The governments decision to fix ex-mill sugar price at Rs 49/kg raises doubts over its ability to do its basic job ie govern. It also creates a perception that regulators are either weaker than the millers or there is a clandestine relationship between the two sides.
Sugar production costs around Rs 25/kg at current level of sugarcane procurement price, fixed at Rs 80 per 40 Kg last year, and with incorporating fluctuation in open market rate of sugarcane. Hence, an ex-mill price fixed at Rs 49/kg essentially means that millers would be earning a profit margin of about 48 percent.
But this makes no sense; after all, the commodity was being happily sold at an ex-mill price of Rs 27/kg up until two months ago - yielding millers a decent profit margin of 8 to 10 percent. It is pertinent to note that the higher the ex-mill price, the higher government taxes would be, resulting in higher retail prices.
So, at current level of ex-mill price consumers would be paying Rs 60/kg, after adding the 16 percent GST and retailers margin. Should one then infer that higher ex-mill price is aimed at collecting higher GST from consumers pockets, or it is simply a phlegmatic behaviour on the part of the government?
The irony is that even if the government has good intentions, its hands are clipped as more than 80 percent of the countrys sugar industry is owned and controlled by several high profile political families. This conflict of interest leads to regulatory in-action, whether or not the mill owners are associated with the sitting government or its opposition.
If the government fails to keep a check right now, it can set a dangerous precedent, and who knows the consumer might be paying Rs 110 per kg of sugar in the near future. A proposal to raise next years sugarcane procurement price to Rs 150 per 40 Kg is already in place, in order to mitigate the expected impact of low crop yield. If that happens, then the ex-mill price could potentially increase to about Rs 92 per kilogram.
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