India has just raised the minimum selling price for sugar in a bid to undo the problems caused by an earlier decision by the very same Indian government. This isn’t really quite the way to do it – better to undo that earlier mistake, not compound matters. But as we so often say around here, election time, who has the ability to be reasonable?
So, the news itself:
The government’s move to increase the minimum selling price of sugar will augur well for the mills and is expected to increase their operating profit margins by 6 percent, says a report. The government has increased the minimum selling price (MSP) of sugar to Rs 31,000/MT from Rs 29,000/MT (announced in June 2018), to support the oversupply hit sugar industry.
Just think through the gloriousness of that statement. We’ve an industry in oversupply. They’re making too much of the damn stuff. So, to deal with this we’re going to raise the minimum price? But, but, won’t that increase supply, reduce demand, making that oversupply even worse? Well, yes, it will, but you know election year politics:
Worried that the increasing sugarcane arrears could hit its electoral prospects in politically-important States of Maharashtra and Uttar Pradesh, the Government on 14th February has decided to hike the minimum selling price (MSP) of sugar by Rs. 2 per kilogram to Rs. 31. Ram Vilas Paswan, Food and Public distribution Minister in a press conference said, “We have hiked the minimum selling price of sugar from the previous Rs. 29 per kg to Rs. 31 per kg. The move will help sugar mills to pay dues to the cane growers”.
If the mills are getting more money then they can pay the farmers and that’s what gets the votes. But why is it that the mills are having problems in paying the farmers anyway? Ah, that’s an earlier piece of electoral politics:
The obvious question is, well, why are the mills over producing so that they make a loss? A loss is this universe’s way of telling you to stop what you’re doing so why don’t they? Well, because there’s price fixing going on: Each year the federal government and states fix the price at which mills can buy cane from farmers. The cane price has climbed 65 percent in five years, while sugar prices have fallen 8 percent. Well, there’s the political problem, right there. Cane farmers have many more votes than sugar mill owners. So, the inevitable result of such government (or politician) led price fixing is that prices for cane will be set high to garner the votes of the cane farmers.
This is not the only time this has been done:
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.
Yes, it’s election time, that’s why the Indian government has just raised the price of sugar. So the money will flow through to the cane farmers who have lots and lots of lovely votes. And that’s it, that’s all there is to it. However stupid it is to raise the price of something already in oversupply.