metadata: authors: 0: author: Pursell, Garry
1: author: Gupta, Anju
count: India
docna: 0: docna: Trade policies and incentives in Indian
            agriculture : methodology, background statistics, and
            protection and incentive indicators, 1965-95
docty: Policy Research Working Paper
subtopic: Climate Change and Agriculture,Crops and Crop Management Systems,Ports & Waterways,International Trade and Trade Rules,Food Security,Transport Services
teratopic: Macroeconomics and Economic Growth,International Economics and Trade,Environment,Agriculture
abstracts: cdata!: This paper is the first in a series of
            studies to provide background data and protection and
            incentive indicators for 13 major Indian crops, which have
            been estimated in connection with extensive research on
            Indian agricultural incentives. The general methodology of
            the studies is described in the first section of the paper.
            The second section of the paper focuses on sugarcane and
            sugar. It shows that between 1965 and 1994 real domestic
            prices of sugar and cane were quite stable in India,
            declining an average of 0.6 percent (sugar) and 0.3 percent
            (cane) a year. During the same 29 years the free market
            price of sugar fluctuated widely (expressed in India rupees)
            but in real terms increased about 1.3 percent a year. This
            contrasts in trends reflects the real devaluation of the
            rupee after 1986 but meant that by the early 1990s, at world
            sugar prices of US 13-15 cents a pound or higher,
            India's domestic prices were roughly equivalent to, or
            below, world reference prices. Because of the fluctuations
            in world free market prices, nominal protection of sugar and
            sugarcane production in India--as measured by differences
            between domestic prices and border reference prices--also
            fluctuated. Nominal protection was 1) high during low world
            prices in the 1960s and the mid-1980s; 2) negative when
            world prices were high in the mid-1970s and early 1980s; and
            3) moderate to low by previous standards between 1989 and
            1994. Incentives for cane production did not change much
            when allowance is made for the nominal protection and
            tradable inputs (principally fertilizers) or subsidies for
            the principal nontradable imports (canal irrigation, credit,
            and electricity for pumpsets). Incentives for cane
            production were somewhat higher in Uttar Pradesh than in
            Maharashtra and Tamil Nadu. Half of Indian cane production
            is used by artisanal producers of gur and small-scale de
            facto unregulated producers of khandsari sugar. Because of
            India's complex regulatory system--especially in the
            important sugar producing state, Uttar Pradesh--incentives
            are significantly higher for unregulated activities than for
            the modern sugar mill sector. Regulations subject sugar
            mills to controls that require them to 1) sell specific
            quantities of their sugar productions at low
            "levy" prices; 2) sell molasses production at a
            fraction (0.1 or less) of open market and border prices; and
            3) pay minimum prices (for specific quantities of cane) at
            above free market prices, except in years of cane shortages.
geo_reg_key: 517191,517198,517212
repnme: repnme: Trade policies and incentives in Indian
            agriculture : methodology, background statistics, and
            protection and incentive indicators, 1965-95
display_title: Trade policies and incentives in
            Indian agriculture : methodology, background statistics, and
            protection and incentive indicators, 1965-95
listing_relative_url: /research/1998/08/438653/trade-policies-incentives-indian-agriculture-methodology-background-statistics-protection-incentive-indicators-1965-95
topicv3: Agriculture and Food Security m1326205 435,Crop Production m1326627 174,Transport m1326661 135,Trade m1326924 698,Ports m1327399 167
publishtoextweb_dt: 2015-09-14T00:00:00Z
historic_topic: Macroeconomics and Economic Growth,International Economics and Trade,Environment,Agriculture
origu: Development Research Group (DECRG)
no_of_pages: 131
author_keys: 0: author_key: NA
1: author_key: NA
model_extractions: Po[.icY RF5st_\ **'U.** a ci of t(: llig t, i.

# sualmar v 'Andkj'i:.ic :

Irhis paper Isthe **I** ;s **i Of s of** d i s to pir o-vide backgro"ui' ast ' ' and **u** rt ince 6i',' indicators for 13 ma''r tl;ie't Lace been estimated in cooi-' n tescarch e o01 Indian agrictltuLral incentivs. '! g. ied'iogv of the studies is describeci in h:he fi-st section of the paper. The second section or tht paper- focuses on sugarcane and sugar. ]t shows that betweeen 1 965 and 1994 real domestic prices of sugar and cane were quite stable in India, declining an average of _0.6_ percent (sugar) and 0.3 percent (cane) a year. During th!e samne 29 yeai s the free mar'ket price of sugar fluctuated wr idel ,'expressed in Indian rupees) but in real term1s eincreasud about 1.3 percent a year.

This contrast in trends reflects the real devaluation of the rupee after 1986 but meant that by the early 1990s, at world sugar prices of US 13-15 cents a pound or higher, India's domestic prices were roughly equivalent to, or below, world reference prices.

Because of the fluctuations in worlcl free niarket prices, nominal protection of sugar and sugarcane production in India - as measured by differences between domestic prices and border reference prices - also fluctuated. Nominal protection was: High during low world prices in the 1960s and the mid-1980s.

>.N.egative 'vien **vvorld** ol ic; s **vett,** hig-h **in** t'le nid 1I970,s antd arlan 1 98XJ. M\ode rate to **lo-10** **_Ly_** pT':-.suK 'Ja _:i_ .,1 989 diii 994.

incenltives for cane production dIe1 nrot c:ha oe _nluch_ when allowance is made for rble nomil r- tion O' tradable i;] uts (priucipr%i.y **fe** s^ **_-)_** toi _fOr_ **Joe---** ti,e principal nontradable iUmporrs (Can-31 ,- **L' c** and electricity for pumpsets). lnici-L,ves for **Can e** production were somewh}at higber n riJ _a-r_ Piadesh than in Maharashtra and TarriJ Nadu. Half of Indian cane production s i u ci .- , producers of gur and srnal!-scale cie racm,n. larcti producers of khandsari suLgar. Because of' Irdia's cormplex regulatory system -- especially in the impor-ant sugarproducing statr, Uttar Pradesh -- inleot us a.e significantly higher for unregulated aucviciies than for the modern sugar mill sector. Regulations subjec, sugar n-iiPs to controls that require them to: Sell specific quantintes of their sugar p-roduLction at low "levv` prices.

* Sell molasses production at a fraction (0. I or iess) of open market and border prices.

Pay miniimum prices (for specific quanti-ies of cane) at above-free-market prices, except in ears of cane shortages.

This paper is a product of Trade, Development Research Group. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Lili Tabada, room MC3-333, telephone 202-473-6896, fax 202-522-1159, Internet address ltabada@Cworldbank.org. Garry Pursell may be contacted at gpursellEworldbank.org. August 1998. (89 pages) _The Policy Research VWlorking Paper Series disseminates the findings of work in progress to encourage the exchaozge of id.eas ahb-t development issues. An objective of the series ;s to get the fin7dings out quickly, even if the presentations are less than fliy pol:shed. The papers carry the names of the authors and should be cited accordingly. The findings. interpretations, and conclusio;,s expressed in 's i paper are entirely those of the authors. They do not necessarily represen_ **_t_** _he viewv of t;?e v ord Bank, its Efecwiozje Dl)rec-tos o,- tAhe couwttrics thev represent._ Produced by the Policy Researclh Dissemination Centei
# TRADE POLICIES AND INCENTIVES IN INDIAN AGRICULTURE

# METHODOLOGY, BACKGROUND STATISTICS AND PROTECTION AND INCENTIVE INDICATORS, 1965-95

# BACKGROUND PAPER NO. 1 SUGAR AND SUGARCANE

# Garry Pursell and Anju Gupta*

Garry Pursell is a consultant in the Development Research Group (DRG) of the World Bank, Washington DC. Tel. (202) 473-8002. Fax (202) 522-1159. Email:<GPursell@worldbank.org> Anju Gupta was at DRG at the World Bank. She is now at the Department of Economics, Georgetown University, Washington DC.Tel. (202) 687-5563. Email: <Guptaal (gusun.georgetown.edu>
# **Summary findings**

This paper is intended to provides background information and incentive indicators on sugar and sugarcane for an ongoing general study of Indian agricultural trade policies and agricultural incentives, and for other analyses. India is the world's largest sugar producer, but its domestic market has been isolated from world markets by extensive import, export and domestic controls. During the 29 years from 1965 to 1994, real domestic prices of both sugar and cane have remained quite stable and have declined at average annual rates of about 0.6 percent and 0.3 percent respectively. By contrast, the world free market price of sugar has been subject to wide gyrations, but expressed in Indian Rupees, has increased in real terms at about 1.3 percent per year during the same period. The contrast in these trends was mainly due to the large real devaluation of the Indian Rupee after about 1986, but in the first half of the 1990s, it meant that at world sugar prices of about US cents 13-15/lb or above, the Indian domestic prices were about equal to or less than world reference prices.

Because of the fluctuations in world free market prices, nominal protection of sugar and sugarcane production in India, as measured by the differences between domestic prices and border reference prices, has also been subject to very large changes. Nominal protection was very high during periods of low world prices in the 1960s and the mid 1980s, was negative for a number of years of high world prices in the mid-1970s and early 1980s, and was moderate to low by previous standards between 1989 and 1994. As regards incentives for cane production, these broad patterns do not change very much when allowance is made for the nominal protection of the tradable inputs (principally fertilizers) or for subsidies on the three principal non-tradable inputs, of which the most important is canal irrigation, followed by credit, and electricity for pumpsets. Incentives for cane production as measured by effective subsidy and producer subsidy equivalent coefficients appear to be somewhat higher in Uttar Pradesh than in Maharashtra and Tamil Nadu.

About half of Indian cane production is used by artisinal[ producers of gur and small scale, _defacto_ unregulated producers of khandsari sugar. The net effect of the complex regulatory system, especially in the most important sugar producing state, Uttar Pradesh, is that these activities receive significantly higher incentives than the modern sugar mill sector. This is in part because they have not been subject to controls over the mills which have required them to: (a) sell specified quantities of their sugar production at low "levy" prices (b) sell their molasses production at prices which have been a small fraction (one tenth or less) of open market and also border prices, and ( c ) pay minimum prices for specified quantities of cane which have been higher than free market prices, except in years of cane shortages.

This paper- a product of the Development Research Group-is the first in a series of studies which will provide background data and protection and incentive indicators for thirteen major Indian crops. The papers are intended to provide quantitative data and other information in connection with research on Indian agricultural incentives which has been under way for a number of years. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington DC 20433. Please contact Lili-Anne Tabada, room MC3-333, telephone 202-473-6896, fax 202-5221159. Internet address <LTababda~worldbank.org>. September 1997. (122 pages)
# **CONTENTS**

## **RESEARCH PROJECT: INTRODUCTION AND METHODOLOGY**

|**ABSTRACT**|**........................................................**<br>**v**|
|---|---|
|**PREFACE**|**......................................................**<br>vi|
|**RESEARCH**|**PROJECT METHODOLOGY .......................................................**<br>**x**|
||INTRODUCTION .......................................................<br>x|
||NOMINAL PROTECTION .......................................................<br>x|
||EFFECTIVE PROTECTION ......................................................<br>xxii|
||EFFECTIVE SUBSIDY ..................................<br>.................... xxiv|
||PRODUCER SUBSIDY EQUIVALENT .......................................... xxv|
||INCENTIVE INDICATORS AND THE EXCHANGE RATE ...... xxvi|
||TABLES ......................................................<br>xxvii|
||REFERENCES ......................................................<br>xxxiii|
|**RESEARCH**|**PROJECT BIBLIOGRAPHY .....................................................**xxxiv|

## **BACKGROUND PAPER NO.1: SUGAR** AND **SUGARCANE**

|ACRONYMS**........................................................**<br>**2**|
|---|

## **BACKGROUND NOTES AND STATISTICS**

|INTRODUCTION ............................................<br>3|
|---|
|INDIA AND THE WORLD MARKET|
|_World production and consumption ..........................................._<br>_S_|
|_World trade and major exporting and importing countries ...................7_|
|_World sugar prices .........................................._<br>_12_|
|_International sugar policies .........................................._<br>_13_|
|THE INDIAN SUGAR AND SUGARCANE ECONOMY|
|_Producers and consumers .........................................._<br>_16_|
|_Exports and imports of sugar .........................................._<br>_19_|
|_Indian sugar and sugarcane policies .........................................._<br>_20_|
|_Molasses and molasses policies .........................................._<br>_24_|

ii
# **INCENTIVE INDICATORS**

|NOMINAL PROTECTION, 1965-94 ............................................<br>27|
|---|
|_Nominal protection: mill sugar .........................................._<br>_27_|
|_Nominal protection: khandsari .........................................._<br>_34_|
|_Nominal protection: molasses .........................................._<br>_36_|
|_Nominal protection: mill sugarcane ................................_<br>_.......... 39_|
|_Nominal protection. gur and khandsari in UP ...................................._43|
|_Nominal protection of sugar and sugarcane compared ...................... 45_|
|EFFECTIVE PROTECTION FOR SUGARCANE, 1981-90 ............. 46|
|EFFECTIVE SUBSIDY FOR SUGARCANE, 1981-90 ..................... 48|
|PRODUCER SUBSIDY EQUIVALENTS ESTIMATES FOR<br>SUGARCANE, 1981-90 ...........................................<br>51|
|REFERENCES ............................................<br>54|
|STATISTICAL DATA SOURCES ............................................<br>56|

**DATA TABLES Si TO S9**

## **ANNEXES 1 TO** 22

iii
# RESEARCH PROJECT: INTRODUCTION AND METHODOLOGY

iv
# **ABSTRACT**

This is first of six background papers which are intended to bring together some of the principal empirical results of research on trade policies and incentives in Indian agriculture which has been under way for a number of years. The background papers will provide details of the incentive indicators which have been estimated for thirteen major crops, as well as background data on India's role in the world production, consumption and trade of each of these commodities. Each paper also includes a description of the general methodology, and a research project bibliography which lists studies which were completed as part of the project or which were closely related to it. The background papers are intended as a reference point for a forthcoming book by Ashok Gulati and Garry Pursell entitled _Trade Policies and Incentives in Indian Agriculture._ The data and results generated in the research are much too extensive to be documented or even properly summarized in the book, so it was decided to make them available separately as background papers, so that researchers can check, correct or extend them. Eventually it is intended to make the data available in electronic form, perhaps on a CD-ROM.

The starting point for the research summarized in this background paper was an original study of incentives for sugar and sugarcane production by B. N. Goldar and Ashok Gulati, which covers the period 1981 to 1989 (see the research project bibliography).

v
# PREFACE

The incentives to Indian farmers are affected by tariff and non-tariff policies which affect imports and exports, and by other domestic policies which affect the prices they are paid for their outputs and the cost of their inputs. Before 1986, very little systematic research had been done on this topic and very little was known about the net effect of these policies, even for rice and wheat, which are the largest and most important crops. Between 1985 and 1988, I was at the World Bank's New Delhi office, and among other things I initiated some research on protection and incentives to Indian manufacturing. Noticing the extraordinary lacuna in what was known about the equivalent incentives to agriculture, almost as a sideline I engaged Ashok Gulati, who at that time was teaching economics at one of the colleges of Delhi University, to do an equivalent study of wheat and rice. From discussions with him, it was immediately apparent that the estimation of incentive indicators for agriculture involves empirical methods which are different in many ways from the methods I was using in making the equivalent estimates for manufacturing. The methods and general approach we developed were incorporated in a first 1986 paper by Ashok Gulati, which gives effective incentives for wheat and rice for the period 1981 to 1985. These estimates for wheat and rice were subsequently updated, and following the same broad approach Ashok Gulati completed new studies of groundnuts (the most important oilseed) and cotton. During the same period I did a study which incorporates protection estimates for edible oils and oilseed processing.

