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Sugar At Subsidized Rate

Posted in Finance Articles, Total Reads: 2769 , Published on June 17, 2012

The sugar industry is trying for the removal of obligation of carrying forward unlifted quantity of levy sugar. The sugar mills have to sell 10% of their production at a subsidized rate of 1,900 rupees per quintal every year whereas the market price is 2,900 rupees per quintal.

From last 6 years the government has not been able to lift even 50% of the levy sugar of their annual requirement for which the rest of the levied sugar is in inventory. And because of this the firms are making huge losses due to the unproductive inventory. The reason is that government has not been able to utilize the 10% of levied sugar which the firms have to sell at 1,900 rupees per quintal.

So the company has to store the rest amount of levied sugar out of the 10% which the government has not been able to utilize. And because of this the inventory cost for the company increases, but the price of the sugar does not change for which the companies are making losses. The government has implemented such plan for the benefit of the people who are very poor. If the government will lift this levied amount of sugar then definitely the lower class family will be suffered. Anyhow higher class family hardly faces any problem due to abundance of wealth. But the sufferer will be the lower class family.

Already inflation is very high right now and the value of rupee is getting depreciated on daily basis. At this time if the government will take such a decision, the inflation on sugar will increase. And due to this again the gap between poor and rich will increase. Rather if government will make an arrangement of flexibility on levied sugar on a quarterly basis according to the demand then the poorer class may get benefited. i.e., suppose the government predicted the demand of levied sugar for a quarter.

Let the prediction of government is 8%. So in this quarter companies will sell 8% of their production to government at 1,900 rupees per quintal. But if in this quarter the actual demand becomes 6%. So the government will buy 6% of produced sugar from the companies for which 2% of the sugar will be in the inventory of the companies. Now in the next quarter suppose the government predicts the demand of 5%. Now the companies will store 3% extra in their inventory. So the older inventory will be depleted within the next 3 months.

Now if the actual demand becomes more than 5% then the government can notify the companies that the demand is increased so that within some days the companies will provide the extra amount of sugar to the government at 1,900 rupees per quintal. In this way both for the government as well as the companies there will be a win-win situation. i.e., neither the government will face any type of shortage nor the companies will be at a loss for the unsold sugar at levied price.

But sugar is being produced on a seasonal basis i.e., mostly it depends on the production of sugarcane. So the government may face some difficulties in the initial period before the quarterly prediction of sugar, but after 3-6 months of the implementation of the plan the process will get smoother. And if the government will get success by making flexibility on amount of levied sugar on a quarterly basis then after sometime it can make the rules better. i.e., after 1-2 years government may reduce the time span of the levied sugar i.e., it may predict on a monthly basis for which the productivity of sugar companies will be improved because of lesser inventory costs.

Well, Right now Indian Sugar Manufacturing Association (ISMA) has written to the Union Food Ministry, seeking for the removal of the obligation. The government will notify Union Food Ministry regarding the decision after which we will get to know whatever the government is planning to do in this matter. Till that time we have to wait and watch for the decision of the government.

This article has been authored by Anjan Kumar Behera from IIM Lucknow.

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