Sugar At Rs 100?

At the end of the day, this headline could turn out to be an exaggeration. But the price of many food items has shot up so fast of late that anything seems possible, if not probable. After years of rising output, sugar production will see a sharp decline this year. Optimistic estimates peg sugar production at about 24 million tonnes this year. Realists say, no more than 22 million tonnes. Domestic demand would be more than 26 million tonnes.

Perhaps, sensing a looming price surge, the government recently imposed a tax of 20 per cent on sugar exports. Of course, officials and industry managers insist that Indian consumers will not have to pay through their nose for sugar during the coming festive season.

In a statement to BW Businessworld, the Indian Sugar Mills Association says, “As per preliminary estimates, in 2016-17 sugar output is pegged at 23.26 million tonnes. With an estimated opening balance of 71 lakh tonnes on 1 October 2016, sugar availability during the 12 months of next season will be 30.36 million tonnes, enough to meet the domestic sugar requirement of 26 million tonnes in 2016-17.”

But experience shows that reality and statistics often have no role in determining wild fluctuations in prices of food items. Often, it is perceptions and the ability of intermediaries to exploit them that matter more. For instance, the output of both potato and tomato could reach record levels this year. And yet, at the slightest of shortage, their prices have shot up by more than 100 per cent in quick time. Tomatoes are even off the menu in many middle class households. A recent news report in the Times of India said that large fast food giants such as McDonald’s have removed tomatoes from their burgers. Managers at McDonald’s, however, claim that the move is due to poor quality of tomatoes and not their high prices.

This surely defies common sense and logic. But that’s how food markets in India have behaved for quite a while. Against this backdrop, the moment the market “perceives” that there will be a decline in sugar output, there will be a surge in prices. The pattern has become all too familiar now. As intermediaries take advantage, sugar prices would cross Rs 50 per kg leading to loud debates on TV channels. The government would issue dire warnings to hoarders and also conduct raids to teach them a lesson. Whether sugar prices will actually stabilise after that or keep moving northwards would depend on the competence of government agencies to ‘manage perceptions’.

But beyond sugar, potatoes, onions, pulses and tomatoes, there is little doubt that food inflation has become a stubbornly persistent phenomenon. And handling and controlling food inflation is emerging as a major challenge for the Narendra Modi regime. If it fails to control food inflation, no amount of good news and data about the GDP and the health of the economy will spare Modi the wrath of poor voters. The signs are ominous, if you look at the latest data.

After staying in the negative for months, the wholesale price index finally entered the positive zone in April 2016. Data released in mid July show the inflation, measured by the wholesale price index, was 1.62 per cent, a 20-month high. This was almost entirely due to persistently high and rising food prices. The impact of which was more starkly visible in the consumer price index where food items have a greater weightage. Inflation as measured by the consumer price index was 5.77 per cent. Compared to June 2015, vegetable prices rose 16.9 per cent in June 2016. In the same period, the price of potatoes rose more than 60 per cent.

Incidentally, despite a glut in sugar output and massive stocks, the price of sugar rose 26 per cent in the same period. Discerning readers would now understand the meaning of the headline in this article. If prices can rise even during a glut, what would happen at a time of “perceived” shortages?

The fact is, food inflation is not going to go away in a hurry. As more and more poor families escape poverty and move up the income ladder, they will consume more of vegetables, fruits, milk, eggs and chicken. The prices of all these products have been rising persistently. Apart from handling short-term panics, the government needs to address this long-term trend.