The epidemic of farmer suicides in Maharashtra has slowly spread from the cotton-growing regions to the sugar-cane belt. One big reason is the collapse of sugar prices over the past few months. Domestic sugar-cane production is expected to rise to a record 25 million tonnes (mt). Demand could be around 19mt. This imbalance will almost certainly pull down sugar prices further—unless more of the commodity is exported.
That, the Union government claims, is the reason why it has had to announce a huge Rs850 crore subsidy package to help sugar exports. It also plans to buy 2mt of sugar over the next two years to create a buffer. In doing so, the government hopes to stabilize domestic sugar prices and pass domestic uncertainties to the international market. Is this is viable long-term strategy?
We doubt it. First, this attempt to push up sugar prices makes little sense when the government is trying to curb price rises in other commodities, such as cement. Beyond this obvious contradiction, there are other reasons why paying sugar companies to export makes little sense. The export subsidy is a sop to sugar companies, many of which are in the influential cooperative sector. This is why sugar company shares have again attracted investor interest in the stock market. The export subsidy is also a tax on domestic consumers. And there is little in it as far as solving the long-term problems of sugar-cane farmers goes.
A rise in sugar exports will push up domestic prices and (depending on production in other major sugar-producing economies like Brazil) bring down international prices. So domestic consumers will suffer at the expense of consumers in countries that import sugar. It could be argued that this is to help the suffering domestic sector. However, the government has offered no proof of whether the monetary gains to sugar companies are more than the welfare loss suffered by Indian consumers.
The new export drive follows a period when sugar exports were banned to keep domestic prices down—and when consumers were mollycoddled at the expense of producers. This flip-flop is, unfortunately, completely in sync with the general direction of sugar policy in India. Micro management has been high fashion, as successive governments have tried to fix sugar prices by controlling imports and exports and through monthly releases of free levy sugar into the market.
Not that this excitable tinkering has worked. Sugar prices continue to be volatile. There is little evidence that price-fixing mechanisms have significantly reduced the volatility of sugar prices. A vibrant futures market is a better way to help spread price risks, but that is too much to expect from a government that considers forward trading a form of dangerous speculation.
The sugar sector is crying out for reforms. As in many other countries, it is tightly regulated. No sugar factory can come up within a 15km radius of another, for example. This means that farmers have little choice in which mill they sell cane to. There are even stringent rules on the types of gunny bags that should be used when sugar is packed. A lot of these absurd rules were put in the Sugar cane Control Order 1966, which has survived 15 years of general economic reform. A 1998 government decision to delicense the sugar industry is still pending before the Supreme Court.
The global sugar market, too, is a bitter mess. Most of the richer sugar-producing countries, including the US and members of the EU, give huge subsidies and protection to their sugar farmers.
The World Trade Organization has tried to settle these issues, but with little success. India needs to push for more open domestic and global sugar markets, because they can do far more for its farmers than short-term actions like export sops.
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