Generous export subsidy for sugar may only solve half the problem

The cabinet last week approved a huge sugar export subsidy of Rs.6286 crore for sugar mills to export sugar. Cost of producing sugar in India is substantially higher than in countries like Brazil and Australia. With global sugar prices falling, the only way for Indian sugar mills to compete in the world market is through government subsidies. While this is good for optics, will this really address the concerns of sugar sector?

Not so sweet sugar problem

For a long time, sugar has been a very sensitive topic; politically and socially. That is the reason governments have gone out of their way to keep the sugar farmers and the sugar mills in good humor. With a global glut of supply, the prices of sugar are falling globally. But India has a larger problem of high cost of production. Apart from structural issues, sugar costs and output also gets impacted by weather related factors. When sugar prices are below cost, it results in burgeoning sugarcane dues to farmers. The government cannot afford an unhappy farmer lobby and cane farmers are very powerful in states like Uttar Pradesh and Maharashtra. The only option is to give subsidies and this year the government has announced export subsidies for 6 million tons at the rate off Rs.10,448/ton. The centre’s bet is that if the subsidy helps boost exports then the funds can be realized faster and the cane farmer dues can also be paid out on time by the sugar mills.

Subsidy may fall short

The subsidy announced by the centre was lower than expected since markets were anticipating a subsidy of Rs.12,000 per ton. In the previous sugar cycle year 2018-19, the sugar mills managed to export just 3.8 million tones out of the target of 5 million tons. Sugar analysts believe that the export performance will largely depend on the global raw sugar prices. These prices are currently lower than 12 cents per lb and the export target can only be met if the global sugar recoveries are above 13 cents. With a global glut in sugar, that looks quite unlikely. In fact, experts estimate that at the current global price recovery, India will only be able to export 3-3.5 million tons as against the target of 6 million tons in the next sugar cycle. That will still leave a lot of unpaid dues to sugarcane farmers across India.

 WTO issue could be serious

For India to expand its export basket, adherence to WTO framework is a must. In the case of sugar subsidies, Brazil and Australia have already pulled India to the WTO. While India has justified it, these kinds of thorny issues will continue to become a major challenge over time. India needs to seriously look at its sugar cost of production and work on the efficiency matrix. The subsidy may be good for short term optics, but in the longer term, it is unlikely to give any kind of competitive advantage!