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Sugar problems escalate for India - Views on News from Equitymaster
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  • Aug 18, 2009

    Sugar problems escalate for India

    That crop production in India this year has taken a backseat due to weak monsoons is no big secret. But the impact seems to be severe on the sugar sector in India, which is also riddled with many other problems. As reported in a leading business daily, not only has India been compelled to go in for a second consecutive season of sizeable sugar imports, but it is possible that this phenomenon will spill over in 2010-11 as well as farmers fail to sow more cane. While the primary reason for the same is the scarcity of water due to deficient rainfall, the other reasons why cultivating sugarcane is not catching the fancy of farmers are the rising prices of shorter-cycle food crops and the need for captive buyers, which are limited in number. Thus, sugar supply is all set to fall considerably short of demand meaning that sugar prices will rise and India will have to import sugar.

    Further, there is a minimum support price at which the government buys sugarcane from the farmers and while this has been raised, it is still not enough for farmers to earn good margins; the margins on sugarcane are behind what can be earned on other crops. While monsoons so far have been 29% below normal, sugar acreage stood at 4.25 m hectares by the middle of last week translating into a 3% drop. What compounds India's problems further is that international sugar prices have also escalated. As reported in the Economist, due to bad weather in both Brazil and India, which are the world's biggest producers, the price of sugar soared to 28-year highs. And what is more, food companies in the US have warned of job cuts unless the government eased restrictions on the import of sugar (the sugar producers in the US are subsidized). Hence, the sugar sector has no choice but to swallow a bitter pill in the medium term.

    Government has to repair its finances
    With the fiscal deficit soaring to 6.2% in FY09, it is obvious that the government's expenditures need a serious overhaul. Accordingly, a working group of the RBI has prepared a report on the need for expenditure restructuring of the Centre and States. Various proposals made in the report include re-classifying data, revealing contingent liabilities in the budget and increasing accountability and transparency in Centrally Sponsored Schemes (CSS). What the government also needs to do, as highlighted in the report, is to have a more qualitative approach. This would mean focusing more on its primary responsibilities rather than expanding its focus, as there are certain areas where the private sector can provide the required services.

    Also, the division of expenditure into plan and non-plan needs to be done away with as there tends to be a distortion in the way resources are allocated to various sectors thereby affecting delivery of services. Infact, healthcare and education, the two most important sectors have always been given a raw deal in the past precisely due to this anomaly in the allocation of resources. Thus, it goes without saying that some radical changes will have to take place in the way the government manages its financial affairs. But are the politicians and policy makers up to the task? Will they put their own vested interests over and above the interests of the nation? Will this report released by the RBI be taken to heart? While we believe that it is unlikely, we surely hope that we are wrong!



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