Following my return to the Washington office of the World Bank in September 1988, I prepared a larger research project on this subject which was finally approved by the Bank's research committee in March 1990. This funding was supplemented by a small grant from the Ford Foundation. As part of this program of research the previous studies on wheat, rice, groundnuts and cotton were updated, and new studies were initiated by Ashok Gulati and other Indian researchers. A list of published and unpublished papers and monographs which were either done directly as part of this research, or which were closely related offshoots, is given in the bibliography. Some of these were studies of crops not previously covered, including sugar (Bishwanath Goldar and Ashok Gulati), rape-mustard, soyabeans and sunflowerseed (Ashok Gulati), rubber, coconut/copra and tobacco (Sunil Mani), coarse grains (Pradeep Sharma), pulses (Rajesh Chadha), and khandsari and gur (G.D. Kalra). Others were studies of general topics related to agricultural incentives, including transport and marketing costs (Pradeep Sharma), tractors (G.D. Kalra) and and environmental issues (P.K.Joshi). At the same time Ashok and I started work on a book, the aim of which is to synthesize these individual studies and to draw out their implications for the agricultural sector as a whole and for policy reform. Sections of the draft manuscript and a number of the individual studies were discussed at a conference held in New Delhi in November 1991. This conference was attended by a number of Indian agricultural and other economists as well as other participants in the by then active debates on economic policy reform. Four principal suggestions for improving the interest and relevance of the book we were preparing clearly emerged from these discussions. First, it was essential to update the vi
estimates, most of which went up to 1987 or 1988, to take account of the substantial downward movement in the real value of the Rupee which started in about 1987, and of the the July 1991 devaluation. Secondly, extensive and unprecedented liberalizations of the trade and other policies affecting manufacturing had either been recently implemented or were in prospect, and it was felt that the book should take account of the direct and indirect impact of these changes on agricultural incentives. Thirdly, it was strongly urged that the protection and incentive estimates for the 1 980s and later should be put in a longer term perspective which, among other things, would allow for fluctuations and longer term trends in world commodity prices. Finally, it was suggested that the study should recognize India's potential impact on world prices in the cases of commodities - notably rice - where Indian production or consumption is a large fraction of world production or consumption, and where changes in Indian imports or exports are likely to perceptibly affect world prices.

In order to accommodate the suggestions for a longer and updated time series of agricultural incentive indicators, it was decided where possible to use some shortcuts to extend the detailed estimates of effective protection and effective subsidy coefficients (see below for a description of these concepts) up to 1990, but to confine the longer term series to nominal protection estimates for the years 1965 to 1993. Fiscal 1993 was the first full year following the July 1991 devaluation and the first year to include the trade policy and other reforms introduced in March and April 1992. Subsequently, for most but not all of the crops, the nominal protection estimates were extended up to 1995. These long period nominal protection estimates for agriculture have in turn been used as one input into the analysis of the extent of exchange rate overvaluation inherent in India's trade regime, which is a key element for quantifying the relative incentives over time between agriculture on the one hand and manufacturing, minerals and non-traded activities on the other. Nalin Kishor and subsequently Anju Gupta have had major roles in these later developments in the research.

The extension of the original study as described above took much more time than originally anticipated and involved very extensive data collection and manipulation. Most of this was done in Washington, with some assistance from researchers in India on various topics, mainly as regards Indian production and price data. The original data and the details of how it has been processed are much too extensive to include and describe in detail in the book that is under preparation. On the other hand I feel that there should be some place in which this material is available, so that it can be checked, corrected, extended, contested-whatever-by other researchers. At the same time, following the suggestions made at the 1991 Delhi workshop, for each commodity studied, I thought it would also be useful to include some data on India's role in world production, consumption and trade. In this way researchers would be provided with an initial basis for rough judgments and a starting place for subsequent research, among other things on the question of India's likely influence on world prices.

Thirteen crops will be covered in the planned background papers: together these crops currently account for roughly 65 percent of the value added of the Indian crop sector. The crops will are be grouped as described below in five background papers, followed by various aggregations which will be presented in the sixth.

Sugar and sugarcane Food grains (rice, wheat, maize, sorghum and gram) vii
Oilseeds (groundnut, rapeseed/ mustard, soybean, sunflowerseed, copra). Cotton Rubber Aggregate incentive indicators.

A general description of the incentive indicator concepts used is given in the following section on methodology, as well as of the broad principles used in estimating them. However, each crop has its special characteristics which required individual treatment, and rough rules of thumb and shortcuts were often used. These are described in the relevant text and table notes.

Garry Pursell viii
# METHODOLOGY

## **Introduction**

Thirteen commodities, five foodgrains and eight non foodgrains, are covered in the study. These are wheat, rice, jowar (sorghum) and maize, gram (chickpea), groundnut, mustard/ rapeseed, soybean, sunflower, copra, cotton, sugarcane and rubber. Together these crops account for roughly 65% of the gross value added of crop output.

<!-- Start of picture text --> Agricultura rp<br>| Food Grains | | N-on-Food Grainsl<br>iCerealsChickpeas [X1 Sugarcane Cotton Rubber<br>Wheat Rice Maize Sorghum Groundnut Rapeseed/ Soybean Sunflower Copra<br>Mustard<br><!-- End of picture text -->

For each of these commodities, the background papers present and discuss estimates of nominal protection, effective protection, effective subsidy, and two variants of producer subsidy equivalent indicators. All these concepts are well known.<sup>1</sup> We briefly define them below, and for each indicator, describe at greater length the approaches that were adopted, and some of the problems encountered, in estimating it empirically. Because tradable inputs generally constitute a much lower share of the cost of producing agricultural products than their typical shares in the production costs of manufactured products, we have emphasised and included a considerably more extensive discussion of the estimation of the nominal protection of the commodities, than of the other indicators.

### Nominal Protection

Very roughly, the nominal protection of a commodity is simply an estimate of the extent to which its price has been affected government interventions in the country's international trade. In the study, nominal protection is measured as the _Nominal Protection Coefficient_ (NPC) I The underlying theory, including the many general caveats that should be borne in mind in interpreting incentive indicators, are availabl **e** lsewhere in the very extensive literature on this subject and are not dealt with here. The original research in India was principally guided by a manual on the empirical estimation of these indicators. Pursell, Garry and Neil Roger. 1985.

x
of a commodity, defined as the ratio of that commodity's domestic price to its international reference price. Symbolically,

# NPC = pD/pR

# where,

NPC = Nominal protection coefficient pD = Domestic price of the commodity at the farm gate.

pR = Reference price of the commodity i.e. what the farmer would have received under free trade at the same exchange rate.

If the NPC is greater (less) than one, then the commodity under consideration is protected (disprotected or in effect taxed), compared to the situation that would have prevailed under free trade at the same exchange rate. The nominal protection of tradable inputs is defined in the same way.

In estimating NPCs, the reference periods for all the estimates are Indian fiscal years, which begin on April 1 and finish on March 31 during the following calendar year. However, to economize on space throughout the background papers and the book we use the second calendar year to refer to the fiscal year. For example, 1981 means Indian fiscal 1980/81, 1985 means Indian fiscal 1984/85, and so on.

# _State coverage_

The nominal protection coefficients, as well as the other incentive indicators, have been calculated initially at state level, based on prices ruling at representative market centers. The state with the largest production during the 1980s is always included, and others either because they are also large producers or were considered to represent varying production conditions. As explained below, the state level indicators are subsequently aggregated to give India-wide indicators. Because of data availability and changing production over time, there are sometimes fewer states included in the long term nominal protection series and in the effective protection and effective subsidy estimates presented here, than in the more detailed original studies of individual crops which generally start in 1981. We have considered five states for maize, four for sorghum (jowar) and gram, three for groundnut, sugar, cotton, wheat and rice, two for mustard and copra and one for rubber, soybean, and sunflower.

# _Domestic prices_

For wheat and rice the domestic price in each state has been approximated by the government's procurement prices which are announced in advance of the sowing seasons. As explained in the detailed crop studies, these were judged to be the key prices influencing farmers' planting decisions, and in the major producing states in most years they did not greatly differ from average wholesale prices during the harvest periods. Alternative protection estimates based on wholesale prices for a number of years during the 1980s do not greatly differ from these estimates. For the other crops we generally use wholesale prices at major market centers in the producing areas, and so the prices include some transport and marketing expenses. To this extent they are higher than the prices actually received by farmers, but this does not make much difference to the NPC estimates, since the reference prices are estimated at the same regional centers and also include the same local transport and marketing expenses. A key advantage of using procurement or wholesale prices is that they distinguish different varieties and qualities xi
and give weekly and monthly average prices in the major markets for long periods going back to the 1960s and earlier. An alternative would be to use statistics on farm harvest prices, but these are usually averages with unknown weights of different varieties, the coverage is uneven and uncertain, and it is difficult to obtain reasonably lengthy time series. Experiments using farm harvest prices were tried in the detailed studies of coarse grains and of pulses, and in an adjunct study of wheat and rice, but were judged to be unsatisfactory.

A fixed proportion ( and in some cases 100 percent) of some commodities has been acquired by the government at "levy prices " which are lower than open market wholesale prices. In these cases we have calculated and used the weighted average of the levy price and the free market wholesale price in estimating nominal protection, where the weights are the mandated share of levy sales in production and the free market share. This is important for sugar, for which the government has varied the levy proportion of mill sales quite substantially from year to year, and also for molasses where the entire production of each sugar mill has been acquired at very low levy prices. 2 The domestic prices used in the estimation of nominal protection are intended to approximate as closely as possible the prices that the farmers (or mills in the case of estimates done at that level) receive during the harvest. Prices during the rest of the year reflect a variety of other factors including storage costs of traders, and using them to measure incentives would include the incentives for post harvest storage and distribution functions as well as farming. The principle we have followed has therefore been to calculate average prices during the periods during which the bulk of each crop is harvested. These periods are indicated in the individual studies. But it should be noted that they differ considerably as between commodities e.g. most of the wheat crop in the north-west is harvested and sold during a short six week period, whereas rubber and coconut trees in the south produce year round. There are also differences for the same commodities between producing regions. In addition the data available for some commodities(e.g. rubber) in earlier years is for "crop year " averages, which differ from Indian fiscal years. Some of the harvest periods also overlap fiscal years but have been assigned to particular fiscal years in presenting the estimates. The correspondences between these periods and fiscal years are indicated in the individual studies, but they should borne in mind in interpreting the time series, and especially the NPC estimates for agriculture as a whole and the various other aggregations.

There can be substantial differences between the prices of different varieties and grades of a commodity, and we have been careful to specify which ones have been used in the price comparisons. As far as possible we have used price data for the same or similar varieties in the estimates for each year, including the long term estimates. But doing so has inevitably involved making some _ad hoc_ judgments which are noted in the text or the relevant tables, and also in the original commodity studies. The varieties for which price comparisons have been made are generally those with the largest production that the authors of the original commodity studies 2 If the levy were of a fixed quantity rather than a fixed proportion, it could be argued that the free market price should be used, as this is the relevant incentive that producers will take into account in deciding whether to increase or decrease their production. On the other hand in the long run the size of the levy and the acquisition price will affect the total return from the crop and long run investment and production decisions. In practice the Indian levies have been applied to processors (mainly sugar mills and rice mills)and have been fixed proportions of mill production. There has been no corresponding differentiation of prices paid to farmers: the main effect of the levies has been to reduce the prices that mills can afford to pay for sugar cane and paddy respectively.

xii
considered would reasonably represent the overall protection situation of the particular industry, but we recognize that the relatively few and fairly arbitrarily chosen price comparisons that it was feasible to undertake mean that there is a considerably margin of error in the estimates. For example, we compared the Indian and world prices of one short staple, one medium staple and one long staple cotton, but there are many varieties of cotton, and there can be significant quality differences between regions for varieties which apparently have the same technical characteristics. Again, we compared the prices of Indian "common rice" with the prices of exported Thai 15% broken rice, but the broken grain percentages in the Indian rice vary to unknown and unreported extents from less to considerably more than 15 percent. These problems of representativeness and accuracy are inherent in all price-comparison based estimates of incentives, and should be recognized and allowed for at the outset.

# _Reference prices_

Having estimated average domestic prices of representative product varieties during the principal harvest periods, the next step is to estimate corresponding average _reference prices._ We define reference prices as what the prices of the domestic varieties would have been during the same period under conditions of free trade at the same exchange rate. Estimating reference prices would be straightforward if there were substantial imports or exports of the same or a similar variety. In that case, provided there were no non-tariff controls, the tariff (or the export tax or subsidy in the case of exportables) after adjustment for domestic port, transport and marketing costs, would provide a reasonable first approximation of nominal protection. Even if there were non-tariff controls, a reference price could be derived from recorded cif import prices or fob export prices. But in India during most of the period studied, every one of the crops was subject to some form of non-tariff control over imports or exports or both. Largely but not entirely for this reason, for most crops included in the study, there were no imports or exports in most years. Consequently, with only a few exceptions, scheduled tariffs or export taxes and subsidies had no relation whatever to the actual differences between domestic and international prices. This also meant that direct observations of relevant international prices from Indian sources was not possible. Moreover, for products of which there were significant exports or imports during certain periods, the trade was frequently in varieties or grades that were not representative of domestic production. For example, during the 1 980s and after there were regular exports of high quality basmati rice, but these prices were far above the international prices of the common rice varieties which constitute the vast bulk of Indian rice production. Another problem was that even when there were regular imports or exports, the actual prices of these transactions could be obtained with great difficulty, or more often not at all, notably for periods more than a few years in the past. The only easily available data in such cases were unit values calculated from the official trade statistics, but because these usually aggregate different grades and varieties in unknown proportions, which moreover change in unknown ways from year to year, they are notoriously unreliable as indicators of either the level or trends in international prices.

For these reasons, the principal starting point for the estimation of reference prices was published data on international commodity prices. In doing this, we generally followed the choices in the original detailed studies, but these comparisons sometimes had to be modified in going back to earlier years. In doing so we tried as far as possible to find international prices for the same or a similar specification, variety and quality as the domestic product. By the same token, we used averages of the international prices during the same periods as the average xiii
domestic prices with which they were being compared.<sup>3</sup> Finding a product traded internationally for which a consistent long term price series was available was crucial but difficult and usually required making some arbitrary assumptions which are detailed in the background papers. Although it is perhaps an extreme case, the lengths to which we had to go can be illustrated by the NPC estimates for groundnuts.. Indian groundnuts are overwhelmingly used as the raw material for the groundnut oils and meal industry, but for many years there have been no Indian imports or exports of crushing grade groundnuts, and international trade in similar groundnuts (mainly exported from Africa) practically ceased in about 1988. After this there are no published statistics of international groundnut prices, with the exception of much higher quality and higher priced "US runner " groundnuts used for direct consumption and in the confectionery industry. Comparisons of Indian groundnut prices with the latter would be quite misleading and would suggest that the Indian industry which previously has been heavily protected had overnight become disprotected. To deal with this problem, in this case we obtained a regression equation relating international prices of crushing- grade groundnuts at Rotterdam during the period in which these prices were published, to the international prices of groundnut oil and meal during the same period. For the years after 1988, this equation was used to infer hypothetical international crushing- grade groundnut prices from the published international prices of groundnut oil and groundnut meal, and adjusted for transport and marketing costs, these inferred prices were in turn used as the basis for the Indian reference prices and the NPC estimates for Indian groundnuts.

# _Importable and exportable hypotheses_

In estimating the nominal protection indicators of farm commodities, transport and other related costs - both international and domestic - can make a very large difference. International transport costs provide a degree of protection for domestic producers against imports, whereas in exporting the domestic producer's price must be low enough to make the product competitive in foreign markets, including transport cost to the market. Consequently, the observed domestic price of a commodity may well be lower than the import reference price, while at the same time substantially exceeding the price that would have to be charged to capture export markets. Similarly, domestic transport costs provide additional protection to production in inland areas, but on the other hand reduce the prices that producers would receive if they were competing with imports at a port city, or if they were exporting. The importance of transport costs depends on a variety of factors, including the location of foreign suppliers of imports and foreign markets for exports, the location of domestic producing areas in relation to the main ports, and the value of the commodity in international trade. In particular, in our sample of commodities, transport costs were very high in relation to the international prices of low-value commodities such as maize, sorghum, and wheat but considerably lower in relation to the international prices of higher-value commodities such as rice, sugar and long staple cotton. For example, we estimate that under free trade in the 1990s, the price that the farmer would have received for wheat under free trade would have been about 40 percent lower than the price at which he would have had to compete with imports. By contrast, the estimated free trade export price for milled common rice was

**3** If there actually had been free trade, differences between the delivery times of domestic supplies and imports, and other factors, might mean that international prices in periods before and after the domestic harvest would also influence domestic prices. But we made no attempt to allow for this, owing to the arbitrary assumptions that would have to be made to construct the alternative free trade scenarios in such detail.

