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Sugar
policy: collusion breached
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By Syed Shahid Husain
Government has withstood the pressure from Pakistan Sugar
Mills Association (PSMA) and allowed import of sugar. PSMA
members have been acting thus far in concert with the
government against the consumers.
 Desperate
to stop import of sugar entirely, the sugar mills have
mounted pressure on the government either to stop imports
completely or at least to impose duty so that the impact of
imports is neutralized. A Finance Ministry official said
importers have booked around 270,000 tons of raw and 110,000
tons of refined sugar against 400,000 tons allowed.
The imports are to supplement domestic production, which is
expected not to exceed 3.2 million tons this year. Annual
consumption is around 3.6 m tons. The government's stocks of
375,000 tons just about balance the demand with production.
Yet the serious crisis continues and the Trading Corporation
of Pakistan won't release its stocks. Don't you see
collusion there? Price rise appears to be the handiwork of
PSMA.
The collusion between the government and the mills to the
detriment of the consumer appears to have been breached this
time. The audacity of the millers is simply appalling. The
government was complicit in hoarding this year by
withholding its own stocks, when the prices had been rising.
Its sudden decision to allow imports in private sector is a
right move. One wishes that it had followed the same policy
with regard to wheat, which it unfortunately allowed to be
imported in the public sector, in utter disregard of free
market theology with disastrous consequences.
Ordinarily, the government acts in concert with the vested
interest like in case of cars, which it does not allow to be
imported in spite of the decision by the cabinet a year back
thereby giving local car manufacturers a windfall five years
running. But this time, in case of sugar, the government has
kept the interest of the common man in mind.
The government has been acting differently in the case of
wheat, which it allowed to be imported only in public
sector. The commodity has as yet not acquired the jinxed
reputation of sugar as a demolisher of governments.
According to a recent report, because of two-week delay in
wheat imports, public sector being proverbially flatfooted,
flour shortage has gripped main cities of Punjab as private
wheat supplies have dried up and the food department has
failed to maintain supplies.
The government succeeded in forcing the stockists of wheat,
which it chose to call hoarders, to release their stocks
through some stringent administrative measures like when the
State Bank of Pakistan ordered the return of commodity
finance. Fearing a price slide, after imports arrive,
stockists have released their stocks. Now, with delay in
imports, the market is in a 'tail-spin'.
Sugar prices, on the other hand, which had reached Rs.30 per
kg, have briefly come down to Rs25-26. Had the Government
not intervened, the price of sugar would have stayed at Rs30
per kg.
Sugar industry suffers from terminal illness. The milling is
almost twice the growers' capacity to provide cane.
Sustaining the units on artificial basis is proving to be
costly? Against a crushing capacity of 68 million tons they
crush only 40 and against a capacity to produce 6.5 million
tons of sugar they produce only 3.61 million tons.
It has an idle capacity of 44 per cent. Crop is another key
element, which cannot, in the foreseeable future, match the
industrial capacity. This year mills started crushing late
and finished early.
Not only that the industry produces inefficiently but also
it fails to market its product and leans on the government
to serve as its marketing board. Government readily
baby-sits this sick and sickening industry.
An industry, which produces inefficiently cannot sell its
sugar in the captive domestic market, would be unable to
sell more sugar if it had to crush twice the quantity and
would thus bankrupt the government in the bargain.
It produces inefficiently at a much higher cost than even in
the neighbouring country. In the three years that the sugar
industry claims to have succeeded in doubling its stocks,
with highly "adverse" impact on prices, its revenue
liquidity etc. is an admission of massive mismanagement in
the industry. Otherwise higher output should be a matter of
rejoicing.
The government is under no obligation to guarantee profits
or undertake marketing on behalf of sugar industry, or for
that matter any other industry. The industry should be
subject to all the laws of economics including those of
production and supply and demand to justify its existence.
Any industry in order to survive has to perform two main
functions - production and sale. It does not have to depend
on crutches of the government to bail it out of the corner
in which it may have painted itself. This political industry
would have gone into receivership in a functioning polity.
The PSMA does not want to miss any opportunity of maximizing
their members' profits by squeezing the consumers. Besides
the consumers who are forced to pay higher than the market
price, growers too face serious problem from the sugar mills
primarily on account of latter's refusal to buy their crop,
delayed lifting, delayed payment or lower than the support
price.
In Punjab, the mills appear to have formed a cartel or an
informal zone against the growers. The price received by the
growers varied between Rs35 to Rs40. The mills were
exploiting the weak bargaining position of the grower
everywhere.
Government showed surprising toughness and directed the
provinces of Punjab and Sindh to invoke Sugar Factory
Control Act 1950 against mill owners The proposals
prescribed a harsher new procedure whereby the sugar mills
were to issue a Cane Purchase Receipt (CPR) along with a
cheque post-dated by 30 days for the amount payable.
The mills were be liable to pay interest at 12 per cent per
annum for delay of each day beyond a period of 30 days from
the date of purchase. The specified branches of the bank
were to en cash the cheque on 61st day. No mill was to
purchase cane without this arrangement and without signing
an agreement with the banks. Nothing much ever came out of
it.
Both sugar cane and sugar manufacturing are a heavy burden
on our economy. Comparative economics of sugar cane and the
competing crops at prices realized by the growers do not
favour sugar cane production or the establishment of
industry.
For each rupee of inputs, cotton plus sunflower yields
Rs3.04 as against Rs2.97 for sugar cane. For each day of
crop duration the comparative figures for the two crops are
Rs63.23 against 43.03. For each acre - inch of irrigation
water cotton plus wheat yields an income of Rs596.36 against
Rs353.23 for sugar cane.
These are the figures for Punjab. Sindh figures are just
about the same. Why then do the growers not shift? One
reason is almost free water for which they do not pay. On
purely economic grounds sugar cane is an uneconomic crop
because it is too heavy on water, and causes water logging
and salinity.
We do not have to adopt methods like threats of bullying or
outright payment of ransom, euphemistically known as support
price or support price to the growers export bonus to the
mills.
There are 78 sugar mills in Pakistan with five permanently
closed and ironically two under construction. Why are new
units being allowed, when there is so much spare capacity?
After all that is national wealth and they have no right to
squander it as they please.
A cool calculated consideration by the government of the
entire gamut of issues is needed to arrive at a sensible
solution to allow the market to determine the allocation of
resources to optimize the outcome.
Artificial measures at controlling the allocation of
resources can cause deep distortions. If support price is
not fixed for sugar cane, the mills will lift the crop at a
price depending on the supply of the cane.
A lower price for sugar cane will cause the entire crop to
be lifted, and the marginal growers will stop growing
resulting in lower acreage next year. That should save
enormous amount of water that it costs to produce sugar
cane.
A lower sugar cane crop will mean lower output of sugar and
the surplus with the mills will over time disappear, until
such time as the prices rise to encourage marginal mills to
produce.
The mills' excess capacity will also disappear through
attrition and the most un competitive units will close down.
The balance mediated by the laws of demand and supply will
have beneficial effects all around on the economy through
sensible allocation of resources without burdening the
government with ad hoc senseless decisions.
A policy decision by the government to keep its hands off
will bring about a reduction in production of sugar cane and
will force the sugar mills to review their production
strategy.
Half the inefficient mills will mercifully go out of
business. The other half will then be able to cope with the
reduced cane production and will be able to pay good price
to the grower. A balance will have been reached, courtesy
the invisible hand of Adam Smith.
Courtesy: The DAWN
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