To explain this part of Indian economic management it’s only necessary to understand that growing sugar cane is a small scale farm matter. Sugar mills are a much larger scale industrial matter. There are therefore many more votes in favouring the farmers than there are the processors. With that, and only that, how do we think that a government would price things? Yes, quite, cane prices would continually rise, to the point that the mills consistently make a loss. Well done, you are now an analyst of political economics:
The government today decided to increase the minimum price sugar mills pay to cane growers by Rs 20 per quintal to Rs 275 per quintal for the next marketing year starting October, sources said.
The decision to increase the fair and remunerative price of sugarcane for the 2018-19 marketing year was taken by the Cabinet Committee on Economic Affairs, they added.
It’s obvious that such decisions, all the way up at cabinet level, are going to be taken upon the most rigorous assessments of local markets, isn’t it? It would just never be true that base political calculations take precedence.
Two developments this week have added to the despair of investors in sugar mills. The government has hiked the central benchmark price for procuring sugarcane in 2018-19. In a free market, prices would have fallen but politics trumps economics in an election year. Sugar mill shares fell on Thursday, reacting to this news.
Due to this, sugar production is expected to increase by 10 per cent in the next marketing year.
The problem being that this is not exactly what the market is crying out for:
With global sugar prices down due to excessive supply in the market, Indian mills don’t find themselves competitive in the global market. In the domestic market, sugar prices continued to trade lower following extended selling pressure by millers with excess domestic supplies and poor demand from bulk consumers. Mills said it was a loss making business with them selling at Rs 26-27 a kg while cost of production was at Rs 35-36 per kg.
The very point of the government setting such prices is that they know more than, are able to correct the power imbalances in, the market itself. And we’re really seeing that, aren’t we? For the government’s reaction to increasing sugar cane production, to be made into sugar that cannot be processed and sold profitably, is to raise the price that must be paid for the raw cane. The reason being, of course, that the cane farmers have more votes than the sugar mills.