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about 19 percent lower than the corresponding import competing price. In order to deal with the resulting ambiguity of the nominal protection estimates, the NPCs of a number of the commodities are calculated under two alternative hypotheses: a) The _importable hypothesis:_ when the foreign product is an actual or potential substitute for the domestic crop in domestic markets.

b) The _exportable hypothesis:_ when the domestic crop is or potentially could be exported to compete in foreign export markets.

For the reasons given previously, there were often no imports or exports, and in these cases we estimated the _potential_ import or export reference price i.e. what the price would have been if the QRs or other conditions which prevented imports or exports had not existed. As regards potential exports, in doing this we took into account the possibility that in the absence of export controls, exports would have been profitable at a devalued exchange rate. An example is the treatment of wheat. At the actual exchange rate during most years before 1990, wheat exports would not have been profitable, but we have estimated elsewhere that they would have been profitable in many years at an equilibrium free trade exchange rate. For this reason we estimated wheat nominal protection over the period both on the exportable hypothesis as well as the importable hypothesis.

# _Domestic transport costs_

As noted above, reference prices are affected by domestic transport and other domestic costs as well as by international transport costs. In India, these domestic costs are sometimes as great or larger than international costs. For example, we estimated that the storage, marketing and transport cost of shipping wheat from Punjab to Bombay is only slightly lower than the cost of shipping wheat from the US gulf to India. Hence the price the Punjab farmer would receive under free trade depends on where his wheat would have to compete with foreign wheat under free trade. For this, some kind of geographical free trade scenario is needed which would indicate these points of competition. In our estimates we generally assumed that under free trade import substitutes would compete with imports in the principal port cities, so that the reference price in the supplying region would be the landed price of the import in the port city _minus_ marketing and transport costs to get the domestic product to the port. Similarly, the reference prices of exportables are the estimated fob prices at the port, _minus_ port charges and _minus_ marketing and transport costs from the supplying region to the port. Assuming competitive conditions in the up-country region shipping to the port city, this would then be the prevailing price in that region under free trade, since if prices for delivery from the same supplying region to any other domestic market were higher, supplies would be diverted to that market and the prices would fall to the level of the reference price.

For the commodities we considered, the scenario just described is only one of a number of possibilities and may not be the most plausible in some cases. For example, the reference price would be higher and estimated nominal protection would be lower if the imported commodity were to compete with the domestic commodity at some intermediate point between the supplying region and the port city, since in that case we would need to add transport costs to the area of competition, to the landed price of the import at the port, and deduct the transport cost from the supplying region to the area of competition.

Another complication is the existence of both surplus and deficit producing areas. This may be illustrated by the case of wheat. For the NPC estimates made under the importable hypothesis, for a region with surplus wheat like Ludhiana in Punjab, the reference price was xv
defined as the c.i.f. price of imported wheat at Bombay plus port charges to land the wheat, minus internal transport costs from Ludhiana to Bombay, minus marketing costs and trading margins. This assumes that imported wheat competes with Ludhiana wheat at Bombay, and that the impact of this competition falls on farmers in the Ludhiana region, for whom the reference price that they would receive under free trade is reduced by an amount equivalent to the sum of the transport costs, marketing costs and trading margins required to get his wheat to Bombay. More generally, also allowing for processing costs needed to make the domestic commodity equivalent to the internationally traded commodity, the reference price for surplus states under the importable hypothesis is: pR = pB + Port clearance charges - TCS - Marketing costs - Traders' margin - PCs pB = (International price + Freight + Insurance) * exchange rate where, pR5 = Reference price of the crop for surplus states pB = Border price in rupees TCs = Transport cost from surplus state s to the port city PCS = Processing costs in surplus states If, however, NPCs are estimated for deficit areas, such as (in the case of wheat) Lucknow in Uttar Pradesh, the reference price for the cultivator in the Lucknow area depends on whether under free trade his wheat would have to compete with imported wheat or domestic wheat from a surplus area such as Ludhiana. In such cases we have taken the lower of the estimated delivered prices, here the lower of (1) the c.i.f. price plus port charges plus transport costs to Lucknow from Bombay, plus marketing costs and traders margins; or (2) the reference price in Ludhiana, plus transport cost from Ludhiana to Lucknow, plus marketing costs and traders margin. As the second of these was lower, the reference price in Lucknow was pRs = pRs, + TCd + Marketing costs + Traders' margin where, pRs, = Reference price in nearby surplus area ( Ludhiana) TCd = Transport cost from the surplus area to the deficit area.

Ideally, this procedure would have been followed for a number of producing areas in each state - especially in geographically large states such as UP - but this was not permitted by the time and resources available for the study, and we used the reference prices and the derived NPCs for a single major market town in each state as estimates of the corresponding state-wide reference prices and NPCs. Both this and the assumptions made regarding the points of competition under hypothetical free trade should be borne in mind in interpreting the NPC estimates.<sup>4</sup> In order to provide researchers with a means of judging how quantitatively important these assumptions might be, and of making their own alternative calculations, we have described them in each 4 The various plausible ways of treating domestic transport and marketing costs is one of many reasons for not attaching a lot of significance to the precise values of nominal protection estimates based on price comparisons. However, it should be pointed out that estimates of nominal protection derived from binding tariffs or export taxes or subsidies would be subject to the same problems of interpretation, since these are applied to border values (cif or fob) which do not include domestic transport and other costs.

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commodity paper, and have also shown the transport and other domestic costs which have been used in the relevant tables.

Because of their importance, a separate paper on transport - both domestic and international - and marketing costs was written for the research project by Pradeep Sharma.<sup>5</sup> As regards domestic transport costs, this study provides estimates of rail and road freight rates for wheat, rice, four oilseeds, cotton and sugar between major producing regions and major ports and markets for each year between 1981 and 1990. The study also gives general statistics on the average variation of road and rail freights according to distance, as well as statistics on the average proportions shipped by these two modes for different distances. The modal composition by distance for foodgrains, cotton, oilseeds and sugar in 1981 is shown in Annex 3. These proportions were used to calculate weighted averages of the road and rail freight rates and were used in the estimation of the commodity reference prices during the 1980s. Freight rates for coarse grains (maize and sorghum) were assumed to be the same as for wheat, and for copra and rubber we used separate estimates made in the original commodity studies. To project the 1980s estimates, indices of road and rail freight rates were constructed and applied to the 1981 freights. The 1981 freight rates are given in Annex 4. The rail freight series is the deflator implicit in the published series of rail gross goods traffic receipts at current and constant prices over the period, explained in Annex 5. The road series is the equivalent implicit road freight deflator when available, supplemented by various _ad hoc_ adjustments explained in Annex 6.

# _International transport costs_

In estimating nominal protection under the exportable hypothesis, we have made various assumptions indicated in the background papers, regarding the points of competition with similar foreign products. For example, for wheat we have followed the original study and assumed that Indian wheat would compete with US wheat in deficit countries in North Africa, represented by Tunis. In this case, Tunis is roughly equidistant from India and the US, which allowed us to assume that fob prices in India would be the same as fob prices in the US. In other cases we made separate estimates of the freight from other major exporting countries to the export market in order to estimate the price at which the Indian product would have to compete, and deducted estimated freight to that point from India to give an estimate of the Indian fob price. These estimates focus on the actual or potential competitiveness of the surplus areas in India and include only the surplus states. For example, in the wheat study, exportable hypothesis NPCs are estimated based on Ludhiana in Punjab and Karnal in Haryana only, and there is no NPC estimate for UP. Deficit states are also excluded from the exportable hypothesis estimates for rice and maize. In principle they could be included, and this would alter the corresponding aggregate indicators for these commodities, but in practice only slightly.<sup>6</sup> The three states covered in the importable hypothesis estimates for cotton and sugar, are also covered in the exportable hypothesis estimates for these products.

The study by Sharma includes a discussion and presents estimates of international freight rates and various international freight rate indices over the period 1981 to 1990. Together with other estimates in the original commodity studies, these were used for the nominal protection estimates for the 1980s. However, consistent series of international freights for all the crops are

> 5 Pradeep K. Sharna (1990).

> 6 There is sufficient information in the background paper tables for interested researchers to check the significance of these omissions.

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not available for the whole 1965-95 period. The most complete are sixteen series for wheat based on different origins and destinations published in the FAO yearbooks, including wheat freights from US gulf ports to Japan and Rotterdam, and to I]ndia in some years( see Annex 1). These have been used to estimate freight rates for wheat and also as a basis for the estimates for some of the other crops. For other commodities, actual freight rates were available from Indian sources for a few years, and we used the international wheat freight series or other series to index these forwards and backwards to other years. Various other approximations and calculations are explained in the individual background papers. Among the complications that should borne in mind in interpreting these estimates is that for many commodities in most years they are hypothetical, since there was no trade actually occurring. However the level of freight rates depends among other things on the volume of trade and the efficiency of ports. In using published international freights as a basis for estimating Indian freights, we generally assumed implicitly that if trade had occurred, it would have been in large ships in large volumes, and that port capacities would have been adjusted accordingly without, for example, port bottlenecks and long waiting times for ships which would be reflected in freight rates 7

# _Port costs_

Estimates of port costs -mainly the cost of unloading imports or loading exports, but also other expenses such as customs clearance and storage- were made in the original commodity studies, but usually for one or a few years in the 1 980s only. For a number of commodities there were no exports or imports, and it was assumed that port costs would be the same as for other similar commodities. Partly for the same reasons, we were also unable to find actual port costs for the 1970s and earlier. To project the observed port charges forward to 1995 and back to 1971 we used the public sector emolument index, on the reasoning that this would approximate labor costs in the ports, which are managed by public sector port authorities. This index is not available before 1971, and for these years we used the consumer price index for industrial workers. The two together give a consistent series to project port charges, and are shown in Annex 2.

# _Marketing costs_

Moving commodities to be exported from port cities or to compete with imports there or elsewhere also involves marketing costs which include interest charges, handling expenses, storage charges, overhead expenses, miscellaneous expenses arising out of transit and storage losses, and wholesale distribution margins. These costs vary considerably by year, by season and by crop. In the case of each crop, the general treatment follows that adopted in the original commodity studies. However some general rules of thumb have also been used. In particular, based on the study by Sharma and a review of a number of studies by Gulati et al (1990)8, in the case of foodgrains and oilseeds in the 1 980s, we have taken marketing costs to consist of an interest charge for two months at an 18 percent rate applied to the procurement price, plus Re 1 per quintal to represent other marketing expenses. To project these estimates forwards and backwards, we calculated the average of these marketing costs expressed as a percentages of the prices of each commodity during five years in the 1980s. These percentages were applied to

> 7 The significance of this assumption is apparent from reports of port bottlenecks which were creating long waiting times for ships when substantial exports of wheat and rice started in the mid 1 990s. 8Gulati, Ashok with James Hanson and Garry Pursell. 1990. "Effective Incentives in Indian Agriculture: Cotton, Groundnuts, Wheat, and Rice".

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average prices to to give estimates of marketing costs in other years. This same general approach was also used in treating rubber, sugar and cotton, but as regards the first two it was incorporated in the treatment of processing costs, discussed separately below.<sup>9</sup>

# _Processing costs_

A number of farm commodities are processed before they are traded internationally, or even very widely in the domestic market. The methods used to treat processing costs are described in the original commodity studies and in the background papers. In three cases ( rice, rubber and copra) the processing margins were not separated, so the protection estimates are for the combined activity of growing and processing. In the case of rice, to the extent that rice mills possess some local monopsony power,<sup>1 0</sup> it is possible that changes in milling margins rice would not be fully reflected in the prices of paddy, and the nominal protection estimates for rice would not accurately represent the incentives to paddy farmers. It was originally intended to separate milling from paddy fanning, but we were not able to obtain satisfactory India-wide data on processing margins or on competition in the rice milling industry. Among other things, to do so was complicated by the need to separate out the processing from the trading functions of the mills. However Sharma's study of marketing and transport costs suggested that rice milling and marketing by private traders is highly competitive, and we have judged that our estimates of nominal protection for milled rice are generally reliable indicators of farm level incentives for paddy. As regards rubber and copra, according to the original commodity studies, the processing margins required to transform latex to smoked rubber sheets and coconuts to copra are very small relative to the international prices of these commodities, and in any case are typically performed by the farmers themselves or in villages in the farming areas. Consequently we believe that the nominal protection estimates for traded rubber sheets and for copra are also reasonably reliable estimates of protection for rubber and coconut farming.

For three other commodities-groundnuts, cotton and sugar-we separated processing from the farming activity. Groundnuts traded internationally are shelled, and so the original study allowed for decortication costs and weight losses (in addition to domestic marketing and transport costs) so as to be able to compare them with the domestic groundnuts as sold by farmers in pods. In the case of cotton, farmers produce seed cotton ( kapas) which is ginned before the cotton lint and cotton seed are traded. The incentive for farmers therefore depends on both the nominal protection of the cotton lint and of the cotton seed by-product. These two were estimated separately, and after allowing for ginning margins, the nominal protection of seed cotton was derived. Although the nominal protection of cotton lint is the main determinant of seed cotton nominal protection, the nominal protection of the seeds turned out to be of some significance. In particular, from the early 1980s onwards especially, the nominal protection of the exportable cotton lint varieties considered was negative in most years, but this was partly offset by high nominal protection of the cotton seeds, which reflected the general import substitution drive and consequent high domestic prices in the oilseed industry during this period.

9 For some commoditie **s** , uch as wheat, which are harveste **d** uring a short period during the year, and must be held for relatively long periods if they are to supply domestic buyers later in the year, the marketing adjustment which should in principle be deducted from reference prices would need to take account of the interest and other costs and could be considerably larger than the adjustments we have made. This issue is discussed in the book, but is not dealt with in the background papers. 10 A study by Subbarao (1978) of rice milling in Andhra Pradesh in the 1970s found that local rice mills had a certain degree of monopsony power.

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Processing was also treated separately in the study of sugar and sugarcane. In this industry, the cane is processed by mills in the growing areas, and is not traded either nationally or internationally. The original commodity study and the background paper start by estimating the nominal protection of sugar and its by-product molasses, and work back to the nominal protection of sugarcane growing by the use of two different hypotheses regarding the level of processing charges in the mills.

# _By-products_

Apart from those just mentioned, most of the other crops also have by-products. Relative to the total return to farmers, fodder generated in harvesting maize and sorghum (jowar) is the most important, and the incentive estimates for these crops reported in the background papers make allowance for it. In doing so, we assumed that fodder is mainly consumed by animals in the farming areas in which it is produced, and in any case is not traded or tradeable internationally. On this ground we assumed that its selling price would be the same under free trade as in the observed situation.<sup>1 1</sup> Hence the nominal protection coefficient for maize and cotton is (PD +F )/ (PR +F), where F is the value of the fodder corresponding to the unit in which the price is expressed, say per quintal of maize. Fodder is also generated in harvesting other crops, but its value relative to the selling prices of the crops was too low to be worth allowing for in estimating nominal protection or the other incentive indicators. For the same reason, we did not adjust for other by products e.g. rice bran derived from rice milling and used to produce rice bran oil, and groundnut shells used in cattle feed. We implicitly took account of bagasse (the residue of sugar cane milling) insofar as it is used as the principal fuel in sugar mills, but its sale value for other uses -in particular as a raw material for paper mills-was not sufficient to warrant any special adjustments.

