Commodity Analysis

India’s sugar subsidy: Why is WTO up in arms?

Rajalakshmi Nirmal | Updated on November 10, 2019 Published on November 10, 2019

Brazil, Australia and others say India’s sugar subsidies are trade-distorting. We show how India can present the realistic value of market support by basing calculations on a different provision under the WTO

Sugarcane is the most rewarding crop of all. While rural India is facing tough times due to falling prices at the mandi gate and rising input costs, cane growers have seen their incomes rise in past 5-6 years. The FRP (Fair and Remunerative Price) on cane, which is the guaranteed price paid to farmers, was ₹170/quintal for a basic recovery rate of 9.5 per cent in 2012-13. This now stands at ₹261.25/quintal for a recovery of 9.5 per cent or ₹275/quintal for 10 per cent. In Uttar Pradesh, Bihar, Haryana, Punjab and Uttarakhand, where the State government fixes the price for cane (SAP – State advised price), farmers received an even higher remuneration (SAP in UP is ₹315/quintal).

All the 50 million cane farmers across the country draw benefit of the FRP mechansim .

There are thus reasons why more and more farmers grow sugarcane every year. But in this process India has earned the wrath of large sugar players in the global market. In July, Australia, Brazil and Guatemala initiated dispute proceedings against India at the World Trade Organization, claiming that the country’s sugar policies are not compliant with WTO rules.

While the Indian government keeps claiming that all its supports are within the limits of the WTO, what’s the contention about? Why are these countries, which export bulk amounts of sugar, making India a villain, whose exports are much smaller than that of other countries?

Impact on global market

India has traditionally seen negligible excess production in sugar; the output swings between surplus and deficit.

But over the last two years there has been a significant jump in output of sugar attributable to higher yield, following adoption of new cane varieties and a very remunerative FRP.

India’s sugar output jumped from 20.3 million tonnes in 2016-17 to 32.5 million tonnes in 2017-18 and 32.9 million tonnes in 2018-19. The 2019-20 sugar season has begun with a massive opening stock of 14.2 million tonnes.

That said, India’s sugar exports didn’t see a big jump in the past two years due to lower international prices. India exported about 0.46 million tonnes of sugar in 2017-18 and about 3 million tonnes in 2018-19. It needs mention here that India’s exports account for only 5-6 per cent in the world sugar export, while Brazil’s share is 34 per cent; Australia and Guatemala together share 10 per cent.

Speaking with BusinessLine, David Rynne, Director, Economics, Policy & Trade, Australian Sugar Milling Council, said: “Something to be understood about global sugar prices is that big surpluses that are generated in countries such as India at the moment impact the global stocks-to-use ratio. So, even though stocks are sitting in shades domestically, the market anticipates that one day this sugar will be exported and does factor that into price…”

In 2018, as well as the current year, it has been observed that raw sugar prices globally have been sensitive to news from the Indian market on sugar output and subsidies by the government for mills and farmers.

For 2019-20, the government has announced export subsidies to the tune of ₹10.44/kg for exports of 6 million tonnes of sugar — the highest ever.

Weak global prices

Global raw sugar prices, after falling steeply in the first nine months of 2018 (16 to 12 cents/lb) following higher output in key producing countries, mainly India, saw a smart recovery in October (climbing to 14.7 cents/lb), thanks to news of lower exports from India, and Brazil shifting large quantities of its cane into ethanol manufacturing (reducing sugar output by around 10 million tonnes). But it didn’t hold for long.

Beginning 2019, prices started to wilt again with worries over bumper sugar output in India and the huge stocks the country will be carrying. Global raw sugar prices are at 12.39 cents/lb now versus 13.85 cents/lb same time last year.

Low sugar prices are hitting the bottom-line of sugar exporters globally. Despite mills in Australia, Brazil and Thailand producing sugar at far below the cost of mills in India, they are not making much profit.

Raw sugar production costs are $302/tonne in Brazil, $338/lb in Thailand and $377/tonne in Australia. Cost for Indian mills comes to over $444/tonne. The average sugar selling price this year is $400/tonne.

