Rise in sugar prices may turn festival season bitter

Sugar prices in India have been surging relentlessly for several weeks. Exacerbated by global cues, it seems to have gone completely out of the Government’s control. The sweetness of the festival season is sure to be soured by the high prices of the sweetener. In cities such as Mumbai, the retail rate is close to Rs 40 a kg. Sugar has a strong weightage in the consumer price index. Worse, the situation is compounded by rising prices of other essential food items such as pulses, rice and edible oil.

Exploding sugar prices have turned politically sensitive with some State elections, notably Maharashtra, round the corner. The UPA Chairperson, Ms Sonia Gandhi, has written to the Food and Agriculture Minister, Mr Sharad Pawar, to take immediate steps to contain the price rise and augment supplies.

Late realisation

Unfortunately, the advisory (which can be interpreted as a directive) has come a little too late, and is akin to closing the stable after the horse has bolted.

Primarily, the Government dragged its feet for too long in first recognising the existence of the problem of shortage and need to augment supplies. After the problem snowballed in terms of escalating prices, the way it was handled left much to be desired. Clearly, there are different dimensions to the issue. The growers’ angle, the consumers’ angle (within which there are two segments – household and institutional consumers), the mills’ angle and the international market angle. The overarching need is to protect consumer interest during 2009-10 and advance growers’ interest during 2010-11.

The problem associated with emerging sugar shortage during 2008-09 was evident as early as July 2008. On July 26, 2008, Business Line warned of an imminent rise in sugar prices, among others, in the second half of the year because of lower acreage and lower cane output. Yet, exports continued merrily for many more months, that too with incentives.

Expand acreage

Planning for 2009-10 ought to have started by September 2008; but that was not to be. We are now paying a price for inaction or slow action for over a year now. The situation is unlikely to change until end-2010 when next year’s cane harvest begins. For 2010-11, we have to start working on area expansion now. Cane has to regain about 10 lakh hectares of area it lost to other crops. The only way to ensure that it does is to incentivise cane cultivation.

The political fallout of high food inflation is perceived to be a negative one for the present government unless dramatic initiatives are taken to contain prices. But the degrees of freedom available to policymakers are limited. The policy response to sugar shortage and rising prices has been tardy. Coordination among the various arms of the government – Ministries of Agriculture, Commerce, Finance and Food – has been ineffective.

Prices at 28-year high

Taking a cue from India’s plight, world sugar prices have touched multi-decade highs. Speculators in international commodity exchanges have made windfall profits because of India’s muddled response to the sugar crisis. In the international market, sugar prices are consolidating around the new higher trading range which is about 22 cents a pound, a 28-year high.

The evolving situation in India, the world’s largest sugar consumer, remains the focal point of the global price rally. Low output for second year in a row, low inventory and steady consumption have triggered a massive price rally, exacerbated by flow of speculative capital.

Over the next four weeks, world prices have the potential to rise to about 27 cents a pound which means a possible rise of about 20 per cent. Such a further price escalation if realized will have a direct bearing on Indian sugar prices because of growing import dependence.

At home, neither the cane grower, nor the consumer or the mill is happy about the state of affairs. It is a sad commentary on the poverty of leadership and lack of decisive and timely action by the government.

Let market decide

There is one school of thought within the industry that believes that if the government does not interfere, things will sort themselves out. While one may like to go with the belief, for the government itself it is rather risky to let the market decide. Things could potentially go awfully wrong. As yet, the industry does not enjoy the full or unqualified confidence of policymakers.

In the last five years, the government failed to effect de-control of the industry even though conditions were supportive of such an initiative; but 2009-10 is surely not the year to take chances.