Higher import tariff is no sweetener

With Indian sugar being decontrolled on April 4, 2013, the onus of dealing with producers (sugarcane farmers and industry) and consumers, especially those catering to PDS (Public Distribution System)/levy, has shifted from the Centre to the State governments for next two years (up to 2014-15).

No formal consent of the States was secured before the announcement of decontrol. The Centre continues to maintain its hold on import and export trade of sugar

The fundamentals of Indian sugar in 2012-13 reveal a comfortable supply side of 32 million tonnes (mt) consisting of production 24.8 mt, stocks 6.5 mt, and imports 0.7 mt. The annual demand of 22 mt remains constrained because levy/PDS sugar requirements of 2.5 mt are non-existent after decontrol, and routine annual exports of 1.5-2 mt are unviable.

Sentiment of excessive oversupply has kept market prices below the cost of production. Conservative estimates of stock for the next year (2013-14) are 8-9 mt. Net result: Industry and farmers are in a mess. The exuberance of decontrol is over and it is time for a reality check.

Big Bearishness

Since April 2013, spot domestic prices of sugar dropped from Rs 34/kg ($600/t) to Rs 32/kg ($565) on June 7, 2013. About 2.5 mt — 10 per cent of production of 25mt — that was held back by the industry for “PDS/levy-a/c the Government” and which costs around Rs 34/kg ($600) has become “extra” in the open market leading to price depression.

States have not actively responded in covering PDS demand and neither is there any hue and cry due to absence of PDS distribution. The monsoon is advancing well in India, bringing with it good prospects for the next crop.

Unviable Exports

Average export volumes, at 1.5-2 mt annually since 2008 onwards, are not viable because the SAP (Sugarcane Advisory Price) of Rs 250-280/quintal was determined arbitrarily by States, while the FRP (Fair Remunerative Price) fixed by the Centre was Rs 170/quintal (2012-13). On June 7, 2013, Brazilian raw sugar was $364 f.o.b/tonne and $400 c&f and white sugar $500/tonne c&f for 150 Icumsa (a good variety of white sugar). Indian export price of $600/t fob, even after rupee deprecation to Rs.57, is patently unworkable. Brazil and Mexico are flush with raw sugar. A combination of four factors — availability of PDS/levy quota for trading, lack of export viability, non-existent PDS requirement and about 0.7 million tonnes of cheaper raw sugar imports with 10 per cent import duty (which cost $500/t or Rs 29/kg) — is financially crippling the industry.

It is unable to pay cane arrears to farmers of around Rs 12,000 crore ($2.1 billion) due to accumulated losses. Agriculture Minister Sharad Pawar has written to the Prime Minister on June 6, 2013 for a hike in Customs duty, presently at 10 per cent, to 30 per cent, to discourage imports. The proposal has been pending for the last six months. The intention is to “increase” domestic price to assist the industry and the farmer.

Additional Import Duty

With the above surpluses and 8-9 mt opening stocks next year, there is hardly any possibility of domestic values firming up; duty imposition will be a cosmetic exercise. It might mollify the tempers of industry, seeking all avenues of protection. The “Advance Licence Route” (ALR) is open to industry for import under which “grain to grain” sugar has to be re-exported in the next 36 months. However, the possibility of diversion to the domestic market cannot be ruled out, as the Centre does not control the release mechanism any more.

Tariff imposition beyond 10 per cent is not a good idea. The effort should be to compete, converge and integrate with the world market. If economies of scale are to be attained, then trade cannot be limited within national boundaries. Increasing duty to 30 per cent is akin to banning imports, giving a licence of inefficiency to the industry and right to States to politically fix sugar cane prices.

Had the State government(s) followed the revenue-sharing formula with farmers as envisaged by Rangarajan Committee, instead of the irrational State Advisory Price methodology, the issue of arrears would have been resolved. Now, the Agriculture Ministry’s attempt to bail out the UP Government’s flawed policy for the sake of farmers and electioneering is devoid of any tangible benefit.

So far, decontrol has not helped the industry. Nor will the duty hike until sugarcane price, which constitutes 80 per cent of the production cost of sugar, is rationally determined.

(The author is a grains trade analyst.)

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