Sugar has always been a political hot potato, if you will excuse the weird metaphor.
The sugar lobby dominates politics in Maharashtra and is influential in a few other states as well. Meanwhile, higher incomes have ensured that sugar consumption has climbed in India.
Pressures from both sides muddy the policy waters: The former group has an interest in higher prices while the latter group prefers lower prices.
This could be said about most economic activities, but governments usually let the market work out a balance. Sugar continues to be a tightly regulated activity, with successive governments imposing export curbs when prices climb and buying sugar from the world market when prices rise. The result is huge swings in sugar prices.
We are now seeing an upswing—and the usual ban on forward trading in sugar and cheap talk about huge imports to bring down local prices are much in evidence. Global sugar prices are now at their highest level in at least two decades because of poor production in India. But this price rise follows a collapse in world sugar prices last year.
The underlying problem is volatile production. As a New York Times story republished in this paper last week shows, farmers in India’s sugar bowl respond to price signals with alacrity, as any rational producer would. The story cites the example of a farmer who shifted his 6 acres from cane to bananas after sugar prices fell 40% last year.
The price elasticity of consumption seems to be far lower. Consumers do not stay away from sweet tea and mithai (sweets) because of higher prices. The government will have to buy an estimated 4-5 million tonnes of sugar this year at a cost of around $2 billion.
India alone is not to blame. The global sugar trade is also hobbled by European protectionism and subsidized ethanol in Brazil. But the government should, despite these global factors, realize that its heavy intervention to suppress the local sugar market helps neither producers nor consumers.
What can be done to address the record sugar prices? Tell us at firstname.lastname@example.org