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Sugar policy: collusion breached                                     Home
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.

Sugar policy: collusion breached 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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