Bitter truth about sugar

The same ritual is repeated every year and almost to the point of perfection. Citing various reasons, the sugarcane growers demand a high price for their product at the start of crushing season, mill owners refuse to buy the commodity at exorbitant prices, try to delay the crushing season and also ask the government to abolish or minimise the role of Trading Corporation of Pakistan (TCP) on the pretext of ensuring reasonable profits to the industry.
Finally, the government intervenes to settle the matter and the consumers are usually left with no option but to pay a higher price for the commodity than last year.
In a meeting between the Secretaries Committee constituted by the Prime Minister and representatives of Pakistan Sugar Mills Association (PSMA) on 9th October, 2006, it was decided to fix the sugarcane price at Rs 60 per 40 kg for Punjab, Rs 67 for Sindh and Rs 65 for NWFP. Last year, the cane price in Punjab was Rs 45, and the increase was purportedly allowed to benefit the farmers. The representatives of the sugar industry, who were earlier adamant to delay the crushing, agreed to commence operations to ensure on-time commencement of the sugar harvest.
The crushing operations will now start in Sindh from 1st November and in Punjab and NWFP from November 15, 2006 and prompt payments will be made to the growers. In exchange, the Federal Government promised an affirmative action on most of PSMA's demands and remove the snags pointed out by them.
By way of concession to the sugar industry, Food, Agriculture and Livestock Secretary, Ismail Qureshi stated that the "central bank would be advised to provide financing to the mills in time" (in the form of working capital loans in order to improve their cash flows for starting their crushing operations) without any pre-conditions.
The government is also said to have agreed to the millers' demand that the central bank should withdraw its earlier order, directing banks to ensure that all working capital loans obtained by the sugar mills against the security of their stocks are fully adjusted by October 31, and stopping the banks to issue fresh loans at least after one month of adjustment of the existing loans. The central bank in the same order had also doubled the cash margin requirement to 50 percent from the previous 25 percent.
According to the PSMA, "the government will shortly direct the central bank to revoke its controversial order so that timely payments can be made to the growers". The PSMA leaders also claimed that TCP would not sell its stocks in the domestic market during October and November to enable the mills to offload their old stocks of the sweetener. It was also reported by the industry sources that the government had decided to impose 15 percent duty on the import of cheap sugar from India and other sources. However, the government is stated to have refused the demand for fixing the "fair ex-mill price" of sugar at Rs 32 per kilo.
Seen closely, this exercise appears to be no more than a routine affair which is humbug. In a free market economy like the one in Pakistan, prices are determined essentially by the market forces without any advice or directive from the government. If at a certain point of time, the government feels that the price of a certain commodity is unusually high, it could augment its supply by importing it in sufficient quantity through some of its agencies and release it in abundance in the market or allow the private sector to import it freely. The tariff could be adjusted or removed altogether to make it cheaper in the domestic market. If everything else fails, the government could provide a subsidy from the budget in the exceptional circumstances for essential items. The way the government of Pakistan deals with the sugar problem every year gives the impression that the growers and the sugar industry are benefited every year at the cost of consumers.
This perception is strengthened by the fact that the lobby of the agriculturists and sugar industry is very strong, both in the National and Provincial Assemblies and in the government while there is nobody to look after the interests of the consumers. Also, from a purely economic point of view, the overall productivity in the economy is at the optimal level when uncontrolled price signals in the market determine the allocation of resources. By interfering in the market mechanism, the government may be retarding the growth prospects of the economy.
The assurance by the government to ask/advise the State Bank of Pakistan in a certain manner is perplexing, to say the least. The secretaries of the government who were on the sugar committee should know that the State Bank is now totally an autonomous institution and supposed to make independent decisions. The cash margin requirement is a selective credit control instrument and was imposed to force the mill owners to unload their stocks to contain the price of sugar in the domestic market.
The banks were asked not to release fresh loans in certain conditions in order to ensure that the mill owners are prompt in their payments to the banks and do not default. These credit conditions can of course be relaxed at the appropriate time but it is the State Bank who has to judge the necessity or the usefulness of these measures at a certain point of time. The government can only engage but cannot dictate the State Bank on the matter.