Subsidies, market support have turned sugar into an anachronism

| Updated on November 13, 2019

In post-reform India, sugar remains an enclave of protection and political patronage.

India’s sugar sector is in the eye of a global storm for its subsidies in the form of price support and for exports. India has been producing far more sugar than its domestic market can absorb. This glut, triggered by price support, is believed to be holding down world sugar prices, as a result of which Australia, Brazil and Guatemala have dragged India to the WTO (BusinessLine, November 11). Sugar output has risen from 20.3 million tonnes in 2016-17 to 32.5 million tonnes in 2017-18 and 32.9 million tonnes in 2018-19, while consumption remains constant at about 27 million tonnes. The problem of excess is likely to persist in the 2019-20 marketing season, despite a lower sugar output. India’s capacity to export (at three million tonnes in 2018-19, it is 5-6 per cent of world sugar export) remains constrained because of its higher cost of production. To deal with this excess, the industry has received a buffer stock subsidy of ₹1,674 crore for holding four million tonnes, and an additional ₹6,268-crore export subsidy for exporting six million tonnes. The latter works out to a subsidy of ₹10.44 a kg, which is roughly estimated to be the difference between the Indian cost of production of ₹30 a kg and the globally competitive price of ₹20 a kg. It would appear that the case made out by Brazil et al is flawed; India’s sugar price support (or ‘fair and remunerative price’) does not seem to exceed the WTO limit of 10 per cent of the value of the produce in question, if the reference price is adjusted for inflation. But there can be no case for an export or buffer stock subsidy, besides interest subvention, which discourages the industry from improving efficiency. Sugar remains an enclave of protection and political patronage. It is a striking anachronism in post-reform India.

While it is true that India’s FRP has increased from ₹170 a quintal in 2012-13 to ₹275 a quintal today, raising costs of sugar mills, the industry’s inefficiencies are well known. Sugar mills do not reinvest their surplus in modern technology. They are assured of State support at every adverse turn. Managements of sugar mills use the proceeds for pursuing commercial and political ambitions, while running up debts that remain unpaid.

A sugar export subsidy should be replaced by incentives for ethanol production. The Centre has done well to push ethanol production by encouraging both the producers and the oil marketing companies in this regard. Ethanol can be produced from sugarcane juice, besides molasses, without its requiring a separate environmental clearance. India’s ethanol output of three billion litres in 2018 falls short of its consumption of 3.8 billion litres. With blending slated to rise, this output gap would need to be closed.

Published on November 13, 2019

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