Column: Sugar-coating subsidies

Mar 15 2014, 02:51 IST
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SummaryA fixed subsidy on raw sugar, without considering inherent market volatility, is questionable

On February 28, 2014, the government notified an export incentive/subsidy of R3,300 per metric tonne (pmt) or $53 pmt for 4 million tonnes raw sugar out of the Sugar Development Fund (SDF). The total implications are of $212 million or R1,300 crore. This will stimulate demand expansion and better price

realisation by shipping out excess stockpiles during 2013-14 and 2014-15, helping to partially clear the arrears payable to farmers. About 1.3 million tonnes of raw sugar has been shipped out this marketing season. The target

has been set at 2 million tonnes by end-September 2014.

The gazette notification of February 28, 2014, is retrospectively applicable from February 1, 2014. Whenever an order is backdated, corporate organisations that are privy to the details before notification become the preferred beneficiaries. Refined sugar—a value-added product—is excluded from this policy prescription for unknown reasons! This incentive ensures cheaper supplies abroad while locally, raw sugar becomes expensive—a defiance of WTO commitments.

The government, in its decision, was guided by the fact that prices of raw sugar bottomed out at 14-15 cents/lb or $320-343 pmt in the New York exchange. Therefore, exports were not viable without the incentive calculated at R3,300 pmt. Commodity markets have violent fluctuations. In the recent past, the “price band” of raw sugar has been rather elastic, at 14-30 cents/lb. Policymakers cannot be oblivious of this fact. (A variation of 1 cent/lb changes the price by $23 pmt.) Potentially, the price can easily swing between $320-$690. Therefore, the incentive needs benchmarking with prices abroad. Put simply, higher prices of the commodity should lead to corresponding reductions in the subsidy and vice-versa. Dispensing a 'fixed' subsidy without considering inherent market volatility is grossly erroneous and questionable.

Pursuant to the incentive, the global prices should have further declined. But negating logic, raw sugar values immediately climbed up by $70-75 pmt (3c/lb), assuring better realisation for the Indian traders. The conditions existing a month ago have radically mutated for bullishness. Dry weather in Brazil and the possibility of the El Nino effect on crops may provide additional boost to a rising market. This doubly reinforces the rationale behind pegging the incentive to international quotes. Thus, the lacuna requires immediate official correction, even though the sugar industry may support the status quo.

Another selective dispensation and discrimination is accorded to the few holders of the advance authorisation licences (AAL). Only AAL-holders can export refined sugar with duty draw back benefit

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