The Hindu Business Line : Sugar turns bitter-sweet

The rising sugar prices are as much a whammy to the consumer as they are to the cane grower, who gets none of the benefits of the higher rates. — Sandeep Saxena

THE sugar situation is full of iniquity to the consumer and the cane farmer. Sugar prices have shot up steeply. The average price in Mumbai is around Rs 22 per kg — a peak in 30 years.

It marks an increase of about 25 per cent over the year. But much of the increase has happened in the recent days. In one week the rise was Rs 4 per kg. The Government goes by the Index Number of Wholesale Prices (INWP) to measure inflation and takes ameliorative measures.

`Sugar' falls under manufactured products and has a lowly weight of 3.62 per cent. It is even less, at 2.24 per cent, in the Consumer Price Index (CPI) for Industrial Workers. The base years are 1993-94 and 1982, respectively.

They are completely out of date so far as the average basket of consumption goods of the common man is concerned. Sugar is one of the few `luxuries' that a poor family can afford, using it mostly for beverages coffee and tea.

The fact that the Government claims that the proportion of families under the poverty line has declined substantially over the last two decades or so should imply a larger scale of consumption per family than indicated by the weights. Besides, there is the problem of divergence between the trends revealed by the INWP and the CPI.

The Economic Survey of 2002-03 gives the inflation rates for essential commodities (November to November). According to the INWP, the sugar price fell 5.8 per cent in 2001-02 whereas it rose 7.7 per cent in the CPI.

The ostensible cause for the recent price rise is the fall in cane production, particularly in the sugar belt of Maharashtra, due to unfavourable weather.

No doubt there has been a fall in sugar output since 2002-03, when it was 189 lakh tonnes. It declined to 163 lakh tonnes the following year, and is expected to be just 120 lakh tonnes this year.

Of course, market estimates at this stage in the sugar season (October-September) may exaggerate the fall to fuel a price rise. The prediction is that the price will go up to Rs 25 a kg unless the Government and the Reserve Bank of India (RBI) take some serious measures.

The statistics show that there are enough stocks to meet the demand this year despite the decline in cane output and the strong competition for procuring raw material from the gur and khandsari sectors. Thus, there is a buffer stock of 85 lakh tonnes, supplemented by sugar imports of around 20 lakh tonnes, of which 11 lakh tonnes has arrived in the country.

Even if the sugar output were to decline to 120 lakh tonnes, total availability would be 225 lakh tonnes against the normal consumption in a year of 180-185 lakh tonnes after factoring in the annual growth rate.

Press reports speak of speculation leading to price rise. It is another name for the hoarding of stocks. Sugar futures are reported to have fuelled speculation.

The Forward Markets Commission has done well to issue a directive to commodity exchanges to raise the margin for sugar prices from 8.5 per cent to 44 per cent from January 6. The additional margin will have to be paid in cash (bank deposits) and not as a bank guarantee. As of now, this is the highest margin fixed for any commodity in futures trading.

According to press reports, sugar is traded on the National Commodity and Derivatives Exchange (NCDEX) and the open position is for 87,800 tonnes for the next four months against only 15,000 tonnes as on December 1, 2004.

The additional margin is a small amount, much less than Rs 100 crore. Considering the unutilised credit entitlement and the drawing power of mills in their bank accounts, it will not hurt them. They can easily pay the margin and continue to play in the futures market. Studies have shown that mills do not draw to the full extent of the drawing power that would be the case if they promptly settled the dues owed to cane farmers.

Instead, the dues become overdue and are euphemistically called `arrears'. They run into hundreds of crores of rupees. This is advantageous to the mills as they do not pay interest to the farmers for the arrears although, under the law, the latter are entitled to a 15-per-cent interest for arrears beyond 15 days.

Were the mills to settle the dues in time they would be constrained to draw from their loan or cash credit accounts in the banks, in which case they would have to pay interest. Does it not stand to reason that the profit-maximising entrepreneur prefers interest-free suppliers' credit to bank credit? This is the injustice to the farmer that was referred to earlier in this article.

In the past, whenever the Government imposed controls on any sector producing sensitive commodities, complementary action was taken by the RBI through Selective Credit Control (SCC) under the Banking Regulation Act to ensure that bank funds were not utilised to counteract Government regulations.

Thus, if the Textile Commissioner imposed stock controls on raw cotton in a situation of scarcity, immediate action was taken by the RBI to raise the minimum margin on bank advances against the commodity. Sensitive commodities are those that are important for the common man, the price movements of which affect him. Sugar is one of them.

With the new-found enthusiasm for deregulation, the SCC is shunned as something belonging to the realm of directed credit — a dirty expression. But the fact remains that around two-thirds of bank deposits are still pre-empted for use in directions mandated by the authorities despite the oft-repeated claim that there is no directed credit in the country!

Ironically, the only SCC prevailing now is on bank advances against sugar to mills against levy stocks with a negligible minimum margin of 10 per cent.

It appears that even this margin is in place at the request of mills and banks. In the absence of the prescribed margin, banks were reported to be not able to fix it and, hence, the RBI was requested to do it for them! It is difficult to believe that any banker would find it not possible to decide on the margin in the absence of any directive from the RBI.

Traditionally, the manufacturer, being a producer who needs to keep stocks-in-trade, was given favourable treatment vis-à-vis the trader, whose contribution in carrying goods through time and space was not recognised. He was considered to be avaricious, and on the prowl for a fast buck! There is now no control on credit to traders against stocks.

But mills, which are producers and which have necessarily to keep the levy stocks of sugar in their godowns until they are released by the Government, are prescribed a minimum margin on credit against their pledge or hypothecation but not against the stock of free-sale sugar.

The RBI should take a look at this piquant situation immediately and impose a minimum margin that is stiff enough to discourage the use of bank credit for speculative hoarding of stocks — say, 40 per cent for mills against free-sale sugar, and 50 per cent for traders.

Of course, in the ultimate analysis, prices will be determined by the demand and supply forces. To the extent that selective credit control is imposed, the cost of hoarding stocks will increase for the speculator, as bank credit is the least expensive for him.

(The author is a former officer-in-charge of the Department of Economic Analysis and Policy, RBI.)

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