# _Aggregation_

The background papers report the estimated NPCs of the individual crops in each of the states studied for that crop. From these we have calculated weighted averages of the state NPCs which have used to represent the average all-India NPCs. As the focus of the study is the level of incentives for farmers ( rather than, for example, the extent to which consumers are taxed or subsidized), the weights are the production of each state valued at the estimated reference price in the state. Symbolically,

# NPC = Ss NPCs as

where, as = pRs Qs / PspRS Qs E as= 1 pRs = Reference price for the state Qs = Crop production of the state NPCs = Nominal protection coefficient of the state for the crop NPC = Weighted average nominal protection coefficient for the crop s = The states included in the study of the particular crop 11 Under free trade prices of non-tradeables such as fodder would in fact change. Apart from the difficulty of devising rules of thumb that might indicate wha **t** hese changes would be, we decided not to make any adjustment because doing so would have in any case made only very minor differences to the NPC estimates for maize and sorghum.

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We have also calculated a variety of other NPC indicators which aggregate the NPCs of various groups of crops. These include aggregations for cereals (wheat, rice, maize and sorghum), foodgrains (cereals and pulses), oilseeds (groundnut, mustard, copra, soybean and sunflower), non foodgrains (oilseeds, cotton, sugar and rubber) and aggregate agriculture (all thirteen crops). These aggregations have been made alternately treating all the crops as import substitutes i.e. using the importable hypothesis NPCs only, and treating some of the crops as exportables. In particular the NPC series for all 13 crops, which is an estimate of the NPC for Indian agriculture as a whole, has been done in two ways. In the first aggregation, all the crops are treated as import substitutes with their NPCs based on import reference prices. In the second aggregation, the NPCs over the entire period ( 1965 -95) for rice and cotton use the exportable hypothesis, the NPCs for wheat use the importable hypothesis up to 1973 and the exportable hypothesis in 1974 and after.

The approach to calculating the aggregate NPCs can be illustrated by the aggregation for cereals. As regards each of the four cereals ( rice, wheat, maize and sorghum), we first assumed that the weighted average NPC of the estimated NPCs in the states included in the study, is equal to the all-India NPC for that crop. Secondly, we divided the gross value of the all-India output of each crop (obtained from the National Accounts or estimated from other sources) by its all-India NPC to give an estimate of the all-India value of each crop's output at reference prices. Finally, we divided the all-India aggregate gross value of the output of the four cereal crops by the aggregate value of the output of the same crops valued in reference prices. The same procedure was followed in the other aggregations. That is: NPCc = yi (GVPDi) / Xi (GVPDi/NPCi) where GVPD1 = (Gross value of production of crop i at domestic prices NPCi = Nominal protection coefficient of crop i NPCc = Nominal protection coefficient for cereals i = Rice, wheat, maize, and sorghum.

# _Prices of commodity baskets_

The aggregate nominal protection series provide an indication of the level of and trends in the nominal protection of the groups of crops to which they refer. In order to distinguish the sources of changes in nominal protection of these aggregates over time, we calculated the weighted average domestic reference and world prices of the commodity baskets included in the aggregates. The weights change from year to year and are calculated by dividing the gross value of the output of each crop by its domestic price. That is: pi i(wi~i wi (GVP i/p i) / (E; (GVP i/P i)) where, PJ = Price at j level. j = D (domestic), R (reference) and W (world) As discussed in background paper no.6, the commodity basket price indices make it possible to distinguish how the nominal protection of Indian agriculture has been affected by changes in the xxi
average domestic price level of these products, changes in their average Rupee reference price, and changes in their average world US dollar price. Especially when expressed in constant prices, we believe this provides a useful perspective on the main forces that have determined agricultural incentives over the period, including agricultural trade policies, trends and fluctuations in world agricultural prices, and changes in the Rupee exchange rate.

## _Statistics_

In order to summarize various characteristics of the price series, we have calculated a number of standard statistics, including the coefficient of variation and the average annual percentage rate of change (LS growth) estimated from a log-linear regression of the price series over the 29 years from 1965 to 1994. As an indicator of the variability of prices during the period, in addition to the coefficient of variation, we also show a variant of the Z statistic used in a large multi-country study of agricultural pricing policy (Schiff and Valdes, 1992).As pointed out out in this study, producers may be more concerned with year to year changes in prices than with deviations from the mean of prices over a long period, and to capture this the authors calculate the square root of the average squared difference between the current price and the previous year's price.1<sup>2</sup> To make this concept comparable as between different price series and for symmetry with the coefficient of variation, we have defined the Z statistic as this number divided by the mean. That is:

**_n n_** _Z= [,(p, _ p, _ 1)2 / (n - 1)]"2 I [Pn / n]_ i=2 _1_

where P is the price at time t.

It would also be possible to summarize price variability with respect to trend values rather than the period mean, but for the constant price series of most of the commodities included in the study, the resulting summary statistics would not greatly differ from the statistics actually calculated.

# **Effective Protection**

The effective protection of a commodity is an estimate of the extent to which the margin between its selling price and the cost of its internationally tradeable inputs has been widened or narrowed by the combined effect of the protection of the commodity and the protection (which could be negative i.e. a subsidy) of the tradeable inputs. In this study it is measured as the effective protection coefficient ( EPC), which is defined as the ratio of the value added at domestic prices (i.e. the observed value added) of the production activity, to the estimated value added at reference prices. That is:

# EPC = VAD/VAR

= (pD - Sum (aj PD)) _I_ (pR.- Sum (a PR.))

- = (pD - PDSum(aj)) / (pR - Sum(aj POb/ NPCq)

where, EPC = Effective protection coefficient VAD = Value added at domestic prices 12 Schiff and Valdes (1992), p56. The prices for which the Z statistic is calculated in this study are relative prices with respec **t** o the same numeraire, so that the Z statisitics for different price series are comparable.

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VAR = Value added at world reference price pD = Domestic price of the commodity in question pR = Reference price of the commodity in question pD; = Domestic price of the jth tradable input pR. = Reference price of the jth tradable input J aj = Quantity of the jth tradable input used to produce the ith good NPCi = NPC of the tradable inputs.

Because they take account of the effects of the protection of internationally traded inputs as well as of the protection of the commodity itself, EPCs are more complete indicators of the incentives to producers resulting from trade policies, than NPCs. As with NPCs, in the background papers we adopt the convention that EPCs greater than 1.00 represent positive protection at the observed market exchange rate, while EPCs less than 1.00 represent negative effective protection and EPCs equal to 1.00 represent zero effective protection. Effective protection can alternatively be expressed as a rate. For example, and NPC of 1.40 corresponds to effective protection of plus 40 percent, while an NPC of 0.85 corresponds to effective protection of minus 15 percent.

Estimating the EPC for a commodity requires information on the internationally tradable inputs used to produce it, and estimates of the nominal protection of these inputs. How this was done is discussed in the original commodity studies and summarized in the background papers. The original commodity studies were able to obtain satisfactory data on input structures and estimates of input nominal protection during the 1980s, generally from 1981 to 1987. We were able to supplement this with new data and various _ad hoc_ projections up to 1990, and consequently for most of the commodities studied, the background papers report EPC estimates for each year from 1981 to 1990. With more research, it will be possible to update these estimates beyond 1990, but to do this for the earlier years before 1981 in a satisfactory way would would be a large task that we have not attempted.

For the principal cereals and some of the other crops, the shares of tradable inputs in the cost of production in each of the principal states are published in _Indian Agriculture in Brief._ For most crops it turned out that the principal tradable inputs are fertilizers, seeds and farm machinery. There are others, but with some exceptions they did not constitute a large enough share of production costs for the their protection rates to make a noticeable difference to the effective protection estimates. For example, we did not allow for the protection of pesticides used in producing rice and other cereals. The shares of the major inputs in production costs varied from year to year, and following the original commodity studies, we calculated averages for a number of years in the mid 1980s, and used these averages in each year. For fertilizers, we used nominal protection estimate done as as part of the original commodity studies on wheat and rice and later extended by Ashok Gulati (Gulati, 1990). Tractors were the dominant component in the cost of farm machinery, and to represent farm machinery nominal protection we used estimates of tractor nominal protection faced by farmers, as reported in a paper by G.D. Kalra and Ashok Gulati (1992) prepared as part of the research project. However we were not able to obtain data on the cif prices of seeds in order to estimate seed nominal protection, and assumed that seed nominal protection was the same as the nominal protection of the particular crop.The estimation of the cost shares and NPCs of other tradable inputs is discussed in the original commodity studies and in the background papers.

As with the nominal protection, EPCs for each crop have first been estimated for individual states. A weighted average of the state level indicators has then been calculated using xxiii
total value added at reference prices in each state as weights. This was done by first calculating the value added at observed market prices in the total production of the crop in each state. The value added measured at reference prices in the total production of the crop in each state was then estimated. The total value added at domestic ( observed ) prices in all the states covered was then divided by the total value added in these states measured at reference prices. This was then used as an estimate of the weighted average India -wide effective protection of the crop.

# **Effective Subsidy**

In India, farmers receive subsidies in various forms, and in addition are exempt from income taxes. The fertilizer subsidy is one of the largest, and that is treated in the estimation of the nominal protection coefficient of fertilizers and captured in the effective protections coefficient of the individual commodities. Apart from this, there are three other major subsidies, two on non tradable inputs, canal irrigation water and electricity principally used for pumpsets, and subsidized credit. A number of the original commodity studies include extensive discussions of the methods used to estimate these subsidies, and there is also a considerable body of empirical research on this subject that built on these original estimates. The original results have been incorporated into the incentive estimates included in the background papers for the period 1981-90. In some cases estimates for the last few years of the 1980s were not available, and we projected them using the all-commodities wholesale price index.

In the background papers these subsidies are in the first instance quantified by estimating effective subsidy coefficients ( ESCs). The ESC is simply the numerator of the effective protection coefficient plus the total subsidies per unit of the commodity, divided by value-added in reference prices i.e. by the effective protection denominator. That is: ESC = (VAD + NS) / VAR where, ESC = Effective subsidy coefficient VAD = Value added at domestic prices VAR = Value added at reference price NS = Net subsidies on non traded inputs The rationale for the ESC concept is that the subsidy per unit of the commodity is treated _as if_ it is equivalent to an increase in the price of the commodity. For example, if the combined value of the subsidies on irrigation water, electricity and credit is equivalent to 10 percent of the domestic selling price of the commodity, the ESC pretends that the same incentive effect to the farmer would result from a 10 percent increase in his selling price.<sup>13</sup> The largest non-traded subsidies are generally received by crops grown in irrigated areas. The average level of subsidies received by some crops which are predominantly not irrigated -in particular maize and sorghum- was very low. Partly for this reason, data on non-traded subsidies for these crops was also not available, and so in these cases ESCs were not calculated.

> 13 Insofar as changes in input prices would lead to substitution among them, the incentive effects are clearly not the same. But this qualification also applies more generally to effective protection indicators, which implicitly assume fixed input-output coefficients. There is a considerable literature which argues that empirical EPC estimates are useful indicators of incentives despite this qualification.

xxiv
As with the NPC and EPC indicators, the ESCs were initially estimated for individual crops at state level. Weighted average ESCs for the states included in the study of each commodity were then calculated using the same weights as in the estimation of weighted average EPCs i.e. the value added in the total state production of each state, expressed in reference prices. These weighted average ESCs were then used to to represent the all -India ESCs. The period covered is the same as for the EPC estimates i.e. 1981-90. As for the EPCs, with a moderate fuirther research effort it would be possible to update the ESC estimates in a consistent way, but extending them back to the pre 1981 years, while of considerable interest, would involve very substantial data collection and analysis.

# **Producer Subsidy Equivalent**

The background papers also express the same information captured in the NPCs, EPCs and ESCs in two variants of the _Producer Subsidy Equivalent_ (PSE) concept. The PSE of a commodity is simply its NPC adjusted by the subsidy equivalent of the protection affecting its tradeable inputs, the subsidies ( or taxes ) on its non-tradeable inputs, and any other subsidies. It is understood that subsidies can be negative ( i.e. taxes). In the first variant (PSEl) we allow only for the subsidy equivalent of the protection affecting the commodity's tradeable inputs i.e. the difference between their cost at reference prices and their actual cost, SE1. That is SE1= Sum( ajPR) sum (a **pD)** In the second variant, we add to SE1 all the other subsidies-in our study principally the subsidies on non-traded inputs (denoted as NTS)- to give total subsidies, SE2. That is: SE1+ NTS = SE2 where SEl= Subsidy equivalent of protection to tradable inputs NTS= Subsidies on non-tradable inputs The two versions of the producer subsidy equivalent are then PSE1=(PD+SE1)/P' and PSE2=(P +SE2)/ pR, where pD is the domestic price and **pR** is the reference price.

Since the PSEs are just an alternative way of capturing the same information on incentives incorporated in the EPC and ESC indicators, they use the same estimates of input protection and non-traded subsidies. For these reasons they have been estimated only for the same period i.e. 1981-90.

xxv
The PSEs are aggregated across states and across commodities in the same way as the NPC indicators i.e. using the value of production at reference prices as weights. For example, the weighted average (All India) PSE1 for commodity i is: PSEl1 = ( **p** j Di*Qi+SEl) / EjpRi*Qi where, pRj = Reference price of the ith state Qi = Quantity produced by the ith state In defining and aggregating the PSEs we have used reference prices as the numeraire and in the aggregation weights. This differs from some other applications of PSEs, which have related the subsidies to the domestic prices of the products.<sup>14</sup> We believe the method we have used is methodologically preferable in that it is consistent with standard methods of estimating and aggregating the other incentive indicators i.e. nominal protection, effective protection, and effective subsidy. Among other advantages, we avoid the problem that the use of domestic prices for aggregation systematically gives a higher weight to activities with high protection, and vice versa.

# **Incentive Indicators and the Exchange Rate**

The agricultural trade and other policies quantified in these studies are part of a broader system of trade protection and subsidies which directly impacts on all the tradable activities in the economy, especially the manufacturing and mineral sectors. A key economy-wide impact is on the exchange rate, which has in general been supported at a higher level in relation to foreign currencies than the rate that would exist under free trade. In interpreting the incentive indicators for agriculture, it should therefore be recognized that some positive effective protection may be offsetting the indirect disprotection resulting from the exchange rate overvaluation. Furthermore, negative protection indicators represent only part of the discrimination against a crop. But the extent of protection-induced exchange rate overvaluation varies from year to year. These economy-wide effects will be discussed in the book by Gulati and Pursell, but not in these background papers.

