There are compelling similarities in Indian sugar and cotton export policies. In both cases, the interventionist actions of the government have hampered the industry's ability to respond to favourable market conditions, unfairly squeezing their margins.
The presence of tradable surpluses that could not be exported has led to lower realisations to farmers, as domestic prices have been depressed.
For instance, undertaking sugar exports, even though it is under OGL (Open General License), can be procedurally costly and cumbersome. It relies upon a ‘premium skimming quota regime' for mills. This inflates the cost and is highly time-consuming. The rise in overseas prices has moderated. Exporters have failed to exploit the market. The very concept of “OGL” also stands negated, with such procedural hassles.
Likewise, cotton export policy is declared “free”, yet “restricted” with exercises to “scrutinise and revalidate” earlier authorisations. How can mandated compliance be questioned retrospectively when exporters have been issued “Registration Certificates” (RCs) to ship by DGFT, after examining bank authenticated Letters of credit (LCs), or proof of 25 per cent advance payment? Plentiful supplies have ensured that local prices are lower by 40 per cent over last year. How can producers be incentivised for future sowing?
The remedial suggestions are dealt with below.
Sugar policies
The principle of “equity and transparency” is currently applied for “quota determination”, and not for “sugar export”.
The dispensation of pro-rated quotas, mostly ranging between 10 tonnes and 2000 tonnes to each mill, are an enabling provision to make profit from prices of Rs. 2000-8000/t through paper trading ,when the mill has no intention to export or cannot export viably. This smacks of a mere pretense of equity.
Non-exporter mills do not partake in “export risk” or “market risk”. An exporter is always exposed to loss of profit, or outright loss and liabilities, without recourse to the quota sellers. On the contrary, a quota seller is rewarded with zero risk. How can such a procedure withstand the test of equity?
The “principle of equity” also implies that those who are ready with custom-cleared cargos at ports should be considered for first-come-first-served basis for evidencing the tonnage exported; this is against proof of paper agreements that are now deemed sacrosanct for issuing release orders (ROs).
Operational efficiencies differ with each geographical location, level of technology and financial resilience. All mills, therefore, cannot target profitable exports after loading premiums on a production cost of Rs. 23-26/kg, when dollar realisation hovers at Rs.29-30/kg, and is coming down. Inefficiencies cannot be compensated by gifting quotas — be it due to tolling operations or quality of sugarcane.
Against authorisations of three million tonnes, only 1.3 million tonnes have been exported.
Cotton exports
There appears to be a transgression of the rule of law in cotton exports. The greatest oddity is that once RCs are issued as per a pre-defined written understanding between the Government and the exporters, the former chooses to abrogate the said arrangement without any notice, not even allowing transitional arrangements.
The recent decision of the Directorate General of Foreign Trade (March 12) of providing case-by-case clearance against earlier RCs militates against the principle of “equity and transparency”.
Legally, that may be deemed discriminatory and declared untenable. How can a new criterion of RCs be implemented without making it public? If some “physical exports” were considered fictitious as reported, what precautions have been spelled out for making them infallible?
Only speculators, short of consignments, could have benefited from this policy reversal by notifying to buyers their “inability” to export by an act of Government. All genuine sellers may have suffered forced losses by disposing their stocks in the falling market.
SUGAR, COTTON PRICES
Proponents of quotas contend that domestic prices will surge by freeing sugar and cotton exports. So, bureaucratic speedbreakers should be built in to retard exports. This fear is irrational. First, exportable surpluses are fixed by the Government — whether through a quota regime or RCs. Any price spike will make the product uncompetitive and non-tradable abroad, as the collective wisdom of market is to maintain equilibrium.
Export of rice, wheat, corn, soymeal and many other sensitive items are on OGL, that requires no specific approvals by any Directorate. With the electronic data platform available at most Indian ports, all quantitative limits can be regulated on a real-time basis.
Neither Release Orders, nor Registration Certificates, are required for counting tonnage by authenticating paper contracts or letters of credits in New Delhi. Policymakers can intervene prospectively under abnormal conditions. Global transactions are based on speedy response to higher prices. The quota procedure is anathema to speed, induces inequity, inflates the cost of export and needs to be dispensed with. Policies should be simplified for export opportunities.
(The author is a commodities trade analyst.)