India case study

11 March 2019

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India is the world’s largest domestic sugar consumer and looks set to be the largest producer in 2018/19 with a 31 milion tonnes crop.

India oscillates between being a net importer and exporter depending on prevailing sugar policy and subsidy arrangements, as well as crop output.

India is the most influential ‘swing supplier’ to the world market and contributes to its volatility.

The Policy Environment

The sugar industry in India is large and fragmented. In the states in which sugar cane is grown it has major economic and political significance because of the number of small cane growers and their families it supports. As a result, the sector is heavily regulated at both the federal and state levels¹. 

Farmers receive minimum cane prices which are set at the federal level and supplemented by state governments. Because of the political pressures, the combined federal/state mandated cane prices often make cane more remunerative than other crops.

The government aims to support producers when the domestic industry is under pressure and consumers when domestic market prices are rising. To do this, the government controls both import and export volumes.

When it is protecting the sugar industry the government raises import tariffs (the import tariff was raised to 50% in July 2017)² and it grants export subsidies. Conversely, when domestic market prices are rising, the government lowers tariffs (to zero on occasion) and authorises imports. As a guiding principle, the government only authorises imports to the extent it believes domestic production has fallen short of likely consumption and only allows exports when it is sure the domestic market is adequately supplied. Export subsidies are regularly used to clear excess stocks and support the domestic market.

Cane price support 

A minimum cane price is fixed by the federal government each year by regulation. For the 2016/17 season (October/September) the FRP is set at 2,300 Rupees/tonne (about US$34.5). For 2017/18 the government has been recommended to set a FRP of 2,750 Rupees/tonne³ (about US$38). State governments fix regional cane prices to supplement the national FRP typically by 30-35%.

Export subsidies

India has no World Trade Organisation (WTO) export subsidy commitments. Despite this, when there are surpluses that have to be exported to support the domestic market, India provides export subsidies which countries such as Australia regard as not being WTO-consistent⁴. In 2018 to manage an exceptionally large crop the government stimulated exports with 55 billion INR ($760million) of subsidies and also reintroduced the minimum selling price of sugar of 29ING/kg (effectively increasing the domestic sugar price by 6INR/kg on the basis that excess production could be exported)⁵.

The federal government agreed to pay an extra US$0.7/tonne of cane in 2014/15 conditional on mills meeting their export targets⁶.

The state of Maharashtra waived a 3% tax on cane purchases in 2015/16 for mills which exported at least 12% of their output⁷.

India regularly reimburses transport costs for mill exports⁸.

Soft loans

The Indian government sometimes offers low interest loan schemes to cane millers to help fund payments to cane farmers. Recent examples of this include: in 2013/14 US$1.1bn at zero interest; and in 2014/15 US$950m for which the federal government subsidised the interest burden charged by commercial banks up to 10%⁹. The Union Budget 2017/18 (April-March) allocated about US$76m under the Sugar Development Fund to provide assistance in the form of interest to sugar mills towards working capital loans of about $980m¹⁰.

A Sugar Development Fund with preferential interest rates has been set up to encourage modernisation of sugar mills up to 40% of the project cost. Between 2007 and 2015 a total of US$1.4bn was disbursed in this way¹¹.

Ethanol

In October 2015, the Indian government introduced a compulsory ethanol blending mandate of 10%¹²  and subsidised loans were also offered through the Sugar Development Fund to encourage mills to invest in ethanol production¹³.

Our Analysis

India’s sugar sector is protected through a combination of domestic price support, variable import tariffs and export subsidies, and soft loans. High mandated cane prices reduce the normal planting response to low world prices, which exacerbates global price volatility.

As it is such a large domestic producer and consumer and because its average supply/demand balance is close to neutral, India oscillates between being a net sugar importer and exporter; depending on prevailing sugar policy, subsidy arrangements and crop output. This makes India one of the most influential ‘swing suppliers’ to the world sugar market, which contributes to its volatility.