14 See for example, United States Department of Agriculture. 1988.

xxvi
**TABLE 1: FREIGHTRA1ESIN USD/MT**

|YEAR|**IRAMP**<br>|UNER<br>|WHE<br>|ATFREIGH<br>|T<br>||
|---|---|---|---|---|---|---|
||INDEX|INDEX|FROM U|SA (GULF)|T0||
||||INDIA<br>ROT<br>(EASrCOAST)|TERDAM|JAPAN<br>I<br>(WE|NDIA<br>SrCOASI)|
|1965|111.4|36.7|<br>13.4|3.9|11.6||
|1966|100.0|39.9|<br>14.6|4.3|11.7||
|1967|106.1|37.4|<br>13.7|4.0|10.7||
|1968|92.0|47.9|<br>17.5|5.1|10.6||
|1969|85.0|40.8|<br>14.9|4.4|9.4||
|1970|119.0|40.0|<br>15.9|4.7|12.5||
|1971|81.0|44.0|<br>16.1|4.7|9.9||
|1972|75.0|46.0|<br>10.7|3.1|6.4||
|1973|161.0|49.0|<br>17.5|5.2|13.7||
|1974|218.0|65.0|<br>47.2|13.9|30.3||
|1975|142.0|106.0|<br>39.9|11.7|24.1||
|1976|134.0|75.0|<br>22.2|6.5|15.4||
|1977|133.0|80.0|<br>22.1|6.5|15.1||
|1978|140.0|84.0|<br>21.7|6.4|15.5||
|1979|179.0|93.0|<br>27.5|9.9|22.6||
|1980|213.0|100.0|<br>45.0|16.9|36.3||
|1981|195.0|115.0|<br>53.9|18.5|38.8||
|1982|159.0|117.0|<br>46.4|12.6|27.4||
|1983|170.0|122.0|<br>29.5|10.7|23.4||
|1984|173.0|165.0|<br>30.0|11.8|24.4||
|1985|167.0|176.0|<br>30.0|12.6|26.0||
|1986|158.0|147.0|<br>30.0|11.0|24.6||
|1987|174.0|136.0|<br>25.3|11.6|24.4||
|1988|195.0|139.0|<br>25.8|15.9|31.0||
|1989|204.0|141.0|<br>43.6|17.7|32.9||
|1990|229.5|115.0|<br>42.0|22.2|34.1|39.|
|1991|224.0|112.6|<br>41.0|19.0|33.3|37.|
|1992|224.0|116.9|<br>41.0|16.9|35.0|38.|
|1993|213.1|117.5|<br>39.0|18.7|34.7|34.|
|1994|188.5|111.4|<br>34.5|10.3|35.8|30.|
|1995|213.1|126.0|<br>39.0|16.2|38.1|34.|

> SOlRCE: FAO, _7R4DE YEARBOOKS_

xxvii
**TABLE 2: PO RTC HARG ES INDEX**

|YEAR|CPI<br>(IND.<br>WORKERS)<br>1949=100|PUBUC<br><br>1972=100|£CTOR EMPL E<br>1981**=100**|MO L<br>USNG CPI<br>1981 =100|PO RT<br>INDEX<br>1981=100|
|---|---|---|---|---|---|
||(1)|(2)|(3)|(4)|(5)|
|1965|157.0|||28.0|28.0|
|1966|169.0|||30.1|30.1|
|1967|191.0|||34.0|34.0|
|1968|213.0|||37.9|37.9|
|1969|212.0|||37.8|37.8|
|1970|215.0|||38.3|38.3|
|1971|226.0|||40.2|40.2|
|1972|233.0|100.0|41.5|41.5|41.5|
|1973||98.0|40.7||40.7|
|1974||94.0|39.0||39.0|
|1975||125.0|51.9||51.9|
|1976||152.0|63.1||63.1|
|1977||151.0|62.7||62.7|
|1978||170.0|70.5||70.5|
|1979||189.0|78.4||78.4|
|1980||211.0|87.6||87.6|
|1981||241.0|100.0||100.0|
|1982||273.0|113.3||113.3|
|1983||305.0|126.6||126.6|
|1984||364.0|151.0||151.0|
|1985||411.0|170.5||170.5|
|1986||437.0|181.3||181.3|
|1987||487.0|202.1||202.1|
|1988||550.0|228.2||228.2|
|1989||667.0|276.8||276.8|
|1990||734.0|304.6||304.6|
|1991||807.0|334.9||334.9|
|1992||954.5|396.1||396.1|
|1993||1097.7|455.5||455.5|
|1994||1218.8|505.7||505.7|
|1995||1382.2|573.5||573.5|

# SO URC E & NO **IES:**

(1), (2) G OVERNMENTOF INDIA, MINISTRY OF FINANCE, _ECONOMIC SU9RVEY_ (VARIOU (3) REBA£D £RIESIN COWMN (2) (4) CPI (YEARt)/CPI (YEAR 1972) *PUBUC £CTOR EMPL. EMOL. INDEX(YEAR 1972) (5) COWMN (3) +COWMN (4) xxviii
**lABIE3:** MODAL COMPOSiON **OFIRAFC** BY DISIANCE **SLAB**

|DISrANCE|**FOODG**|**RAINS**|**COTr**|**ON**|**OILSS**|**FFnT**|**SUG**|**AR**|
|---|---|---|---|---|---|---|---|---|
|KMS|RAIL|ROAD|RAIL|ROAD|RAIL|ROAD|RAIL|ROAD|
|000-100|13.79|86.21|2.40|97.60|11.51|88.49|0.98|99.02|
|100.150|19.83|80.17|2.61|97.39|9.04|90.96|0.58|99.02|
|150-200|24.58|75.42|5.65|94.35|16.35|83.65|1.29|98.71|
|200-250|31.41|68.59|3.00|97.00|16.42|83.58|1.48|98.52|
|251-300|32.07|67.93|11.22|88.78|8.31|80.26|2.84|97.16|
|301-350|32.08|67.92|6.93|93.07|19.74|80.26|2.42|97.58|
|351-400|38.95|61.05|13.32|86.68|13.36|86.64|2.15|97.85|
|401-500|36.03|63.97|11.65|88.35|19.78|80.22|4.35|95.65|
|501-750|44.90|55.10|11.50|88.50|37.33|62.67|8.51|91.49|
|750.1000|59.41|40.59|21.70|78.30|43.31|56.69|7.94|92.06|
|1001-1500|72.82|27.18|39.42|60.58|78.87|21.13|13.11|86.89|
|1501-2000|88.54|11.46|69.52|30.48|94.70|5.30|50.47|49.53|
|>2000|97.42|2.58|96.31|3.69|97.92|2.08|78.97|21.03|

SD2RCE: TABLE ISROM SHARMA, PRADEEP KI ( 1991) xxix
# TABLE 4: WEIG HIED FREIG HTRAIES FOR DIFFERENTCO MMO DIMES BE1WEEN DIFFERENTDESlINATO NSFOR IHE YEAR 1980-81

|WHE|AT|RIC|E|COTI|ON|SUG|AR|GROUN|DNUT|MUSCAR|DSEED|SUNFL|
|---|---|---|---|---|---|---|---|---|---|---|---|---|
|KMS|RS(QIL|KMS|RSYQ1L|KMS|RSYQ1L|KMS|RS(Q1L|<br>KMS|RS'QlL|KMS|ROQ1L|<br>KMS|
|300<br>705<br>880<br>1375<br>1386|<br>3.42<br> <br>6.76<br> <br>7.61<br> <br>9.89<br> <br>10.03|<br>390<br> <br>410<br> <br>540<br> <br>720<br> <br>870|<br>3.95<br> <br>4.1<br> <br>5.56<br> <br>&84<br> <br>7.45|<br>324<br>1362<br> <br>1546<br>1585<br>|<br>6.25<br> <br>21.15<br> <br>23.18<br> <br>23.75|<br>880<br> <br>1386<br> <br>1423<br> <br>1441<br>1634|<br>10.55<br> <br>14.84<br> <br>15.03<br> <br>15.24<br> <br>16.83|<br>200<br> <br>300<br> <br>739<br><br>|<br>3.87<br> <br>5.0<br> <br>11.2|<br>1348<br>8<br>1423<br>5|<br>12.68<br> <br>13.3|<br>547<br>9|
|1675<br>1850|<br>10.7<br> <br>11.49|980<br> <br>1060<br>1160<br>1480<br>1700<br>2070|<br>8.24<br> <br>8.09<br>8.83<br> <br>10.58<br> <br>10.82<br> <br>11.81|<br>||1663<br>2054|<br>17.03<br> <br>19.68||||||

SOURCESA **N** D OlES: The table isfrom Sharma, Pradeep K. (1991) Sharma calculatesthese freight ratesby applying the modal composition by distance givenin Annex3to the road and rail freightsfo example, if the dista nce a foodgra in istransported is 100.150 km, it is assumed that 20 percent iscarried by rail and 80 percent by roa 1981 have been projected forwardsand backwardsusing the indicesinAnnexes5and 6.

xxx
**.BLE** 5: **RAIL FFUGHTDERA1D3RS**

(RSCRORES

|YEAR|CURRENT<br>PRICES|1980-81<br>PRICES|1970/71<br>PRICES|DER.AlOR<br> <br>1970/71|1960161<br>PRICES|DEFLAlOR<br> <br>196/61|DEFLAlR<br>196081|
|---|---|---|---|---|---|---|---|
|1961|302||||302|<br>lC0|34|
|1962|328||||316|<br>104|<br>36|
|1963|371||||341|<br>109|<br>37|
|1964|409||||361|<br>113|<br>39|
|1965|419||||366|<br>114|<br>39|
|1966|464||||394|<br>118|<br>40|
|1967|493||||400|123|<br>42|
|1968|499||||412|121|<br>42|
|1969|549||||426|129|<br>44|
|1970|572||||441|130|<br>44|
|1971|618||618|100|445|139|<br>48|
|1972|675||647|104|||50|
|1973|721||663|109|||52|
|1974|680||594|114|||55|
|1975|917||652|141|||67|
|1976|1150||720|160|||76|
|1977|1326||761|174|||83|
|1978|1348||790|171|||81|
|1979|1305||752|174|||83|
|1980|1440||757|190|||91|
|1981|1618|1618|769|210|||100|
|1982|2357|1778|||||133|
|1983|2972|1814|||||164|
|1984|3353|1821|||||184|
|1985|3602|1859|||||194|
|1986|4376|2101|||||208|
|1987|5133|2Z77|||||225|
|1988|5982|2360|||||253|
|1989|6343|2349|||||270|
|1990|7624|2418|||||315|
|1991|8408|2477|||||339|
|1992|9462|2622|||||361|
|1993|10903|2634|||||414|
|1994|12830|2624|||||489|
|1995|14289|2643|||||541|

# SDLiCE AND **NO1B:**

ECONOMIC SAUEY (VARIOUSIS8UES CONSRUCED USNG RAILGROS6GOODS1RAFFIC RECBP1SAT CURRENTAND CONSIANTPRICE FRIESOVER1HE PERIOD 1965-95. 198081 PRICESFORiHEYEAR 1994 =VOLUMEOFGOODS*PRiCEIN 1980/81.

xxxi
TABLE 6: IMPIJCITDERA1CFS FOR ROAD lRANSPORT

|YEAR|<br>CURRNT<br>PRCES<br>NEWSRIES|8081<br>PRFCES|CURRENT<br> <br>PRICES<br>OLD SERIE|<br>70171<br>PRICES<br>S|DEFLATO<br>70/71|R CURENT<br>PRiCES|661<br>PRICES|DERAIOR<br> <br>68061|DERAlOR<br>80/81|
|---|---|---|---|---|---|---|---|---|---|
|1961||||||320|320|<br>100|<br>28|
|1962||||||363|345|<br>105|<br>30|
|1963||||||412|371|<br>111|<br>32|
|1964||||||435|392|<br>111|<br>32|
|1965||||||497|421|<br>118|<br>34|
|1966||||||529|435|<br>122|<br>35|
|1967||||||6Q3|451|<br>134|<br>38|
|1968||||||735|491|<br>150|<br>43|
|1969||||||862|524|<br>165|<br>47|
|1970||||||945|560|<br>169|<br>48|
|1971|||784|784|<br>10|1019|580|<br>176|<br>50|
|1972|||850|815|<br>104||||52|
|1973|||1012|872|<br>116||||58|
|1974|||1241|937|<br>132||||66|
|1975|||1475|1009|<br>146||||73|
|1976|||1580|<br>1046|<br>151||||75|
|1977|||1736|1050|<br>165||||82|
|1978|||2037|110D|<br>185||||92|
|1979|||2626|1262|<br>208||||104|
|1980|||2734|1347|<br>203||||101|
|1981|2454|2454|<br>30C0|1495|<br>201||||10|
|1982|3021|2641|<br>3597|1637|<br>220||||114|
|1983|3765|2867|<br>4479|1809|<br>248||||131|
|1984|4842|3226|||||||150|
|1985|5784|3501|||||||165|
|1986|6902|3861|||||||179|
|1987|8192|4169|||||||196|
|1988|9795|4612|||||||212|
|1989|11831|5019|||||||236|
|1990|13734|5558|||||||247|
|1991|17790|5998|||||||297|
|1992|22221|6358|||||||349|
|1993|26486|6767|||||||391|
|1994|||||||||439|
|1995|||||||||492|

**SOURCE &** NOIES: GOVERNMENTOF INDIA, MINISTRY OF RNANCE, _ECONOMIC SJRVEY_ (VARIOUSYEARS. 1HE DEFLATORSFOR 1984AND 1985 WERE NOTAVAILABLE. IHEY WERE ESTIMAlED YLSNG IHE AVERAGE RAIE OF INCREAS OF1HE DERAlt)R DURING IHE 10YEARS 198310 1993.

xxxii
# **METHODOLOGY REFERENCES**

Directorate of Economics and Statistics, Ministry of Agriculture, Government of India. _Indian Agriculture in Brief._ Annual.

Food and Agricultural Organization of the United Nations (FAO), _Trade Yearbooks._ Various issues.

Government of India, Ministry of Finance. _Economic Survey._ Annual. Various issues.

Gulati, Ashok and Garry Pursell. 1996. _Trade Policy and Incentives in Indian Agriculture._ Book manuscript. Mimeo.

Gulati, Ashok with James Hanson and Garry Pursell. 1990. _Effective Incentives and India's Agriculture. Cotton, Groundnuts Wheat and Rice._ Policy, Planning and Research Working Paper No. 332. The World Bank. January.

Gulati, Ashok. 1990. "Fertiliser Subsidy: is the Cultivator 'Net Subsidised"'. _Indian Journal of Agricultural Economics, XLV_ (1). January - March.

Kalra, G.D. and Ashok Gulati. 1992. _Protection to Tractors in India - a Firm Level Study._ Mimeo. February.

Pursell, Garry and Neil Roger. 1985. _Manualfor Incentive and Comparative Advantage Studies._ World Bank, mimeo. December.

Schiff, Maurice and Alberto Valdes. 1992. _The Political Economy ofAgricultural Pricing Policy. Volume 4. A Synthesis of the Economics in Developing Countries._ Johns Hopkins University Press for the World Bank.

Sharma, Pradeep K. 1991. _Effective Incentives in India's Agriculture: Role of Transport and Marketing Costs._ Mimeo. March.

Subbarao, K. _Rice Marketing System and Compulsory Levies in Andhra Pradesh: a Study of Public Intervention in Foodgrain Marketing._ Allied Publishers, Bombay. 1978.

United States Department of Agriculture, Economic Research Service, Commercial Agricultural Division. 1994. _Estimates of Producer and Consumer Subsidy Equivalents. Government Intervention in Agriculture, 1982-92._ Statistical Bulletin no. 913. December.

xxxiii
# **RESEARCH PROJECT BIBLIOGRAPHY**

## **LIST OF STUDIES WHICH WERE COMPLETED AS PART OF THE RESEARCH PROJECT OR CLOSELY RELATED TO IT.**

Chadha, Rajesh (1991) "Effective Incentives in India's Agriculture: The Case of Pulses." Mimeo. June.

Goldar, Bishwanath and Gulati, Ashok (1991) "Effective Incentives for Sugarcane and Sugar." Working Paper, National Council for Applied Economic Research, New Delhi, pp. 157. June.

Gulati, Ashok (1987) "Effective Protection and Subsidies in Indian Agriculture: Case of Wheat and Rice," _Indian Journal ofAgricultural Economics,_ October-December.

(1987) "Effective Incentives and Subsidies for Cotton Cultivators in India," _Economic and Political Weekly,_ December 26 (Review of Agriculture).

(1988) "Effective Incentives and Subsidies for Groundnut Cultivators in India," _Economic and Political Weekly,_ December 24 (Review of Agriculture).

(1989) "Structure of Effective Incentives in Indian Agriculture: Some Policy Implications." _Economic and Political Weekly._ Review of Agriculture. September 30.

(1989) "Input Subsidies in Indian Agriculture: A Statewise Analysis." _Economic and Political Weekly._ ReviewofAgriculture. XXIV (25). June.

(1990) "Fertilizer Subsidy: Is the Cultivator 'Net Subsidised'?" _Indian Journal ofAgricultural Economics_ XLV (1).January-March.

(1990) "Incentives for Oilseed Cultivators: Implications for Efficiency." _Journal of Indian School of Political Economy,_ vol. 2, no. 2. May-August.

