Why India needs to relax curbs on sugar export

The supporters of the export curbs contend that they are aimed at reining in food inflation given that sugar production is likely to fall.

One type of inflation the Indian government should not worry about at all is of sugar prices. Making sugar artificially cheap — by controlling its prices through export bans and monthly sales quotas — over-incentivises its use by manufacturers of popular breakfast cereals, soft drinks and juices, and sweets. That leads to unintended health consequences, the cost of which is not being factored in by India’s policymakers.

The government decided to extend restrictions on sugar exports beyond October 31 without specifying an end date. The supporters of the export curbs contend that they are aimed at reining in food inflation given that sugar production is likely to fall by 8 percent in the current crushing season. Besides, these curbs will also ensure a steady supply of feedstock to cane-based distilleries for the production of ethanol. It is argued that allowing sugar exports will reduce domestic availability and worsen food inflation. However, the weight of sugar in food and beverage price inflation is less than 3 percent, and in retail (CPI) inflation, it’s just 1.36 percent. Clearly, high sugar prices can’t be responsible for food inflation.

The major culprit for food inflation is high cereal prices (CPI weight 9.67 percent) and sharp seasonal fluctuations in supplies of perishable horticultural products i.e., vegetables and fruits (combined CPI weights 9.93 percent). High cereal prices can be largely attributed to frequent hikes
in minimum support prices, which are intended to boost farmers’ income, amidst shamefully low farm productivity. Yet such market-distorting policies continue. Also, a serious lack of post-harvest infrastructure such as cold chains has been making it difficult to manage the impact of seasonal
variations in supplies of perishables on food inflation. Controlling sugar supplies (by banning exports or imposing monthly sales quotas) won’t be enough to rein in food inflation.

Steadily increasing cane output — because of the continuation of cane price populism — requires steadily rising cane crushing capacities. Preventing sugar mills from making profitable overseas sales will discourage them from ramping up capex. That will hamper future supply responses and make price management even more difficult.

Signalling Shortages

Indian policymakers need to understand that the mere announcement of export curbs signals that there is a serious supply shortage. That, in turn, encourages hoarding and speculation by traders and bulk buyers as well as households which overstock fearing further increases in prices. That makes export curbs ineffective at controlling prices. A little wonder then that the prices of sugar continue to rise despite effective supply (current season production and carry-over stock from the previous season) exceeding consumption and prohibition on exports.

Further, frequent export curbs create complications for foreign buyers and make India an unreliable supplier, prompting measures in importing countries to boost local supplies, often involving the erection of import barriers. That will create complications for India when it will need to export surplus sugar, a situation which is not unlikely if past records are any indication. To conclude, export curbs work neither in the short run nor in the long run even if one ignores their adverse implications for foreign buyers.

Removing export curbs will help sugar mills improve net price realisation as global prices are currently far more lucrative than domestic prices. That would help in ensuring timely payment to cane growers (the suppliers of raw material), especially when the government doesn't seem to be in any hurry to push reform of its archaic cane pricing regime that favours input suppliers at the cost of millers. Because of delays in getting payment from millers — unpaid cane dues stood at Rs 94.99 billion as of July 21. As a result, farmers struggle to make payments for inputs and consumption
leading to mounting discontent and protests. Cane price populism pursued by the central and several state governments jacks up input costs for the sugar millers and erodes their profit margins, which leads to delays in payments to cane growers. Despite favourable prices, many sugar mills such as Bajaj Hindustan or Shri Renuka Sugar are still in the red. This is primarily because millers are not being allowed to benefit from favourable global prices.

That is not all. Given the pro-sugar bias in the country’s milling sector (due to better margins on sugar at a time when sugar prices are at their six-year pick), cane-based distilleries are more likely to process ethanol from B-heavy and C-heavy molasses, and not directly from cane juice or sugar syrup. This weakens the argument that a ban on sugar export will ensure steady supply of feedstocks to distilleries. A far more effective way to support ethanol production is to help grain-based distilleries (which are facing serious shortage of feedstock after the Food Corporation of India stopped supplying them broken rice at concessional rates) import corn from the US. The US corn prices have seen a sharp correction as demand fell after China switched to Brazilian corn.

Prerna Sharma Singh is a director on the board of Indonomics Consulting Private Limited, a policy research and advisory startup, and heads its agriculture, food and retail practice. She tweets at @AgriFoodRetail. Views are personal, and do not represent the stand of this publication.