Pick any publication, and you will find commentators nostalgic for the days when ‘sugar retail price in Punjab was controlled with a stick’. While most may lead readers to believe that the stick was some magic wand, it was in fact, support price.
The retail price of sugar between Jul-13 to Jun-18 remained under Rs 60 per kg during 41 out of 60 months. The only time price flirted with the peak of Rs 72 per kg came during 2015-16, when the government raised notified cane rate by Rs 10. Beginning Oct-14, support price for cane remained constant at Rs180 per 40kg for the next five years, finally witnessing another Rs10 revision in September last year.
The decline in cane production witnessed during last two seasons thus is only a natural consequence of fixed selling price in the face of rising cost of inputs. The crucial question that must be asked thus is why did a shortage of sugar not occur earlier?
While most commentators, including the recent FIA inquiry report, have been quick to point fingers at the poorly planned export quota of 3 million tons announced during last two seasons, that has only contributed to fast depletion of carryover stock in the country. Raw material cane production, however, is on a downtrend as the crop became increasingly unattractive to growers.
Rewind back to mid-2017 when the last political setup announced a lucrative subsidy on fertilizer. According to Dr. Shahid Afghan, anticipating a revision in support price rate amidst poor cotton price outlook, the farm economy witnessed a massive application of fertilizer for cane production.
The economic survey of FY18 notes that ‘sugarcane crop exceed target by 7.5 percent’ that year. But the support price revision never came. Instead of turning profit for farm economy, the bumper crop became a disaster. For two seasons, news of delays in crushing and payment to growers became a norm. According to one PSMA official, “the incumbent government paid a heavy price in the 2018 general elections, as cane growers were up in arms against them”.
Instead of allowing market mechanism to function, the political party in power used price interventions to control both raw material and output prices. The challenge of payment to growers was resolved by eventually allowing export quota for surplus, at a heavy toll of Rs20 billion subsidy in 2018 (in addition to Rs5 billion by Sindh government), and another Rs3 billion in 2019.
But neither the export quota nor the eventual increase in support price to Rs190 came in time to push growers away from sugarcane. Now that acreage under cane has fallen 19 percent since its 2017-18 peak, the support price has become just a notional rate. Raw material shortage means transactions are taking place at commercial rates as high as Rs220 per 40kg, as has also been confirmed by FIA’s inquiry.
The government cannot have it both ways. The objectives of wealth transfer to farm economy and enforcing price ceiling on essential items are binary. It can, however, ensure that it does not create a perverse enabling environment to the benefit of chosen few.
It is fair to castigate sugar mills for contributing to shortfall in domestic market while enjoying subsidy on exports. However, it must be remembered that $71 million worth sugar was exported between Jul-Dec 2019 without subsidy. Export unit price rose from $297 to $390 per ton, compared to the year before, along with currency depreciation of 23 percent (period average).
The eventuality could have been avoided, had MoC exercised the foresight of sending a price signal to exporting players by liberalizing import. So much for what could have been.