(1992) " Agricultural Policy in the Light of New Trade and Industrial Policy". _Indian Journal ofAgricultural Economics,_ Vol.47, no. 3, July-Sept. 1992.

xxxiv
Gulati , Ashok and Bhide, Shashanka (1993) Structural Adjustments and Agriculture. November. National Council of Applied Economic Research New Delhi . Working Paper no. 44.

Gulati , Ashok and G.D. Kalra (1992) "Fertiliser Subsidy: Issues Related to Equity and Efficiency". _Economic and Political Weekly,_ March. Also published in Fertiliser Pricing: Issues Related to Subsidies. Vidyasagar Institute of Development Studies , Jaipur, 1993.

Gulati, Ashok and Katula, Rajni (1991) "Electricity Subsidy to Indian Agriculture." Mimeo. November.

(1992) Input Subsidies in Indian Agriculture: Concepts and Quantification. Mimeo. March.

Gulati, Ashok and Pursell, Garry (1996) Trade Policies, Incentives and Resource Allocation in Indian Agriculture. (Draft Manuscript, Chapters 2-6).

Gulati, Ashok and Sharma, Pradeep K. (1990) "Prices, Procurement and Production: an Analysis of Wheat and Rice." _Economic and Political Weekly,_ March 31.

(1990) "Employment, Foreign Exchange and Environment: Implications for Cropping Pattern." _Economic andPolitical Weekly_ (Review of Agriculture). XXV (13). March 31.

(1990) "Fertilizer Pricing and Subsidy: An Alternative Perspective." Paper presented at the National Workshop on Agriculture Input Marketing, Indian Institute of Management, Ahmedabad, February 15-16. Published in: S.P. Seetharaman, Agricultural Input Marketing Oxford & IBH Publishing Co., New Delhi 1992.

(1991) "Intervention and Subsidies in Indian Agriculture during 1980s." Background paper for the World Bank's 1991 Country Economics Memorandum on India. pp. XI + 129. January.

(1991) "Government Intervention in Agricultural Markets: Nature, Impact and Implications." _Journal of Indian School of Political Economy._ (April-June).

(1991) "Indian Agriculture: Protection, Subsidies and Resource Allocation." pp. XI + 132, Mimeo. July.

(1991) "Cereals Economy of India: Protection and Efficiency" Paper presented at the Workshop on Trade Policy and Resource Allocation in Indian Agriculture organised by the World Bank at New Delhi, 25-26 November 1991.

xxxv
Gulati, Ashok, Hanson, James and Pursell, Garry (1990) Effective Incentives in India's Agriculture. Policy, Planning and Research Working Paper No. 332 (Trade Policy). pp. VII + 138. The World Bank. January.

Gulati, Ashok and Chadha, Rajesh (1991) "Prices, Technology and Incentives: A Study of Oilseeds and Pulses." Mimeo. November.

Joshi, P.K. and Singh, N.T. (1991) "Environmental Issues in Relation to Incentives and Resource Allocation in Indian Agriculture." September. Mimeo, Central Soil Salinity Research Institute, Karnal, Haryana Kalra, G.D. and Gulati, Ashok (1991) "Pricing of Sugarcane in Cooperative Factories: Case of Maharashtra". Mimeo. July.

(1992) "Protection to Tractors in India: a Firm Level Study." Mimeo. February.

Kalra, G.D. (1992) "Effective Incentives in India's Agriculture: Canegur and Sugar Cane in Uttar Pradesh." Mimeo. April.

Katula, Rajni and Ashok Gulati (1991) "Cooperative Sugar Factories in Maharshtra: Pricing of Sugarcane." Mimeo.

(1992) Electricity Subsidy to Indian Agriculture Mimeo.

January.

_ (1992) "Estimating Electricity Subsidy to Indian Agriculture: an Exploratory Exercise." April. Mimeo.

(1992) "Institutional Credit to Agriculture: Issues Related to Interest and Default Subsidy". _Journal of Indian School of Political Economy._ Vol. IV no.4 ,October-December.

Kishor, Nalin (1990) "Trends in Manufacturing Protection in India, 1970/71 to 1987/88". Mimeo. November.

(1991) "Estimating Output Protection for Kapas ,India: 1970 - 89". Mimeo. May.

xxxvi
Mani, Sunil (1990) "Effective Incentives in Indian Agriculture: Case of Natural Rubber." Mimeo. November.

(1991) "Effective Incentives in Indian Agriculture: Case of Flue-Cured Virginia Tobacco." Mimeo. July.

(1992) "Effective Incentives in India's Agriculture: Case of India's Coconut! Copra Sector". Mimeo . March.

(1992) "India's Flue Cured Virginia Tobacco." _Journal of Indian School of Political Economy:_ April - June.

(1992) "Government Intervention in Commercial Crop Development: India's Natural Rubber Industry." _Economic and Political Weekly,_ June 27.

Pursell, Garry (1986) "Effective Incentives for Wheat and Rice: Some Implications of Gulati's Study." Nov. Mimeo.

(1993) "NotesonTradeLiberalisationandDeregulation." 1993.Presented at seminar on agricultural reforms, Indira Gandhi Institute of Development Research, Bombay Jan. IOto 12, 1993.

Pursell, Garry and Ashok Gulati (1993) Liberalising Indian Agriculture : An Agenda for Reform. World Bank Policy Research Working Paper WPS 1172. September 1993.Subsequently published in Robert Cassen and Vijay Joshi (eds) 1995. India: The Future of Economic Reform. Oxford University Press, New Delhi. Pp 261-3111.

Sharma, Pradeep K. (1991) "Effective Incentives in Indian Agriculture: Role of Transport and Marketing Costs." Mimeo. March.

(1991) "Effective Incentives in India's Agriculture: Case of Coarse Cereals". September. Mimeo.

xxxvii
# SUGAR AND SUGARCANE
# ACRONYMS

|AP|Andhra Pradesh|
|---|---|
|APC|Agricultural Price Commission|
|BICP|Bureau of Industrial Costs and Prices|
|CACP|Commission for Agricultural Costs and Prices|
|EEC|European Economic Community|
|EU|European Union|
|FAO|Food and Agricultural Organization|
|FCI|Food Corporation of India|
|FSU|Forner Soviet Union|
|GATT|General Agreement on Trade and Tariffs|
|HA|Hectares|
|HFCS|High Fructose Com Syrup|
|ISA|International Sugar Agreements|
|ISEIC|Indian Sugar Export Import Corporation|
|ISMA|lndian Sugar Mills Association|
|MT|Metric Ton|
|OPS|Open Pan Sulphitation|
|SAP|State Advised Prices|
|SMP|Statutory Minimum Price|
|STC|State Trading Corporation|
|TN|Tamil Nadu|
|UP|Uttar Pradesh|
|VPS|Vacuum Pan Sulphitation|
|WPI|Wholesale Price Index|

Note: For incentive indicators see methodology 2
# BACKGROUND NOTES AND STATISTICS

## INTRODUCTION

Sugar is produced from either sugar cane (about two thirds of world production) or from sugar beet (about a third of world production). Sugar from cane is mainly grown in tropical zones and from beet in temperate and other zones. Sugar cane is a perennial crop from which number of successive harvests ("ratoons") can be taken, whereas sugar beet can be rotated with other crops. In its completely refined form the sugar from beet is indistinguishable from sugar from cane. Since India produces cane sugar, these notes focus on the cane sugar industry. However beet sugar production and trade - and in particular substantial exports of white refined sugar from the highly protected EU market - are major factors in the international environment of the industry.

We are interested in the incentives for sugar cane farmning resulting from the Indian trade regime and various other policies, but as cane is not traded internationally, it is necessary to work back to the incentives for farmers by first looking at how Indian trade and other policies affect sugar and molasses, the two internationally tradable joint products of sugar cane milling. Our approach to this is based on the study of incentives to sugar and sugar cane by Goldar and Gulati (1991) which was done as part of the original research project.

Nearly all the sugar produced and consumed in India _is plantation white (_ see below). Its production) involves five principal stages.2 These are:

- Extraction of the juice from the cane by crushing it between rotating, grooved rollers.

- Clarification or purification of the juice by chemical action.

- Evaporation ofjuice into massecuite, a thick syrup-like mass, by boiling the purified juice..

- Crystallization of the massecuite, as soon as critical temperature is reached.

- Separation of the molasses from the crystals of sugar.

The production of the white refined sugar predominantly consumed in developed countries involves another fairly expensive refining stage, which can be done separately in refineries typically sited near major markets, or added on to the basic milling and first refining stage.<sup>3</sup> The processing of cane to extract sugar produces two principal by-products: bagasse and molasses. The former is a residual from the extraction of the juice and the latter is the residual of the last step. The amount of bagasse produced depends on the fiber content of the sugarcane, usually about 90 percent by weight. It is used as fuel for boiling the juice, but mills produce more bagasse then they can consume. In India part of the surplus is supplied to paper mills for 'Cane sugar production started as early as 400 BC in the South Pacific area, but over time production has moved to other parts of the world. Beet sugar, in contrast, is relatively new. It started in Europe and became commercial in the 1830s. See James Fry( 1985) for a succinct non-technical description of sugar growing, milling and refining. 2As noted previously, Brazil is the largest producer of sugarcane if the cane reserved for ethanol production is counted. 3For specialized uses in certain industries -e.g. the pharmaceutical industry-sugar undergoes yet another refining stage.

3
production of pulp and paper. Molasses is an internationally traded commodity. It is used as an input into the production of alcohol and chemicals, and as an animal feed.

International statistics on the sugar industry distinguish raw sugar, centrifugal sugar, white refined sugar, and non centrifugal sugar. Raw sugar is brown sugar which includes molasses and various impurities at the stage before it is crystallized. By centrifugal sugar is meant raw sugar which has been crystallized and most of the molasses spun off by the use of a centrifuge. In developed countries, most white sugar is sugar that has undergone one further refining process. There are various degrees of refining and the consequent purity and consistency of sugar crystals. As in other developing countries (e.g. Indonesia) most of the mill sugar produced and consumed in India is _plantation white,_ meaning sugar that has undergone a first stage of refining at the mill, but which is less refined than the refined white sugar consumed in developed countries. It also sells at a discount from the world price of fully refined white sugar when it is traded internationally. Non centrifugal sugar is a sugar-like material ( in India known as gur or jaggery) which includes the molasses. It is produced by primitive artisanal processes and mostly consumed in rural areas. In north-western India, mainly in UP, there is also very substantial production of _khandsari,_ which is a type of sugar produced by small scale country mills with the use of a centrifuge ( see below). However the Indian statistics do not distinguish khandsari from gur production, and in the international production statistics khandsari is lumped together with gur as a non-centrifugal sugar. With khandsari included, India is by far the largest world producer of non-centrifugal sugar, accounting for about two-thirds of world production. However its share in the total usage ("drawal rate") of sugar cane has been declining, from around 70 percent in the mid 1960s to around 40 percent in the early 1990s ( Data S4). Correspondingly, the share of non-centrifugal sugar in total world production has declined from about 1 5 percent in the mid 1960s to about 10 percent in the 1990s. As discussed later, the quality of the sugar produced by the unregulated khandsari units in India has been improving to the point that much is barely distinguishable from mill sugar, so that with khandsari included, by the 1990s the share of crystallized sugar in total sugar cane usage would have been well above above 60 percent. Correspondingly, with khandsari included ,the _defacto_ share of India in world sugar production would have been considerably higher than reported in FAO and other statistics. Indian trade statistics make no attempt to distinguish khandsari from mill sugar however, and are therefore not distorted by the omission of khandsari.

Raw sugar is less expensive to transport than refined sugar, and in the past most international trade (and also domestic trade in large countries) was in raw sugar, which was shipped to major consumption centers for refining. However, exporters of raw sugar are now shifting towards refined sugar in order to take advantage of the price premium for refined sugar in world markets. Whereas in the mid- 1 960s the share of refined sugar in total international trade in sugar was about a quarter, by the 1990s this had increased to approximately half (Data S5). Most of the white sugar traded is fully refined, but a number of developing countries import partly refined plantation white sugar. There is practically no international trade in non-centrifugal sugar (see Data S5 and Data S8).

4
As already noted , in India, the three principal sugar products are plantation white sugar, khandsari and gur. Gur is not a close substitute for sugar, and is mainly consumed by low income rural people as a food stuff rather than as a sweetening agent. Khandsari, however, is a close substitute. It can contain high proportions of fine crystals and is sometimes difficult to distinguish from plantation white sugar. The technologies used to produce these three products are briefly described below.

- Plantation white sugar is produced by the vacuum pan sulphitation (VPS) method in large scale manufacturing processes. The cane juice in sugar factories is clarified by a chemical process--lime sulphitation or lime carbonation. The vacuum pan method is used for evaporation of juice to get massecuite. This does not require a high boiling temperature for evaporation. Power driven closed crystallizers (vessels) are then used to form sugar crystals. The molasses is removed from fully automated centrifuges of large capacity. Sugar is dried mechanically and transferred to gunny bags directly.

- Khandsari sugar is finely granulated, crystallized sugar produced by the open pan method. Khandsari units are generally much smaller than modem sugar mills and are not subject to the extremely detailed regulatory controls which are applied to sugar mills ( see later discussion).In traditional processes, vegetable clarification agents are used and the molasses is separated from the sugar crystals by hand-driven centrifuges. In the modem processes, the open sulphitation (OPS) method is used for clarification and power-driven centrifuges are used to separate the molasses from the sugar crystals.

- Gur is solidified clarified cane juice produced in small scale operations. Vegetable agents are used to clarify the cane juice. The juice is boiled and evaporated in open pans. The massecuite is removed from the pan when it reaches a critical temperature of about _115_<sup>0</sup> C, and cooled into solid substances by continuous stirring. One principal difference between white sugar /khandsari and gur is that molasses does not appear as a by-product when gur is made. As noted previously, gur is a non-centrifugal sugar since it does not use centrifuges to separate the sugar crystals.

# **INDIA** AND **THE WORLD MARKET**

# **_World production and consumption_**

Brazil is the largest sugar cane producer in the world , but most of its cane is used exclusively to produce ethanol. Excluding this Brazilian cane from world production statistics (as does FAO- see Data S.3)- India is by far the largest producer, accounting for about 22 percent of world production. Since 1964 world cane production used for sugar has grown at an average rate of about 1.28 percent a year, and Indian cane production has grown at approximately the same rate. However average Indian per hectare yields have increased faster than world average yields, and in the early 1990s were 5 to 10 percent above world average yields, whereas they were 10 to 15 percent lower in the 1960s. Consequently the Indian share of total world sugarcane production did not change despite a decline from about one quarter to about one fifth of the total world area planted to cane used for sugar cane production.

5
2.2 Figure 1 shows world production of raw sugar (including the raw sugar equivalent of directly produced refined sugar), refined sugar and non-centrifugal sugar. Between 1964 and 1993 world production of centrifugal sugar grew at an annual rate of 0.97%. Production crossed 100 mln MT in 1982 and reached a peak in 1992 (117.7 mln MT).

Figure 1: **World production of sugar** <!-- Start of picture text -->
- CENTRIFUGAL<br>+NON  CENTRIFUGAL<br>Mt  21T  REFINED (BEET & CANE)<br>; __XS  YMCAL5NDRThAR<br><!-- End of picture text -->

Source: See Data S4 for details.

World production of refined sugar production has followed a similar pattern to the production of raw sugar, reflecting an average extraction rate of refined sugar from raw sugar of about 92.3 percent. By comparison world production of non-centrifugal sugar is much smaller, only about 12 mln MT in the early 1990s. As noted previously, a significant but unknown proportion of this is Indian khandsari.

In terms of raw sugar equivalents. India was the world's largest sugar producer during 1988-94, accounting for over 10.3 percent of the total production (see Data S4 for details). Its share of world sugar production is about half its share of world sugar cane production, because about 40 percent of its cane is used for khandsari and gur, and because of beet sugar production in other countries. If a quarter of the cane not used to produce mill sugar were used for khandsari production, the Indian share in world sugar production would be about 12 or 13 percent. India was followed by Brazil<sup>4</sup> (6.9 %), Cuba (6.7%) and China<sup>5</sup> (5.9%). Other large producers in the early 1990s were USA, Mexico, France, Germany and Thailand. India replaced Brazil as the world's largest producer of mill sugar in the late 1980s, but its total production could well have been ahead of Brazil's before this if khandsari were included.

