No matter what you do, you never win: Indian sugar industry By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

June 11, 2015 | Posted by bobbysrinivasan << back to blog

According to the Indian Sugar Mills Association (ISMA), the country’s production is estimated to touch 28.2 million tonnes for the current sugar season as against 24.4 million tonnes last year. This output is the highest since 2006-07 when it touched 28.4 million tonnes. It also touched a low of 19.3 million tonnes in 2005-2006. With this high output combined with an existing inventory, we will end up with an inventory of 10.3 million tonnes by the end of Financial Year 2015-16. Basically this is a glut in production and hence inventory. How and why did this happen is the discussion between a student and his professor.

Student: Professor, I read in the papers that the sugar glut is having a big toll on the prices.

Professor: Yes indeed. The price varies between 23,000 to 26,000 per ton. The global prices are also depressed and we have been able to export only 4.6 lakh tonnes until the first week of May inspite of all the government incentives. The government had stated earlier that it will offer Rs. 4,000 per ton subsidy upto 14 lakh tonnes of raw sugar.

Student: I know the government will extend a helping hand to the sugar-cane growers. But is that enough?

Professor: You see Maharashtra, U.P. and Karnataka are big players in the market producing sugar. Look at their outputs (till May 2015).

State	Sugar Production
State	Current Year	Last Year
Maharashtra	10.4 Million tonnes	7.7 Million tonnes
Uttar Pradesh	7 Million tonnes	6.5 Million tonnes
Karnataka	4.9 Million tonnes	4.1 Million tonnes

From the data you can see that every state is producing more sugar than before.

Student: How does the sugar economics work?

Professor: The sugar-cane arrears has gone up tremendously from 18,350 Crore last year to 21,800 Crores this year. For the farmers the sugar-cane arrears have doubled in the last 4 years. Yet the farmers are happy to cultivate sugar-cane. It gives approximately 50% higher return than the competing crops like wheat and paddy, cotton, soya etc. So how can you discourage the farmer from bringing more lands into sugar cultivation?

Student: Is the sugar market facing asymmetric information?

Professor: Of course, yes. There is a huge information gap. No individual farmer knows what the other is doing. They look at the market price and their production cost. So it makes sense to them to shift the land into sugar cultivation as it brings the best return. Every time the government interferes it is either relating to subsidy or price support. Time has come for the government to engage in proper forecasting to ensure that demand and supply are at a manageable level. What good it is if prices crash in one year and the farmers shift to other crops. Then next year sugar shortage will appear.

Student: It is not at all clear to me as to what should be the role of government in regulating food production. Professor, you have any idea.

Professor: As long as margins vary among cultivated crops be it wheat or rice, farmers will always look for the best returns. If the margins are low they shy away from producing such foods. The sugar industry has been facing pricing problem as the current sugar selling price is Rs.22 per Kg, while the cost of production is 25-28 per Kg. It is just bad. The cabinet committee on economic affairs has offered an interest free loan of Rs. 6,000 Crore to the sugar sector in the next one year, while the cane arrears stand at around Rs. 20,000 Crore. You see it is all a mess. Let us wait and see how all these things pan out in the financial year 2015-16.

Student: Thanks Professor.

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