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Will Indian Sugar Industry Taste the Sweetness of Deregulation?

Posted in Finance Articles, Total Reads: 5017 , Published on November 30, 2012

Sugar industry is of significant importance to the Indian economy. Nearly 90 million people are dependent on either sugarcane farming or employment generated by the 637 sugar factories (as of end 2009) and other related industries using sugar in India. No doubt then why politics is the centre stage in the sugar business, but in this article we will ignore the political aspect of the sugar industry and try to see it from economic perspective only.

As it has been pointed out in the beginning a huge proportion of Indian rural population depends on this commodity though which is at the mercy of government regulation and governments intervention in setting base price for the raw material, i.e. sugarcane. Finally, if we look at this commodity from the suppliers’ point of view, again the sugar producers are bleeding, primarily because of the 10% of production that they have to offer to government at below the production price. General public seems to show its outrage against government on every matter where it has to pay a higher price, be it petrol, LPG, taxi fare or general effect of inflation. However, as sugar expenditures constitute a very small portion of the household budget, the public seems to be ignoring this commodity mostly.

Brazil Vs India

Brazil compares well with India in most respects, both are emerging economies, both had similar policies from 1950 to 80s, both started their liberalization process at approximately the same time, both have democratic governments. Starting from a similar regulated environment around sugar Brazil has taken a place which India has found difficult to imagine till now. Now India looks at Brazil as its role model and wants to replicate their success.

Brazil, the world’s largest sugar producer produced 36.9 million tonne in 2011-12, of which it exports nearly two third. It had decontrolled its sugar industry from 1991 to 1997 and since then sugar output in Brazil has gone up five times from seven million tonnes to 33 million tonnes. This shows that if done correctly, sugar production can be a profitable industry in the free market scenario. India, the world’s largest consumer of sugar on the other hand produced around 25 million tonne of sugar in 2011-12 and consumes nearly all of it. Indian sugar production faces the challenge of cyclicality where some years it has surplus and in another years it has to import sugar to satisfy domestic demand. Apart from cyclicality, there are many issues such as government regulations on supply side, inefficient manufacturing processes and fluctuating sales pattern which make the Indian sugar industry different from other industries.

In many respects the argument of protecting the interests of the poor Indian sugarcane farmers from the global competition reminds us of the argument against FDI in retail. But the government has finally taken the hard stance and is opening up a slew of reforms by the way of FDI in various industries – retail, aviation, insurance etc etc. Can the sugar industry also benefit if this run of reforms is extended to there? In this article I would try to show that this uniqueness of sugar industry is all artificial and created, rather than natural, and in a reformed environment it can all be changed.

Let us look how it all started and what are the salient features of current regulation:

In the first quarter of 1900’s when India was seeing sugar mills setting up in UP and Bihar it also observed that they faced adverse competition from Japanese sugar which was ruling Indian market. In response to the cry of sugar industry, the “Tariff Board” passed the “Sugar Industry Protection Act” in 1932. As per the Act, if it was found that sugar was being imported at the prices to make domestic industry ineffective, Govt. had power to levy additional duty on imports.

In the year 1950-51, the Government of India made serious efforts for industrial production of sugar.  The Government projected the license and instalment capacity for the sugar industry in its Five Year Plans. Sugar and Sugarcane became essential commodities under the Essential Commodities Act, 1955.  The Government has since then been following a policy of partial control and dual pricing for sugar. Under this policy, a certain percentage of sugar produced by sugar factories is requisitioned by the Government as compulsory levy at a price fixed by the Government in every sugar season for distribution in the Public Distribution System (PDS).  The non-levy (free sale) sugar is allowed to be sold as per the quantity released by the Government under the free sale sugar release mechanism.

The Government took steps to decontrol the sugar industry in phase wise manner by reducing levy quota from 40% prior to 2000 to currently 10% limit. The salient features of the regulation by the government, as of today are presented below:

The mill owners and many members of the parliament have been vying for deregulation for quite some time now, Committees have been formed and official tours of Brazil have been made to understand how Brazil has successfully achieved the deregulation.

What the future holds:

Brazil has achieved this leadership in global sugar market after it deregulated the industry. It encouraged higher sugar production; private participation was encouraged, increased scale of mill and farms. Brazil has also adopted a dynamic management of product mix between sugar and ethanol, which enables it to respond to global shifts in demand and supply. Rapid modernization of its ports and investment in transport infrastructure has also been key driver for low cost.

Over the next 20 years global sugar demand is expected to reach 260 million tonnes from the present 160 million tonnes, nearly 65% increase in demand by 2030. At present, world depends on Brazil for sugar supply, which currently accounts for 45% of the global exports. Brazil alone cannot supply the increasing demand over the years, as the production can increase to only as much as the farmers can produce. This opens an opportunity for India to come ahead and take advantage of its position as the second largest producer of sugar. Looking at the past 20 years trend of sugar import export in India it appears very difficult to cash in on the opportunity knocking the doors. The inherent cyclic nature of Indian sugar is shown in the graph below. India needs to take certain drastic steps to move out of this import export cycle, which is the result of cyclicality of production.

Indian government will have to decide – whether it wants to please the farmers, the mill workers, mill owners, the public, or the politicians selfish needs. In its pursuit to please everybody it is doing good to nobody. Indian land is fertile, it has huge farmer population, it has the biggest domestic consumer base and a developed market for sugar, but the regulation is creating an atmosphere of laid back attitude. Farmers have no incentive to improve their productivity as they know that government would keep increasing the minimum statutory & remunerative price of sugarcane. The sugar recovery % cane has improved by just 1% over the last 30 years in India, Mills have no incentive to improve production or utilize its capacity because government restricts the amount they can produce and sell. Indian consumers are paying one of the highest prices for sugar right now. And the surplus that mill owners have cannot be sold in the world market at the price which mills want to sell it, as there are no takers for it at that price.

Deregulation does not mean that the government just let off its control from over an industry which has been shaped in its current form (which is not very good, let’s be clear on that) by the government over a period of more than half a century. The apex sugar industry bodies ISMA and NFCSF are seeking partial decontrol of the sector and freedom to sell the entire stock in the open market. The Sugar Industry will compete in the free market and find its way towards better productivity and would flourish on its own, taking ahead all those involved in the process. Rather than tightly controlling at each step of sugar production, government should:

Industrial demand for sugar from food and beverages companies like Cadbury dairy milk, Pepsi and allow the private and cooperative sugar producers to buy sugarcane from farmer; to protect the farmers’ interest, government can then buy the remaining sugarcane for its public sector sugar mills.

The way ahead

Government need not open FDI for sugar as it is doing for the other industries, still the private market in India is mature enough to identify the future opportunities and bet big bucks in this industry for its growth. Privatisation and freeing up of the industry would also break the laid back attitude of people engaged in this industry and motivate them to work towards increasing the productivity. Out of the estimated market size of 260 million tonne sugar requirement in next 20 years India should be able to supply at least 35-40% sugar, including its domestic consumption.

India cannot be on a back foot based on a few of its prior experience, the economy as a whole has changed to a great extent since then, most of the other sectors are deregulated and liberalized, economy is growing at rates never seen before and moreover, long term gains will overshadow the short term losses by deregulating the sector. If govt initiates phase wise reforms in the next few years, with a a long term policy and consistent framework, India’s sugar industry will not only be a major player in the international market but also provide a major boost to the quality of life of people associated with the sugar industry.

This article has been authored by Kunal Gupta from NMIMS.

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