> **5** Per capita consumption of China is very low. China is thus a large potential market for sugar.

6
A crucial determinant of sugar production costs is the amount of sugar extracted from a given amount of cane. This reflects the sucrose content of the cane and hence the efficiency of cane farming, the efficiency of sugar cane processing, and the coordination between farming- in particular harvesting - and milling. Between 1964 and 1994, according to FAO statistics, Indian extraction rates averaged 10 percent, compared to a world average of 9.5 percent over the same period ( Data S4). By this measure, India efficiency appears to be about average, but it is well below the averages in the most efficient producing countries. According to Borell (1996) average extraction rates in the mid- 1 990s in Australia, Brazil and Thailand were about 13 to 14 percent.

India is also the largest consumer of sugar in the world, followed by the USA and Brazil. Other large consumers are China and the EU. World sugar consumption grew at an average annual rate of 2.6 percent. during the period 1961-91. The rate of growth in the developing countries was 4.8 percent, but only 0.1% p.a. in the developed countries. The stagnation of demand in the developed countries was due to saturation in per capita demand and substitution of sugar by alternative sweeteners, such as High Fructose Corn Syrup (HFCS). The development of alternative sweeteners-especially in North America- was to a large extent motivated by high protection of the sugar industries and high domestic sugar prices in these markets. During 199093 , per capita consumption in North America was 31-32 kg per annum and in Europe around 3640 kg. By contrast, average per capita consumption in Asian countries was about 12 kg. India and China, the two most populous countries, have per capita consumption of around 13.9 kg and 6.4 kg, respectively.

# _World trade and major exporting and importing countries_

The quantity of sugar traded internationally is about a quarter of world production, although this involves some double counting insofar as raw sugar is imported to centers such as Rotterdam and is exported after processing into refined sugar. Before the mid 1970s , most world trade took place at prices fixed under long term quota agreements to supply protected domestic markets, and the free market share was around 45 percent of total world trade ( Fig 2). The free market share increased sharply in 1974 and has since remained in a range of about 60-73 percent of total world trade. The increase in the free market share after 1991 largely reflects the move of the FSU from managed imports of raw sugar (mainly from Cuba) to free market imports of refined sugar. However, it should be recognized that a substantial part of free market trade takes place under long term contracts which are used by both sellers and buyers to protect themselves against large swings in spot prices. While the prices fixed under these long term contracts take account of spot prices, the quantities actually traded at spot prices in any given year are considerably lower than the total free market trade.

6For a non-technical discussion of alternative sweetener **s** , ee James Fry ( 1985). 7
Figure 2: **Percentage share of free market exports in total world sugar exports** <!-- Start of picture text --> __~~~~~~~~ AI EN WE _<br>70 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~00<br><!-- End of picture text --> Source: See Data _55_ for details Since 1977, total world trade in sugar has fluctuated around 28-30 million MT per annum, in contrast to earlier years during which there were regular increases in the volumes traded . Intemnational trade has stagnated partly due to protection -induced increases in production by importing countries, and partly as a result of the substitution for sugar by lowcaloric sweeteners, especially HFCS in the USA. Declining income elasticities in developing countries and unfavorable economic conditions in a number of the previously centrally planned economies also contributed to lower world trade.

Table 1 shows the principal countries exporting raw sugar. In the 1980s the major exporters were Cuba (3 8%), Australia (1 4%), Thailand _(9.5%)_ and Brazil (7.7%). The relative positions remain unchanged in 1990-93. Together, the total exports of these four countries were around 12 mln MT per annum, out of total world exports of 16.9 million MT during these years. Indian exports have been sporadic and very small if they occurred at all.

Table 1: **Principal exporters of raw sugar, 1990-93**

|Amount|Countries|
|---|---|
|More than_5_mln MT|Cuba|
|1-3 mln MT|Australia, Brazil, Thailand|
|_0.5-0.9_mln MT|Guatemala, Mauritius, South Africa|
|0.2-0.45 mln MT|Colombia, Dominican Republic, Philippines, Swaziland,<br>Guyana, Fiji|

Source: See Data S6 for details Data S6 lists the major exporting countries and their exports for the six years, 1965, 1975, 1985, and 1 990-93. The countries in the table account for about 91 % of world exports. It is interesting to note that over 80% of raw sugar exports come from developing countries.

8
Table 2 lists the major importers of raw sugar for the period 1990-93. Former USSR, until 1991, and Russia, since 1992, are the largest importers of raw sugar. USA, UK and Japan and Korea are other large importers. On average, each of them imported over 1 mln MT per annum during 1990-93. In the 1960s and 1970s the USA used to be the largest importer, importing over 3 mln MT, about a quarter of world imports.

Table 2: **Principal importers of raw sugar, 1990-93**

|Amount|Countries|
|---|---|
|More than 1.7 mln MT|Former USSR / Russia|
|1.1-2 mln MT|USA, Japan, Korea, UK|
|0.5-1 mln MT|Algeria, Canada, Malaysia, China|
|0.3-0.45 mln MT|France, Sri Lanka, Morocco, Portugal|

Source: See Data S6 for details Data S6 shows the principal importing countries and their imports for the years 1965, 1975, 1985, and 1990-93. The countries listed accounted for over 95% of the total world imports during 1990-92. The developed countries accounted for 67% of total raw sugar imports.

The major exporters of refined sugar (including plantation white sugar) are given in Table 3. In the 1990s the EU was by far the largest exporter, on its own accounting for about 38% of the world's exports. In 1992 and 1993 there were large increases in exports of refined sugar from Brazil and China, which caused total world exports to jump about 50 percent above the levels prevailing during most of the 1980s. In the 1960s, in addition to being the largest exporter of raw sugar, Cuba was also the largest exporter of refined sugar, accounting for about 15 percent of world exports. By 1975 France had taken the lead, and Cuba's share dropped to less than 2% by the early 1990s. Data S7 shows exports by country for the six years 1986, 1988, 1990, and 1991 - 1993. The countries listed accounted for about 95% of world exports of refined sugar during the period 1986-93.

Table 3: **Principal exporters of refined sugar, 1990-93**

|Amount|Countries|
|---|---|
|More than_5_mln MT|EU|
|1-2 mln MT|Brazil, China|
|0.31-0.9 mln MT|Thailand, USSR/FSU, USA, India, Korea|
|0.2-0.3 mln MT|Cuba, Guatemala, Malaysia, Poland, Turkey|

Source: See Data S7 for details The major importers of refined sugar (inclusive of plantation white sugar) in the 1990s are listed in Table 4. USSR/FSU was the largest importer, accounting for around 22% of the world's imports. Algeria (5.3%), Iran (4.6%), Mexico (4.3%) and Nigeria (4.1%) were other large importers. During the 1960s Iraq was a large importer, accounting for around 8-9% of world imports, but its share in early 1990s was only about 2.8%. The EU countries were also important 9
in the 1960s, but by 1992 their combined imports had dropped to less than 1% of total world imports.

Table 4: **Principal importers of refined sugar, 1990-93**

|Amount|Countries|
|---|---|
|More than 2.5 mln MT|USSR / FSU.|
|0.4-0.8 mln MT<br>0.2-0.39 mln MT|Algeria, Egypt, Iran, Mexico, Nigeria, Saudi Arabia<br>Indonesia, Iraq, Israel, Jordan, Pakistan, Persian Gulf, Sri<br>Lanka, Yemen|
|0.1 -0.19 mln MT|Canada, Chile, EU, Ghana, Hong Kong, Korea, Libya,<br>Norway, Peru, Romania, Switzerland, Turkey,|

Source: See Data S7 for details Data S5 shows India's exports and imports of raw and refined sugar for the period 196493. India has been a net exporter of raw sugar since 1964, except for the years 1983-87. Exports have always been quite small, both in relation to Indian production and world trade . India has also consistently exported some of its plantation white sugar in every year since 1964. In most years these quantities have also been small. The share of Indian exports of raw and refined sugar as a percent of world exports are presented in Fig 3.

Figure 3: **Share of Indian exports of raw and refined sugar as a percent of world exports** Source: See Data S5 for details Data S5 also shows India's sugar imports. Except for a few years, there have been no imports of raw sugar. There have been sporadic small imports of refined sugar mostly in very 10
small quantities, with the exception of a period of very low world prices during the mid 1980s when large quantities were imported (Fig 4 and Data S5 and S9). In 1985 there were imports of 1.7 million tons, equivalent to about 28 percent of Indian white sugar production, 17 percent of world trade in refined sugar in that year and to about 6 percent of the combined world trade in raw and refined sugar.

Figure 4: **Share of Indian imports of raw and refined sugar as a percent of world imports** <!-- Start of picture text --> ,,,,,~ ~ ~ ~~~~~~~6 W>As'.-w2 .<br>1-4~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~uv<br><!-- End of picture text -->

**Source: See Data S5 for details**

Data 58 gives details of the recorded trade in non centrifugal sugar, which is negligible alongside world production of over 12 million tons and the international trade in raw and refined sugar. As noted previously, in the past India was a major and at times (198 1-83) the only exporter of non centrifugal sugar, but this trade practically disappeared during the 1 980s . India accounted for _59%_ of total recorded world exports in 1965, 78% in 1975 and 98% in 1985. Indian exports ceased in 1987. Kenya, Uganda and Tanzania were the other three countriesg 111 h~~~~~~~1 exporting non centrifugal sugar in 1965. Uganda and Tanzania had dropped out by 1975 and Kenya has slowly decreased its exports until only 1 MT was exported in 1992, which was equivalent to the total officially recorded world trade in that year! Japan and Laos in Asia and Kenya, Tanzania, and Uganda were the only importers until they stopped importing after 1987. **During the 1 990s only the Cook Islands imported non centrifugal sugar, 22 MT on average per** annum! This was the only recorded trade left in non centrifugal sugar, but non-recorded border trade **between** countries such as India, Bangladesh, Pakistan and Nepal and also in Africa is probably considerable.
# **_World Sugar Prices_**

Figure 5 shows average annual world free market prices for raw sugar and estimated free market prices for plantation white refined sugar for the sugar years (October-September) 1970-95. A longer constant-world price series for plantation white for the period 1965-95 is illustrated in Fig. 11. In the past world free market prices have been extremely volatile, with particularly sharp peaks and collapses between 1973 and 1976 and again between 1979 and 1982. Since 1982 prices have been less volatile, however, and in real terms have been on average at about the same level as they were in the 1960s and early 1970s i.e. at about US 10 cents/pound in constant 1981 prices. In contrast to most other primary commodity prices, there was no statistically significant downward trend between 1965 and 1995. The reduced volatility since 1982 is probably in part a consequence of the much larger volume of sugar traded in the world free market than before 1975 ( Data S5) and also of the increased role of corn and other sweeteners, which have become a significant constraint to massive price increases of the kind which occurred in between 1973 and 1975, and 1979 and 1981 .

Figure 5: **Nominal world prices for raw and refined (plantation white) sugar, 1970-95** <!-- Start of picture text -->
-RAW  REFINED<br>i  I  S  .'\\.  . .<br>. ~  I  ...<br><!-- End of picture text -->

Source: See Data SI for details World prices for plantation white sugar are not published regularly, and so the series of international prices for Indian plantation white sugar shown in Figs 5 and 11 has been estimated from the free market international price of raw sugar plus an average refining margin equivalent to 90 percent of the margin between international raw sugar prices and the international prices of fully refined sugar. Taking 90 percent of the full margin follows Goldar and Gulati (1991), who used price differences existing during a few years in the 1980s when London prices for plantation white were reported. These calculations are shown in Data S1. As shown there and in Fig. 5, the 12
price premia have been extremely volatile. The premium for the fully refined sugar over raw sugar varied from a minimum of 0.04 cents/pound in 1970 to a maximum of 6.04 cents/pound in 1975.

# _International Sugar Policies_

During the 1960s and 1970s the world free market was very narrow and consequently highly susceptible to even relatively small changes in demand and supply . Starting in 1947, there were a series of International Sugar Agreements (ISAs) which aimed to stabilize free market prices. After four ISAs (one every decade since 1947), the fifth (1987) was replaced by an administrative agreement without economic provisions. These agreements failed. One major reason which was sufficient in itself was that the EEC was not a member. A second reason was that in the major exporting countries both domestic prices and export prices under the preferential export agreements were set above prevailing world prices and created surpluses which were sold in the free market.

The most important long term bilateral and multilateral agreements were between the following groups of countries:

- USA with various exporting countries.

- The EEC with particular African, Caribbean and Pacific (ACP) countries.<sup>7</sup>

- The USSR and the Comecon countries with Cuba.

Tlhe importing countries used these agreements to manage imports and protect both their domestic sugar producers and producers in the countries subject to the agreements.

In the 1960s the US preferential quotas absorbed about a quarter of world sugar exports. Tlhe US market was opened for a period in 1975, but preferential quotas were reimposed when world prices reverted to their long term level after the 1974/75 boom. Since then the quotas for traditional exporters including Brazil, Australia, Argentina, and the Philippines have been reduced, and many areas in the Caribbean Basin where the sugar industry was supported by the US quotas have ceased production. In the early 1990s total US imports were equivalent to only about 6 percent of international trade.

Similarly in the EU, imports were and remain subject to variable levies which effectively exclude all imports except those that enter under the Lome Agreement. The Lome Agreement allows select African, Caribbean and Pacific Island countries access to the high priced EU market for around 1.4 million MT of raw sugar annually. Quotas are allocated to individual countries and are not transferable. To protect the market from imports, a threshold price is established which determines the levies on imports. In 1988/89 this threshold value was based on a target price of 57 ECU/ quintal for raw sugar and 66 ECU/quintal for refined sugar. When the world price is lower than the threshold price imports are subject to a levy equal to the difference between the 7 Before Britain joined the EEC it had preferential agreements with various Commonwealth countries (the Commonwealth Sugar Agreement).These agreements were merged with the EEC agreements after it joined.

13
world and threshold price. In 1988-89 the world free market price was about 30 ECU/quintal. The levy removes the incentive to import free market sugar. At the same time subsidies are paid on surplus sugar which is exported. In principle, import subsidies and export taxes would be used if the world price were higher than the threshold price, but in practice internal EU prices have generally been far above free market world prices. To a large extent this is because the high domestic prices in the EU have expanded production, reduced domestic consumption and created large surpluses which have been exported, thus reducing world free market prices.

The former USSR and the Comecon countries had a bilateral agreement with Cuba for the supply of raw sugar at prices above the free market price. Since 1992 Cuba has been selling its sugar on the free market.

Japan is a large importer of sugar and protects its domestic producers with a system of fixed and variable levies on imported raw sugar. A stabilization agency trades in both domestically produced and imported sugar. Domestic prices are extremely high. During 1985/86, when world prices were exceptionally low, they were being maintained at about eight times the level of world prices.

These interventions of the USA, EU, the former USSR ,and Japan and similar measures of other countries have depressed prices in the world free market and have increased their instability. The long run price-depressing effect of the policies of the USA, the EU ( then EEC) and the USSR in the 1980s was estimated to be about 33 percent (Borrell and Duncan, 1990). Borrell, Sturgiss and Wong (1987) estimated that the US policies increased world price instability by 8-12.5% and that the combined policies of the USA, EEC and the USSR increased price instability by 28%. Other large producers and consumers, in particular China and India, have also insulated their domestic sugar markets from world markets, but there are no estimates of the effects on world prices.

