Sugar de-control: Everyone’s smiling, for now

There couldn’t have been a more opportune time than this for the UPA-II Government to unleash the long-awaited decontrol on the sugar sector. At present, prices of the sweetener are bearish both domestically and globally, on abundant supplies.

Last week, the Government freed up the sugar millers from the obligation to sell a tenth of their produce at a lower price for sales through the public distribution system. It also allowed the millers to sell sugar as and when they feel.

Besides benefiting millers and farmers, as the former is expected to take advantage of the decontrol to clear the latter’s cane arrears, the recent Government move is expected to sweeten the sugar for consumers, though only initially. This is not necessarily due to the influence of the bearish global prices that are at a two-year low, but because of the anticipated rise in domestic supplies over the next few weeks.

The cash-starved millers, both in the co-operative and private sectors, are already rushing to sell part of the stocks to tide over their cash flow issues. This is even as cane crushing has entered the last phase in the current 2012-13 season and millers are struggling to make payments to farmers as the cane arrears inch toward the Rs 11,000-crore mark.

The rush to sell will exert further pressure on sugar prices and may eventually benefit the consumer for the next few months. As reflected in the futures contracts, sugar prices, which edged up a bit in the immediate aftermath of de-control, have now erased the gains to trade lower.

Industry officials expect the prices to come down further from the current levels by about Rs 1.5 a kg as the removal of levy is expected to help the millers to an extent of Rs 3,120 crore. Further, the freedom to sell would help millers control their interest outgo. The average stock held by the industry stands at around 10 million tonnes, across the year. At present, the stocks are at over 17 million tonnes. India is the second largest sugar producer after Brazil, and the largest consumer. In the current year, the global surplus is estimated at 10-12 million tonnes and production in Brazil has been revived after two bad crops, impacting the prices.

Consumers stand to benefit from the bearish global sugar prices, which will remain at this level at least for about a year given the current glut. But to tackle any volatility in prices, the Government has already equipped itself to protect consumer interests by regulating the flow of the sweetener through a tariff mechanism introduced in the Budget 2013-14.

Finance Minister P. Chidambaram has made an enabling provision to impose duty of up to 20 per cent on exports of raw sugar, white or refined sugar. Similarly, in case of imports, there is already a provision to increase the customs duty to up to 60 per cent to control the inflow of sugar. However, the current import duty stands at 10 per cent. At present, the exports are not viable as domestic prices are marginally higher than international prices.

The domestic production in the current year is estimated at 24.6 million tonnes, higher than estimated consumption of 22 million tonnes. The domestic output may shrink next year as drought has affected planting in Maharashtra and Karnataka.

But, to what extent the growers in the largest sugarcane producing state of Uttar Pradesh will offset the decline in Maharashtra acreage by planting more cane will depend on how quickly the millers clear the cane arrears, which currently stand at Rs 5,830 crore in the State.

As global sugar prices are bearish now, the Government’s move seems to be a win-win for all stakeholders. But, whether consumers will be forced to shell out more for the sweetener once supplies turn tight, remains to be seen.