If a homeowner finds gold while shovelling through his backyard, should he sell it at a price that is equal to sum of cost of shovel, labour, and a 15 percent profit margin? If the readers find the suggestion absurd, they should get themselves a copy of 347-page stomach-turning Sugar Inquiry Report – and what a Kafkaesque delight it is.
A lot has been said on the media since the report became public two weeks ago, and will continue to be said until the next inquiry commission is set up to probe into “abnormal profits” made by other industries such as auto, cement, refineries, IPPs - and who knows – one day, even commercial banks. The democratic revolution ushered in May 2018 by a section of bourgeoisie will not relent before it extracts its pound of flesh from all businessmen “elites”. After all, the seeds of this revolution were sown when arbitrators of justice in this country wisely declared that “behind every great fortune is a crime”.
Till then, some comments, because that is all policy analysts can do when proposals of structural reforms are rubbished to make way for witch hunt. And the one conclusion that jumps out repeatedly upon reading of the report is a morally righteous obsession with the ‘right’ selling price.
The premise of the inquiry is based on identifying the cost of production across the industry, and then using it to determine whether increase in domestic retail price charged during last year was fair or not. Thus, the inquiry is forced to rely on a cost-plus pricing model, a fundamental error that will ensure it fails the test of both common sense and elementary economics if ever placed in front of independent experts. Unfortunately, the ridicule that may follow will see to it that even the more reasonable recommendations such as improving estimates of crop survey, strengthening Crop Reporting department, mapping suitable areas for cultivation, and increasing crop yield - are also side-lined. So much for the movement of change.
No law, precedent, or regional comparison, for example, is cited to establish that commodity producers must sell their output at ‘cost plus a reasonable margin’. Granted, that price of sugar is regulated under “The Essential Commodities Act, 1957”. But so are coal, timber, cotton textiles, tea, and even shaving blades. And while the Act empowers government to control price of essential goods for public benefit – itself a questionable goal - nowhere does it demand that these commodities be priced based on their cost and not on prevailing market price determined by their supply and demand.
Over the last century, commodity prices have witnessed a secular decline in prices (in real terms) due to advances in productivity. Unlike tech or fashion where firms can charge a premium based on innovation or branding, across the globe today firms enter commodity trade precisely because they seek to make excess returns by taking advantage of market timing.
This space will make an attempt to dissect the claims made in the inquiry report over the course of next month – from market manipulation through satta, catelization, hoarding, justification for export and subsidy, off-the-book sales and stocks, suspicions raised on recovery ratio, effect of debt, loans to growers, and failure of various regulators in fulfilling prescribed responsibilities.
Afterall, claims such as fraudulent exports to Afghanistan need to be addressed, as the failure – if true – goes beyond usually chastised department of Customs to include the central bank, which receives, records, and controls not only claims of subsidy but also realization of exchange proceeds against exports.
But, at the heart of the inquiry is a deeply troubling lack of faith in functioning of markets, and mistrust for market players to act in profit seeking motive without attempting to circumvent the law. This has exposed itself in disclosure of financials and commercially sensitive information of private-limited firms to the public at a fact-finding stage. Similarly, allegations of fraud are frightfully material, which also raise suspicion on the credibility of the external auditors employed by the industry – often from big 4. And the buck will not stop there, as malpractice qualifies as a ‘materially adverse’ change in circumstances, meaning the reputational loss may not only cost customers (both domestic and foreign) and banking relationships to the sugar mills, but also to business groups affiliated with them.
Back in January, the federal government set out to do something right by aiming to unravel the causes of cyclical shortfalls and surpluses in the sugar industry. Instead, it has given into bureaucratic laziness by making presumptions about guilt. One hopes that the political mileage gained is worth loss of business confidence.