Political economy of sugar export restrictions

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After the wheat export ban, the government decided to restrict sugar exports, setting a cap of 10 million tonnes (mt) for the current marketing year of the cane crop. India is the world’s largest sugar producer and number two after Brazil.

The Directorate General for Foreign Trade (DGFT) has notified the ban on exporting sugar from June 1 beyond the quota limit. The main reasons cited are to ensure domestic availability and price stability in the face of growing inflationary pressures. It also aims to ensure orderly trade amid ever-growing sugar exports surpassing previous records by more than 7.2 million tonnes.

The government is also concerned about the threat of a food crisis caused by the supply chain disruption(s); therefore, a dimension of the export restriction is also aimed at supplying sugar to economically distressed countries and friendly nations, thereby increasing India’s diplomatic reach while taming speculative trade.

But the political economy of restricting sugar exports goes well beyond the stated reasons. The other reasons for the export ban are, first, that the government intends to encourage ethanol blending. India is close to meeting the 10% ethanol blend target, with 9.99% already achieved in March.

Incidentally, the Union Cabinet amended the National Biofuels Policy on May 18 by approving the decisions of the National Biofuels Coordinating Committee (NBCC). One of the decisions is to advance the 20% ethanol blend target in gasoline to the 2025-26 Ethanol Supply Year (ESY) from 2030. India has inspired by Indonesia and Brazil which increased the biofuel blend by 30% respectively. and 20% to deal with soaring energy prices. In fact, ethanol is cheaper, costing only around ₹65 per liter compared to gasoline at around ₹96.

The export ban also aims to increase the use of domestic sugar molasses for ethanol production. India has offered sugar export subsidies as the Indian sweetener is overpriced in international markets, costing the treasury dearly.

WTO pressure

Additionally, India lost a sugar subsidy dispute against Brazil, Australia and Guatemala at the WTO. The WTO has advised India to withdraw its sugar subsidies as they do not comply with the WTO Agreement on Agriculture and the Agreement on Subsidies and Countervailing Measures.

Recognizing these challenges, the use of sugar for ethanol will serve two purposes – first, to reduce the burden of ever-increasing imports of crude oil at high prices, coupled with the reduction of the burden of export subsidies and trade disputes potential at the WTO. Improving ethanol production makes sense because it supports farm incomes, provides a cheaper fuel solution, reduces dependence on fossil fuels, and reduces pollution because ethanol is non-toxic and biodegradable.

In addition, it will develop an ecosystem for improved biofuel production thus supporting agricultural income, a sector that is largely struggling.

Exceptional harvest

Second, the argument that export restrictions will improve domestic supplies and ease inflationary pressures has little merit, as the country’s sugar production is expected to reach a record 35.5 tonnes.

In addition, he would hold stocks of 6 to 7 tons from the previous marketing year. India’s sugar industry is bullish on bumper production, with Skymet and IMD forecasting a normal monsoon.

Sugarcane planting data from all major producing states of Uttar Pradesh, Maharashtra and Karnataka confirm the satisfactory trends, supported by both manual input of planting data and validated by the overall positioning. Sugar prices have remained largely stable over the past year (Figure 1) with a notable increase in March, possibly due to the rising cost of transportation with rising diesel prices. Data on production, stocks and consumption (27-28 tonnes) indicate that the country’s sugar supply is sufficient.

Third, the export restriction is driven by external developments such as declining sugarcane plantings in Brazil due to Covid-19 protocols and associated labor shortages as well as harsh weather conditions. Thus, the reduction in exports from Brazil has increased the demand for Indian sugar in the world market. Thus, to preserve the domestic availability of sugar, the government has chosen to limit exports.

Fourth, the global economy is going through a difficult phase with a series of economic disruptions, starting with the Covid-19 pandemic, container shortages, escalating shipping costs, economic and trade sanctions, financial boycotts and trade and supply chain disruptions caused by the Russian-Ukrainian War.

All of these developments have led to a rise in food protectionism around the world, as major producers curb agricultural exports, aggravating the supply shock and increasing price volatility in the international market. An economy with 1.4 billion people to feed, India must carefully plan how to manage its internal political economy.

Finally, in the current geopolitical scenario, caution should be exercised as these commodities (wheat/sugar) can provide us with diplomatic leeway to meet the humanitarian needs of countries that are likely to experience extreme supply shocks.

Needless to say, this is an export restriction and not a ban, which means that India will continue to meet genuine sugar supply demands up to the limit of prescribed export of 10 tons. It is a good move to leverage diplomatic value in the global sugar trade scenario by limiting its supply, but India must recognize that its ambition to evolve as a regional power can only be realized if it is emerging as a key supplier to the global economy.

The writers work for Indian Institute of Foreign Trade, New Delhi and FORE School of Management, New Delhi, respectively. Opinions expressed are personal

Published on

June 01, 2022

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