Flip flops in import duty policy aggravate the problem
For several months now, with back-to-back droughts hitting output, traders have been predicting a sugar shortage, but the government refused to lower the import duty from 40%. This was especially odd since even the government’s output estimate of 22.5 million tonnes was almost a million lower than the Indian Sugar Mills Association’s estimate. Suddenly, as estimates of the crop have firmed up and the likelihood of a sugar shortfall is becoming clear, the government has slashed the import duty to zero, but just for raw sugar imports, just for 5 lakh tonnes that has to be imported by June 12 and with specified quantities in different zones—0.5 lakh tonnes in the east, 3 lakh tonnes in the south and 1.5 lakh tonnes in the west—and the application will be processed based on the refining capacity of each mill. Apart from the fact that this looks like going back to the bad old days of the import-export control with all its attendant evils of discretion, what can the logic be for not slashing import duties for refined sugar as well or for restricting the imports to just 5 lakh tonnes? Chances are, some weeks down the line, some restrictions will be eased again as importers ask for more time to make the necessary imports.
If this was something that happened just this time around, it wouldn’t matter as much—India is now in a unique position of having both high import and export duties on sugar. In the case of wheat, local prices have been hardening since mid-2015 due to the shortage in the crop, but the government refused to lower the 25% import duty. In September last year, by when wheat inflation was over 10% at the retail level, the government reduced the import duty to 10%—when even this was found inadequate, the duties were brought down to zero in December, after which 5.5 million tonnes of imports were contracted; last month, with prices collapsing due to a production surge, a 10% import duty was once again imposed.
Given the frequent flip-flops in duties and the government’s inability to change them in time since it is unable to predict demand-supply shortages accurately, surely a more desirable solution would be to link these to a formula that even industry knew about—the added advantage is that no one would allege the duty changes were being made to favour a particular group of persons. Apart from the obvious fact that the futures markets need to be used more extensively to even out price volatility, it would be sensible to have a formula which said, for instance, that import duties would fall to 20% if global prices rose one standard deviation above the trend and to 10% in case of two standard deviations.