ARTICLE: The good news is that I finally got around to reading the "Report of The Commission of Inquiry constituted by Ministry of Interior to probe into the increase in Sugar Prices" (the Report) - the bad news is that I could not go past page 96, and perhaps am also guilty of skipping a few pages in between; give me a break here, the report is almost 350 pages thick.
First impressions, the free market gang has not read the report. Or, on the other hand, political affiliations are stronger than their beliefs in the free market; albeit in that case, their so called principled stand for freedom goes for a six. Reminds me of the time Thomas Piketty's "Capital" erupted onto the scene: it was dubbed the economic book of the century, until someone from the Right eventually read it - thereafter, everything was wrong with it! So let me warn the free markets camp, the Report recommends more State control and more regulation, coupled with price control and inventory control - Rightists of Pakistan unite, you have nothing to lose but your wealth!
Never realised that, like oil prices, sugar prices are a mug's game. From a layman's perspective, applying the inflation rate on the 30th June 2019 price and then adding the increase in sales tax thereto might have been a starting point - which, by the way, very well explains the increase, apparently. The funny thing was that sugar prices have gone way up in the past as well - trend analysis perhaps might have been pertinent for determining the causes this time around as well.
Curiously the detailed Terms of Reference of the Committee, while covering everything else under the sun, some terms more curious than others, did not include a price trend analysis.
We seem to be obsessed with elite capture once again; history may well repeat itself. The fact that sugar mill owners have political clout is a no brainer - something that the media was harping out unnecessarily. Political clout and wealth go hand in hand the world over. If you are wealthy you buy clout, and vice versa. It is not as if anyone of us common men can set up a sugar mill. And political clout is not limited to sugar mill owners only; every big business has clout - let's not forget the textile sector as an example. Seriously, we need to decide: on the one hand we want State Owned Enterprises to be privatised, and on the other hand we are worried about elite capture - crazy!
Notwithstanding, the primary take away for me - or concern, if you may - was the drop in sugar cane production from the high of 71 million tons in 2016-17 down to the low of 48 million tons in 2019-20. The report is silent on why the cultivation fell from 1.9 million acres in 2016-17 to 1.7 million acres in 2019-20. Was it because of water shortage? That might be a very ominous sign.
The Report's finding that the difference between sugarcane production and sugarcane crushed in Punjab had to do with off-the-book production, thereby avoiding taxes, might even be a rational construct. However, this was not the case only in 2019-20; in fact the gap in the previous two years is higher. Perhaps another reason for this difference might be production of jaggery, which, if I understand correctly, is prohibited in Punjab. From the grower's perspective, considering the market prices, it may make more sense to produce jaggery than sell sugarcane to the mills. Perhaps a later column may take up in detail the issue of letting market forces decide whether growers sell sugarcane at the support price or produce jaggery- for the moment, in a free market economy, why should not the growers be allowed to do what they want with what they produce, is a pertinent question.
This is especially true if you consider that the support price of sugarcane (per 40KG) was stagnant in Punjab at Rs 180 for the five year period 2015-16 to 2018-19; it was increased to Rs 190 during 2010-20. The Report correctly points out that if you cater for inflation alone, the support price did not seem sufficient. No wonder the Report's finding was that the national average procurement price of sugarcane was Rs 226 per 40 KG this time around. Apparently, the millers strike did not help either; if the mills had shut down due for a few days due to the low availability of sugarcane, the price should have come down - curiously, the report found that the price went up after the strike was called off, which is inexplicable.
The report points out that the imposition of 17% sales tax this year resulted in increasing the price of per KG of sugar by Rs 3.60. On a separate note, whiles financial costs may not form part of cost of production, but they cannot be completely ignored for price determination.
Notwithstanding all of the above, the most amusing revelation in the Report, at least for me, was that the brokers had set up a futures market on a Whatsapp group: imagine the possibilities, the Pakistan Stock Exchange on Whatsapp! I for one agree with the Report, that futures market is a gambling den, and even beyond. However, trading in futures might not have an impact on the market, at least directly - no more than the speculative trading on the PSX has on the profitability of the underlying companies. But food for thought- if the stock exchange is the barometer of a country's economy, why is not commodities future market?
Reading the report, one thing remained unclear - before the recent legislations relating to hoarding, legally speaking, what stopped sugar mills owners from keeping stocks in their Godowns in the hope of higher profits? After all, greed is the forte of a capitalist.
Essentially, in conclusion, while I am a proponent of protectionism and planned industrialization, I am pretty conscious of the power of the market. The report asserts that sugar production was almost equal to demand, so why did the prices go up?
Nonetheless, what happens hereafter remains to be seen!
The plan this week is to peruse the "Report on the Power Sector"- as more and more sectors come under scrutiny, the atmosphere for the capitalists is becoming more sour than sweet!
(The writer is a chartered accountant based in Islamabad. Email: [email protected]. The views expressed in this article are personal. The views are not necessarily those of the newspaper)
Copyright Business Recorder, 2020
Comments
Comments are closed.