While Australia, Brazil and others have complaints over all forms of subsidies that the Indian government offers cane farmers and mills, the bone of contention is FRP.

Bone of contention

It is the high price paid for cane in India that has pushed more farmers into the crop, resulting in large surplus output of sugar, believe global sugar mills.

As per the agreement under WTO - Article 6, paragraph 4 of the AoA (Agreement on Agriculture), India can provide a product-specific AMS (Aggregate Measurement of Support) for sugarcane of up to 10 per cent of the total value of production of cane. However, according to a communication from Australia to the Committee of Agriculture, WTO, over the five-year period from 2011-12 to 2016-17, it appears India has provided sugarcane AMS vastly in excess of the limits.

In 2016-17, this stood at ₹656,163 million — that amounted to 94.4 per cent of the total value of cane production. If the SAP programme of the three large States — Uttar Pradesh, Maharashtra and Karnataka — is included, the MPS (Market Price Support) increases further, it adds.

It is the MPS value that decides if India is compliant with WTO rules or not. MPS is the gap between a fixed external reference price and the applied administered price multiplied by the quantity of production eligible to receive the applied administered price. To put it simply, it is the current FRP less the external reference price multiplied by total sugarcane produced (as all the cane produced in the country is eligible for FRP). The ‘fixed external reference price (ERP)’ is defined in Annex 3, paragraph 9 of the AoA, which states that this price shall be the average of the years 1986 to 1988.

Based on this, India’s ERP is ₹156.16/tonne (as per the Supporting Tables Relating to Commitments on Agricultural Products in Part IV of the Schedules).

So, if we take the year 2016-17, against ERP of ₹156.16/tonne, the FRP offered was ₹2,300/tonne and multiplying it by the total cane production of 306.069 tonnes for the year, the total support offered comes ₹656,163 million, which is 94.4 per cent of the total value of production of ₹695,260 million (value of cane production based on current prices as reported by the government of the year).

India’s defence

India refutes claims made by the complainants. It argues that it is only the mills (private limited or co-operatives; cane crushed by public sector mills is negligible) that offer the FRP support to farmers and not the government, and therefore MPS offered for sugar by the government is zero.

Not convinced by this argument put forth by India, the giant sugar exporters are now wanting a solution from the Dispute Resolution Panel of WTO. If the complainants get a judgement in their favour, India has to stop all the support it is offering to cane farmers and mills.

Even if one buys the argument of the complainants that FRP is only a programme of the government that is done indirectly through sugar mills, the method of calculating MPS is not acceptable.

Way out

When working out the difference between ERP and FRP, inflation is not taken into account and this results in MPS turning out to be an unrealistic number. So, is there a way out of this, for India?

In the paras 10 and 11 of Annex 3 of the AoA of WTO, there is solution, says Sachin Kumar Sharma, Associate Professor, Centre for WTO Studies, Indian Institute of Foreign Trade, New Delhi. “This alternate provision allows to calculate the support offered as a price gap, which will help show India’s support in realistic numbers and bring it within the allowed limits of WTO.” To calculate price gap, there is requirement of two prices — (a) target price, which will be the price that is being administered by the government to support the agricultural product; and (b) another price such as market price. In the case of sugarcane, target price would be FRP. Market price would be derived from current sugar prices, the relevant conversion cost, value of by-products and recovery rate.

Rather than using the market price support methodology, where the reference price is price of 1986, if the price gap system is followed, it will reflect the actual level of support to the sugar sector, says Sharma. “Under the price-gap system, workings show that from 2013-14 to 2016-17, the actual product-specific support for sugar ranged between 0.62 and 2.92 per cent during the same period, which is much below the de minimis level of 10 per cent under WTO.”

India has to, sooner or later, switch to a revenue-share model in cane-pricing and link it to the market value of sugar. This is good for the Centre and the mills. Immediately, however, to save itself from backlashes at the WTO, it can consider showing subsidies as per the price-gap approach.

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Published on November 10, 2019
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