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Less than four months into the release of “bombshell” Sugar Inquiry Report that lambasted country's export policy for causing a domestic price spiral, another export quota may be on the cards, come crushing season in December-2020.

This was bound to happen. Does the government want it? No, because nothing says a “U-turn” more than first burning bridges with party financiers publicly, only to have to make a humiliating peace offering in less than a year. Should it? No, because the prospective export earnings of less than $200 million are far too meagre for government to dish out funds out of public kitty, at a time when fiscal space is already vastly limited than 2017-2019. Will it? It depends on the promptness of its strategy, and whether it can pre-empt a demand for subsidy by taking mitigating action soon.

How did we get here? A quick recap. Bumper crops in 2017 and 2018 led to a surplus sugar supply that led to delayed crushing, causing losses to farmers for two seasons. By the time the last regime took mitigating steps by allowing exports with freight support, farmers had already turned their back on the crop. While the incumbents claim they were “misled” into continuing the export policy, by Dec-2019, crop was in short supply domestically, leading to a price spiral that saw retail price peaking around Rs 83 per kg by Feb-2020. The inquiry and media trials that followed are now etched in public memory.

Fate, of course, then took an unpredictable turn with the onset of Covid-19 and lockdowns, which some believe have turned a year of shortfall into one of surplus. Domestic stock availability for 2019-20 marketing season stands at 5.3 million tons, which includes carryover stocks of 0.5 million tons from last year. This is against annual estimated demand of 5.4 million tons under ordinary circumstances. Except, if commentators are to be believed, there is nothing ordinary about consumption patterns this year when economy is undergoing a Covid-led slowdown.

Back in May-2020, industry sources estimated that monthly consumption will slowdown by ten percent. Retail price - which now appears to have stabilized around Rs 80 per kg - is 30 percent higher compared to last year, and is bound to have a limiting effect on demand, unless demand for sweetener has zero price and income elasticity.

If the ten percent slowdown in demand is correct, it means the industry may end the marketing year with carryover stock of 0.5 million tons. Had the industry been looking at another season of crop shortfall, the ending inventory would not cause alarm. Except, conflicting reports to this effect are raising concerns in official quarters.

After two years of getting kicked in the shin, it appears sugarcane crop is back in the game. Those who had turned to competing crops such as cotton and maize have been sorely disappointed, whereas rice is expected to suffer a setback as export demand slows down.

Meanwhile, shrewd growers that had stuck with sugarcane in 2019-2020 season raked in huge profits as the crop traded at a premium – Rs 230kg per 40kg – above a minimum support price that had already been increased by Rs 10, to Rs190kg per 40kg.

Come Dec-2020 – a bumper crop would eventually mean that domestic market prices will spiral down. A prospect that will be unacceptable to mills as their cost of production has permanently increased with a rise in support price (at least theoretically).

The resulting friction will inadvertently lead to delay in crushing, an episode that both the public and policymakers have witnessed far too often.

This is where the incumbents must take stock of the situation. Before the farming lobbies and innumerable Kissan Ittehads are up in arms due to delayed crushing - which may then be used as a justification to extract ill-thought subsidy over exports – it would be wiser if the eventuality is avoided altogether.

One strategy would be to stop fighting the market forces by restoring exports immediately. Global demand compression has led to a slide in sugar prices internationally, leading to a downward spiral in prices. This has led to erosion of the short-lived competitiveness of domestic sugar in export market.

This means that only the most efficient players may be able to export at current prices, which is anyway a wiser strategy than subjecting the industry to cycles of patronage and vilification. Access to international markets will also mean that domestic price will remain range-bound around current prices, instead of falling due to forecast of bumper crop. In case domestic price goes wayward due to an export bonanza (an unlikely situation given depressed international prices), the government can also use the stick of removing custom duty and allowing in cheap imports to stabilize domestic prices, which has been on the cards since Feb-2020, but has not translated into reality.