Commodity Commentary . Sugar sector reforms need ‘political will’

The government’s think-tank NITI Aayog recently set the cat among the pigeons by suggesting that the area under sugarcane cultivation deserves to be reduced. Surplus sugar production, inventory burden, huge costs associated with buffer stocks, incentive-driven export and not the least, water-guzzling nature of the crop, have all combined to be a bane for the sector.

The normal area under cane cultivation is 4.8-4.9 million hectares; but in the last three years, the area has gone up to 5.1-5.2 ml ha. Combined with improved input management higher acreage has resulted in the country harvesting cane in the 360-400 million tonnes (mt) range, which roughly translates to about 30 mt of sugar production.

Domestic demand for sugar is estimated at 25-26 mt, which leaves an annual surplus that translates into consumer-friendly sugar prices. The government encourages ethanol production too as biofuel to be blended with petrol.

From 2013-14, the country’s sugarcane harvest has stayed in the vicinity of 350 mt, with the exception of 2016-17 when output declined to 306 mt because of poor precipitation. In 2018-19, cane harvest reached a new high of 405 mt.

So, barring one year (2016-17), the country has had a decent level of cane output last seven years. Does it mean we have decisively broken the cyclical nature of cane production? Data of last 25 years would suggest that cane output and in turn sugar production was inconsistent.

Usually two good years were followed by a bad year and then possibly a normal year and so on. These variations resulted in wild swings in sugar production. During years of shortage, India had to resort to import to contain the domestic price spiral. In years of surplus, more often than not, exports had to be incentivised.

Because India has been and is the world’s second largest sugar producer after Brazil, whenever India had to import sugar, global prices immediately spurted and whenever India was in the export market, global sugar prices softened.

The larger question

To come back to NITI Aayog’s prescription that cultivated area for cane should be reduced by 300,000 hectares, the larger question to be answered is whether the cyclical nature of cane output has been broken decisively. Experience of last seven years would suggest, Yes we have. But if the past is any guide, we should be prepared for an occasional bad year, albeit less frequently than before.

Where or in which State should cane area be reduced? Surely, it is logical to think that States and regions with looming water shortage should be identified for reduction of cane area. Another consideration should be yield. Regions with yields lower than the national average may also be considered for cane area reduction.

Assuming an average cane yield of roughly 75 tonnes a hectare, reduction of 300,000 hectares would lead to reduction of about 22-24 mt of cane. If the economy begins to perform well with robust GDP growth in future, we should also factor in increased consumption demand.

The NITI Aayog recommendation to cut cane acreage, however well-intentioned, is most unlikely to be embraced by the sugar mills. After all, a large number of mills are directly or indirectly owned and controlled by politicians. Lack of adequate political will would most likely ensure that status quo continues with occasional lip service to reforms.

(The writer is a policy commentator and commodities market specialist. Views are personal)

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