The Hindu Business Line : Centre should come clean on sugar situation

New Delhi must find itself in an awkwardly defensive position following its latest decision to allow sugar import with only countervailing duty. It is unclear what prompted the move to open up imports when all along policymakers have been asserting that sugar production in 2006-07 would be an estimated 191 lakh tonne, substantially higher than in the previous year's 130 lakh tonne.

Estimates flawed

What's clear is that the Union Government's production, demand and supply estimates of sugar and many other essential commodities seem to be seriously flawed, exposing once again the hollowness of research and commercial intelligence in New Delhi's policy-making circles. Worse, the recent developments can potentially raise suspicion, albeit incipient, that some insiders could be playing the market.

What can explain the current mess up in the country's sugar economy? It is absolutely essential for the Centre to come clean on the sugar situation and reasons for opening up imports when all along sugar imports were being projected as something most undesirable and unwarranted.

It was only a few weeks ago — in fact, earlier this month — that the Union Government talked about sugar exports through the State Trading Corporation of India (up to 1.5 lakh tonnes) in addition to those under the export obligation route.

Unless the policymakers were convinced that the overall supply and stock situation was comfortable, there was absolutely no justification to even talk about sugar exports through STC. What changed in the last two weeks? Nothing really.

Sugar prices have been hovering around Rs 2,000 a quintal. With the crushing season coming to an end and festival season weeks away, it is but natural that the market would begin to show signs of firming. Seasonal factors usually come in to play at this time of the year.

But, given the large production numbers religiously floated by the Union Government in recent months and consistently seconded by the industry in its own self-interest, there is no warrant for a sharp spike. Nor has there been any alarming price signal.

The fact, however, remained that while wholesale prices were in the Rs 2,000-2,100 a quintal range, retail prices were Rs 24-25 a kg.

Ironically, it is now conceded that imports are unlikely to bring domestic prices down, given the high international market rates caused by tightening supplies due to diversion of cane for ethanol purposes, mainly in Brazil. If imports are not feasible, then the very rationale of opening up imports becomes questionable. Who is this Centre trying to fool? The next question that needs an answer is if policymakers thought demand-supply fundamentals were well balanced but current prices were out of sync with the physical market conditions, then one must go into the reasons for the price play. It is clear, too much money has been allowed to chase the commodity. But no step has been initiated to curb the flow of speculative funds into this commodity.

Will decontrol happen?

Amid these developments, the decision on total decontrol has been put on the backburner. There is no reason for controls such as levy system and monthly free-sale quota to continue. Full decontrol should have taken place by October last year; but currently there is nothing to suggest it may happen in the new season beginning October this year.

Financially, most of the private sector sugar units in the country are doing reasonably well. An indication of this is available from the sharp rise in share prices of leading sugar mills over the last one-year and more.

The same cannot be said about sugar co-operatives. But, frankly, sugar co-operatives are not doing well and will not be able to do well because nothing concrete has been done in the last three years to strengthen them.

They have continued to remain enervated.

With the announcement of a liberal import policy and prospects of import prices remaining high, talks that subsidies are necessary to contain prices have begun to do the rounds in the market. It is a cruel joke on the stakeholders of the country's sugar economy and reflects policy failure.