The sugar inquiry report’s main finding is that the export of sugar during 2019 was not justified. That conclusion is faulty; simply because it begins with asking the wrong question. If the government does not restrict trade of other major farm commodities such as rice, cotton, or maize; why is sugar treated differently?
Sugar export becomes an emotive issue because historically, it has been made based on subsidies after gluts in domestic market that persist over several years, putting firms out of businesses. Subsequent governments have maintained the unenviable record of belatedly allowing export of surplus, often based on political considerations (such as election year, 2017-18).
Once the incremental foreign exchange begins to trickle in, it becomes too lucrative for the babus at the Ministry of Commerce to let go off. As any other profit maximizing business, the sugar industry insists on keeping the export gates open. Until finally the reality sets in after domestic prices run amok.
Why? Because once in favour, the over regulated industry extracts its pound of flesh, fully knowing that it can profit in both markets due to prohibitive controls on import: with a custom duty of 40 percent! It may not be far-fetched to conclude that thanks to over regulation, the sugar supply and demand has hardly ever been in equilibrium.
But why does production not increase in tandem with demand? That’s where the supply dynamics become unique. Sugarcane, the raw material, is a perennial plant, meaning that it lives for two or more years. Ratoon cropping allows growers to harvest multiple crops from a single round of cultivation. This means that once farmers plant sugarcane, they do not switch away from it for several seasons, irrespective of demand dynamics.
Trade distortions that result in high carryover stock of sugar in domestic market has a ripple effect across the value chain. Sugarcane grower bears losses for several seasons, finally switching away. Remarkably, each time MoC eventually allowed export quotas in the last 10 years, it is already too late for growers to switch back to cane for upcoming season. That need not create a shortfall in domestic market, except babus turn import restrictions of sugar into a matter of national pride.
The relevant question to ask then is whether a subsidy on export was warranted? It never is, but then why is a dollar earned from subsidized textile export superior to subsidy-based sugar export. Negotiation should be a two-way street. Unfortunately, each time government scrambles for export earnings by resorting to half-baked solutions, it has ended up shooting itself in the foot.
The sugar industry is guilty, but only so far as taking advantage of the trade imbalance. In that it is not the only one. It should not take a rocket scientist to figure out that subsidies are only justifiable for as long as price in domestic market is higher than international.