The Hindu Business Line : Set sugar free

ALARM BELLS HAVE begun to ring over the soaring sugar prices, in the cash and futures markets. The Centre is upset because of the potentially bitter political ramification. High sugar prices hurt consumers, already reeling under inflation; it could turn out to be a decisive negative factor in the Assembly elections coming up in a few crucial States. Cleverly, mills have distanced themselves from the price rise. Speculators are being blamed, though no one seems to know who they actually are. The Government's reaction has been knee-jerk. Additional free-sale quota has been released for the current quarter. Raw sugar importers have also managed to get a further grace of 12 months (making it 36) to fulfil export obligation, though such an extension will hardly help contain prices at present. Thinking that it is tightening the screws, the Government has directed the futures exchanges to impose stiff margins on open positions. But all these can have only a limited impact, that too for a short while. Fundamentals will catch up.

Indeed, the present price rise is the result of a supply-demand mismatch in the domestic market for the second season in a row. Given the ground reality — a steep decline in production and a rising consumption — no one can talk the market down. The market is unwilling to buy the Government's repeated assertions of sufficient stocks. In any case, the sugar market, as with any commodity, functions on the basis not only of current demand and supply but, more important, on expectations of future changes in demand and supply. There is no point ignoring the fact that this season the fundamentals support high prices, while the next season is 10 months away. It would be illogical to fault the futures exchanges; the trade activity merely reflects the collective expectation of market participants. You cannot blame the thermometer for the high fever. In any case, futures trading, by its very nature, cannot prevent a glut or a shortage. Indeed, one of the reasons contributing to the bullish tendency could be the repeated assertion that white sugar imports would not be allowed. The surest way of containing wild speculation is to keep the import option open.

In addition to current measures to contain prices, the Government needs to look beyond the short term. The sugar sector can no more be run by official diktat. It has to be market-driven. Reforms are the only way forward. Actually, it is time for total decontrol, without waiting for the October 2005 deadline. Abolish the monthly release mechanism with immediate effect. Let the government purchase sugar for the public distribution system from the open market at the going price. Open up white sugar imports and use the instrument of tariffs effectively to regulate imports. Competition will improve market efficiency. If some sick, inefficient units are forced to close, so be it. Consolidation of capacities, modernisation of processing units and standardisation of product quality need attention. Governments should get out of the business of running sugar mills. To attract much needed investments, the sugar sector has to be set free.

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