victim of over-regulation and muddled policy regimes. Needless government interference has disturbed market dynamics and discouraged investment and modernization. Instead of tinkering with quotas, releases and import/export norms, the industry deserves total decontrol, deregulation and rational cane pricing. This would encourage fresh investment, consolidation of fragmented capacities and modernization of factories.

The current policy imposes a plethora of curbs on production and distribution while leaving trading free for speculators. It is essential to reverse the direction: free production and distribution and take out unhealthy speculation from trading.

The author is Executive Editor, Corporate India, and lives in Mumbai