Why is sugar industry politically influential?

In a candid moment during a TV interview, Jehangir Khan Tareen emphatically admitted “of course, sugar mill buys political influence; during the crushing season, it generates large-scale economic activity and employment opportunity for the entire village.” Ever wondered why rice or cotton millers are not branded ‘political barons”?

Pakistan has over 800 rice and 300 spinning mills, but only 91 sugar producing units. Although the term sugar barons is an invention of the 1990s, the regulatory distortion that has made sugar industry appealing to political families dates back to pre-independence.

Licenses for sugar production is issued under The Sugarcane Act, 1934, whereby only those notified by provincial government can set up a unit in “controlled area”. This License Raj ensures that the miller has a carte blanche over the cane grown in the reserved region, making it a buyer-driven market.

To balance the scales, the government is forced to enforce a countervailing mechanism of notifying a minimum support price at which cane may be procured from growers. In order to make the support price enforceable and not just a notional rate, it is clubbed with the condition of mandatory crushing. This means that mills must crush all harvested cane for so long as grower in the local area demands to sell at the notified minimum rate.

The colonial overhang over sugar industry regulation has created an economy of rents where the mill owner has a monopoly in the ‘cane area’, as it is the only buyer in the market. It is no surprise then that the industry has attracted those with political ambitions, even if the faces keep changing.

Why did it not happen for first four decades since independence? Because the legislation was designed at a time when sugar was a “rationed” item. Once the selling price of sugar was deregulated by early 1990s, setting up of downstream value-adding industry made sugar milling a hugely profitable business. The licensing regime, thus, also became a tool for political patronage.

An inquiry into the ultimate beneficiaries of subsidy on sugar export, thus, while welcome, addresses the symptom, not the cause. It should be of no surprise then that politically linked families that have set up milling empires with largest production capacities in the country are also the largest beneficiaries of export quotas. That’s just market forces at play.

The failure, however, is one of legislation, which allow chosen few to set up mills, under a licensing regime run by those in power, both political and bureaucratic. Unless the government goes the last mile and fixes the underlying regulatory distortions, it will only be creating martyrs, not addressing sugar shortages. Good for political mileage, bad for economy.