Until about 1972, the protection of their domestic sugar producers by the major developed countries became a cumulative process as other countries, including large efficient exporters, protected their domestic markets against the large price fluctuations which even relatively minor changes in supply or demand could cause in the narrow free market. From about 1973, however, the amount of sugar traded in the free market increased. In 1993 sugar traded at free market prices was 21.4 million tons, equivalent to about 73 percent of total world trade in sugar and to about 23 percent of world production. The principal protected quota markets left for sugar are the US and EU, which together amount to about 3 million MT out of total world sugar exports in 1993 of 29.4 million tons. This suggests that the free market is sufficiently large that it would not be greatly disturbed in the long run by moderate Indian exports or imports e.g. of the order of 1 to 2 million tons, or say 10 to 20 percent of Indian production. However, as noted previously, the volume of sugar traded at spot prices is much smaller than the total free market, owing to the prevalence of sugar traded under long term contracts. Consequently, if exports or imports of this magnitude were not to significantly either depress or increase world prices in the short run, they would have to be developed in a predictable way over a number of years.

14
In addition to this ,Indian policies need to recognize that the prevailing levels of free market prices are being supported by restraints on production and exports on the part of the major low cost producers. In particular:

- Australia has low production costs and exports a large proportion of its production to the world free market. It has the potential to produce more at even lower costs. Regulatory provisions restrict production. In the absence of these interventions, output would expand considerably. Sturgiss, Connell and Tobler (1990) estimate that each one percent expansion of supply would lower the world free market price by 0.2% over the long-term.

- In Brazil, the world's second largest producer, a tight net of controls and interventions limit substitution between ethanol and sugar production. But if they were relaxed or removed, large areas of cane could be switched to sugar production, which could expand very substantially at low cost. Borrell and Duncan (1990) estimated that for each one percent expansion of exports from Brazil, world prices would fall by 0.3%.

It was originally hoped that the Uruguay Round of international trade negotiations would succeed in reducing agricultural protectionism , but analyses of the outcome -notably a study by Merlinda Ingco (1995)8- suggest that the new GATT agricultural agreements will not significantly constrain national policies , especially sugar policies. The principal requirements of the agreements relate to minimum access, export subsidies, domestic support, and tariffication of non tariff import barriers. As regards sugar, it appears that the minimum access provisions were to a large extent met by applying preferential tariff quotas to the same countries which benefited from the previous preferential import quotas e.g. to the countries which previously received sugar import quotas from the US and the EU. As regards export subsidies, according to Ingco, the required reductions in the volume of subsidized exports of sugar are a very small share of world trade and there is unlikely to be much impact on world prices. As regards domestic support, the new rules have very little force in practice owing to the exclusion of various "green box" subsidies and the provision that required tariff reductions can be reductions in unweighted averages, which allows high tariffs on "sensitive " products such as sugar to be maintained while satisfying the rules by reducing tariffs on items in which there is little domestic production or which are already reasonably competitive internationally. As regards the required tariffication of non tariff barriers, the US and the EU and most other countries bound their sugar tariffs at levels well above the already unusually high implicit protection levels prevailing during the 1986-88 base period, with the result that the GATT -consistent tariffs that they are in principle able to apply are actually significantly higher than the protection levels that existed for sugar before the Uruguay Round agreements were finalized. For all these reasons, it seems that the new GATT agreements will not have a significant independent influence on how world markets for sugar develop in the future.

8 References to the Uruguay Round agreements in relation to sugar can also be found in Valdes (1996), Valdes and Zietz (1995) and in various chpapters of Martin and Winters eds ( 1995).

15
## **THE INDIAN SUGAR AND SUGARCANE ECONOMY**

# _Producers and Consumers_

In India most sugar cane is a 10 to 12 month crop planted during January to March. In northern Maharashtra and parts of Andhra Pradesh and Karnataka there is also an 18 to 20 month crop. In most areas the 12 month crop is followed by just one ratoon crop, that is, a new crop grown from the stubble of the harvested crop. Most sugarcane is irrigated ( about 85 percent of the total area since the mid 1980s) and uses large quantities of fertilizer. It is a sturdy crop, unaffected by heavy rains and hailstorms. It is cultivated in both tropical and subtropical regions, but is best suited to the tropical areas where yields are considerably higher. In the tropical regions the states with the largest production are Maharashtra, TN, Karnataka, AP and Gujarat and in the sub-tropical regions UP, Haryana, Punjab, Bihar and Orissa.

Figure 6: **Sugarcane production by state for the crop year 1993-94** <!-- Start of picture text --> Haryana<br>TN 2.8% Karnataka<br>0.8% 6 -<br>Mahiarashtra ... Gujarat<br>12.3%<br>2.1%<br>Rajastha<br>46.2%<br>0.4~~~~~~~<br><!-- End of picture text --> Source: Agricultural Statistics at a Glance, 1995.

Yields are highest in TN (105 MT/HA) followed by Karnataka (85 MT/HA), Maharashtra (81 MT/HA), Gujarat (80 MT/HA) and AP (77 MT/HA). The average yield at all India level was 67 MT/HA, due to lower yields in the sub-tropical regions. Between 1951 and 1994 the area under sugarcane increased from 1.7 mln HA to 3.4 mln HA. In 1994, UP accounted for 1.8 mln HA, 16
over 52% of the total area, and Maharashtra for about 10 percent. Between 1965 and 1994 the cultivated area grew at 0.64% per annum, but production grew faster, at 1.23 percent per annum.

Sugar beet production in India is very small. It is grown on a commercial basis only in the area of the Ganganagar Sugar Mills, Sriganganagar, Rajasthan where the beet yield is about 22-25 MT per HA.

In the early 1990s, between 40 and 50 percent of the cane was being crushed by sugar mills, about the same proportion was being used to produce gur and khandsari, and a balance of about 12 percent was used for seed, animal feed, chewing etc. (Data S3 and Fig.7). The share of production being crushed by sugar mills has been steadily increasing: in the 1960s only 25-30 percent was consumed by the mills, and 60 percent or more was used for gur and khandsari. The increasing share of the mills reflects the faster growth of production in the southern and western areas than in the traditional sugar areas in UP. In Maharashtra in particular, sugar is dominated by sugar mill cooperatives of the supplying farmers, and there is negligible gur or kahndsari production. By contrast, gur and khandsari were still dominant in UP during the 1 990s. For example, in 1990 the sugar cane produced was estimated to have been used as follows: gur 43.4 percent, mill sugar 33.2 percent, khandsari 11.5 percent, seed, feed etc 11.8 percent.( Data S3) Figure 7: **Shares of cane used in production of mill sugar, gur and khandsari, and for chewing, animal feed, seed etc.** <!-- Start of picture text -->
*SUGAR 0 GUR & KHIANDSARI 0 CHBINGFE  EC<br>C;j  4;..:XR -FI  i -00  :S<br>6  0%.<br><!-- End of picture text -->

Source: See Data S3 for details Molasses, a by product of mill and khandsari sugar, on average forms 4.5 percent of the cane crushed by the licenced mills and about 5.3 percent of the cane processed by khandsari units. Gur -which includes both sugar and molasses, normally constitutes about 10 percent of the weight of the cane. Most gur is from UP, but significant quantities are also produced in TN, Karnataka, AP, Haryana, Punjab and Assam. As noted previously, gur is mainly consumed locally in the 17
villages, but wholesale prices are regularly quoted in major market centers. Khandsari is traded separately from mill sugar in wholesale markets, in the 1980s and 1990s at discounts of about 10 to 20 percent from mill sugar prices. However consistent price series are only available for Bareilly in UP and Delhi. The special role of khandsari and gur production in the Indian sugar economy is discussed in World Bank ( 1981) Goldar and Gulati (1991) and Kalra and Gulati (1992).

Sugar cane is processed in the rural areas where it is grown. For mill sugar, in order of production ( Fig 8), the four most important states are Maharashtra, UP, TN , and Karnataka . The average recovery rate for mill sugar is higher in Maharashtra than in other states. In 1992 it was 11.19 percent compared to 9. 19 percent in UP and an all India average of 10.02 percent.<sup>9</sup> About half the cane grown in UP, Tamil Nadu and Kamataka is used for gur and khandsari.. In the early 1990s UP accounted for roughly 60 percent of national gur and khandsari production. Tamil Nadu about 13 to 15 percent each, and all other states combined between 10 and 14 percent.

Figure 8: **Mill sugar production by state for the crop year 1993-94** <!-- Start of picture text --> O ihar 7 6%<br>Rajasthan<br>0. I%<br>ar=LIt? ~~~~~~~~~8 ~Punjab<br>Karnataka 29<br>7.7%<br>Haryana<br>2.8% MP g||<br><!-- End of picture text -->

Source: Indian Sugar Yearbook, 1995 After textiles, sugar milling is the second largest agro-based industry in India. In the 1991-92 season there were 406 sugar mills, of which 392 were operating and employing about 350,000 people directly. On average mills receive cane from about 30-35 thousand growers. The total number of farmers growing at least some cane in this year was estimated to be about 35 million. In 1993 national sugarcane output was valued at Rs 11,439 crores, or about $US 3.7 billion. ' India is also the world's largest consumer of sugar. Consumption of mill sugar has more than doubled over the past three decades. In the first half of the 1980s consumption grew at 13.2 percent a year, but the growth rate slowed to about 5.5 percent per annum after 1985. As disposable incomes have increased consumption has shifted from gur and the cruder forms of

> 9Indian Sugar Mills Association, _Indian Sugar Yearbook(I_ 991/92) Table5. p.13. 10 Central Statistical Organisation, _National Accounts Statistics,_ 1995.

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khandsari to plantation white sugar and finer khandsari sugars. As noted previously, the quality of khandsari has improved to the extent that a growing proportion is difficult to distinguish from plantation white sugar, and some of it sells at about the same price or at only a small discount from mill sugar.

# **_Exports and_** _imports of_ **_sugar_**

India started exporting sugar in 1957. It became a member of the International Sugar Agreement (ISA) in 1961 and joined the Commonwealth Sugar Agreement in 1965. As a member of ISA it obtained a preferential quota for the US market. Its export quotas under these agreements are shown in Table 5.

Table 5: **Preferential quotas of India with major importers**

|Agreements|Year of|Original|Year ended or|
|---|---|---|---|
||agreement|quota|present quota|
|Statutory quota allocations|1962|175,000 MT|1975|
|under US Sugar Act|1982|20,000 MT|10,571 MT|
|Commonwealth /EEC-ACP Sugar|1965|||
|Agreement - Overall Agreement Quota||100,000 MT||
|- Negotiated Price Quota|1975|25,000 MT|10,000 MT|
|International Sugar Agreement|1968|250,000 MT|1977|
||1977|824,000 MT|1982|
||1983|700,400 MT|1987|

Source and Notes: Extreme Focus Group (1992).

The Commonwealth Sugar Agreement was replaced by the EEC-ACP Sugar Agreement in 1975. ISA had no economic provisions after 1987.

The ISA quotas were the maxima for free market exports as part of ISA's attempts to stabilize the world free market price, but gave no price advantage. They had no real impact on Indian exports and were abandoned after 1987. In most years the US and CommonwealthlEEC-ACP quotas were at higher prices than prevailing free market prices, but they were reduced if a country did not fulfill its commitments, and once reduced they were not revised upwards. In an attempt to meet these commitments, India made elaborate arrangements to cross subsidize exports and in this way continued exporting even when domestic prices exceeded the export quota prices. Despite this it did not export the required amounts and its preferential quotas have declined over time to almost negligible levels.

Data S9 gives the origins of Indian sugar imports and the destinations of Indian sugar exports for the period 1985-93. Between 1985 and 1990 there were substantial imports from a variety of countries including the EU, the USA, Brazil, China, Cuba and others. At the same time as sugar was imported from the EU and the US, there were small Indian exports to these same 19
countries under the preferential export agreements. Between 1991 and 1993 imports ceased and there were substantial Indian exports to a range of countries, of which Sri Lanka was the most important.

20
# _Indian Sugar and Sugarcane Policies_

Production of plantation white sugar in India started at the beginning of the century. As in other countries, sugar is a politically controversial commodity, with strong lobbies including the cane growers, public sector sugar mills, private sugar mills, cooperative sugar mills, khandsari producers, consumers of subsidized sugar, and legal and illegal distilleries using both pricecontrolled and black market molasses as well as gur. These pressures are reflected in various bureaucracies at both the central and state levels which also have independent interests of their own, in particular at the central level the Ministry of Food and Civil Supplies, the Food Corporation of India, the Public Distribution System, the Ministry of Agriculture, the State Trading Corporation, and agriculture and other ministries at the state level. Reflecting these pressures, both internal and external pricing and distribution are regulated by a plethora of government policies and interventions. I I

## _Policies on production and domestic distribution_

New and expansion investments in sugar milling in India have been directly regulated by the central government since 1951, under its industrial licensing powers, and the industry was not included in the 1991 reform which removed these controls from most other industries. There are also comprehensive controls both over the prices of sugar and molasses, and state government controls over the prices paid by the mills for cane. At times of excess sugar supply, the growers and millers demand intervention to prevent sugar prices from falling, while in times of excess demand, the government is pressed to keep consumer prices down. Just about any central government intervention in pursuit of these or other objectives is legal, as sugar is an "essential" commodity under the Essential Commodities Act of 1955. To ensure that minimum quantities are available at controlled prices for distribution to consumers, the government has followed different policies at various times. These policies have been applied to the sugar mills only: for practical purposes the khandsari and gur producers have been free of all regulatory controls and consequently have always had a considerable advantage over the mill sector of the industry.'<sup>2</sup>

- In 1949-50, the govenment introduced a system in which basic production quotas were fixed for each mill based on its performance during the preceding two years. One half of the production in excess of the basic quota could be sold on the free market, but the excess plus the fixed quota had to be sold to the government at controlled prices. The timing of permitted free market sales was regulated by a monthly release system applied to each mill. This system continued until 1960-61.

- In 1961-62, the government experimented with the removal of the fixed price quota but retained the monthly release system.

"For an overview of regulatory controls over the sugar industry see Goldar and Gulati(I 991) and references cited by them, in particular the 1985 study of the black economy (Acharya and Associates, 1985). See also Centre for International economics ( 1996).

12 For a detailed account of the policies summarized below, see Indian Sugar Mills Association, _Indian Sugar Year Book._ According to this, a few attempts have been made to regulate some aspects of the khandsari business but they appear to have had little impact in practice.

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- a In 1963-64, the government resumed full control i.e. no free market sales were permitted.

- In August 1967, the government reintroduced a system of partial controls which, except for a few years and with variations, has been in place ever since. Under this system a fixed percentage of the sugar produced by each mill (initially 60 percent ) is acquired by the Government at fixed prices and the balance -subject to monthly release controls-is allowed to be sold on the free market. The sugar purchased by the government is distributed by the Food Corporation of India ( FCI ) to domestic consumers through the public distribution system against ration cards. This portion is called _levy sugar_ 13 and the fixed prices at which it is purchased are called _levy prices._ Since 1967 the ratio of free sale sugar has been varied as shown in Annex 7. In 1972 and 1978 the controls were abandoned and all the mill sugar produced was allowed to be sold on the free market (free sale ratio equals 1.00). By contrast in 1981 all mill sugar was acquired by the government (free sale ratio equals 0.00). In most other years, the free sale ratio has varied from 0.30 to 0.60, but on average the ratio has been higher since 1987. In 1995 it was 0.60. Since the return from sugar milling depends on both sales at the free market price and sales at the lower levy price, in estimating nominal protection (see discussion below) we have used an average price weighted by the proportions sold at free market and levy prices.

While the system of controls described above applies to established sugar mills, in the 1970s the government decided to give extra incentives to new sugar mills and to expansion investments in existing mills. The basic principle adopted was to subsidize new investment by, for a specified number of years, increasing the allowable free sale ratio of the sugar produced, and by giving rebates of excise taxes. The schemes to implement this policy have been frequently varied, but have remained "cost plus " in nature, in that they give higher subsidies in the form of higher plant-specific free sale ratios to mills in areas with lower sugar yields and higher production costs. The higher free sale ratios and reduced excise taxes of such mills mean that, if they were measured, their nominal protection and other incentive indicators would be higher than the averages we have calculated, and in addition would raise the averages themselves. However to do this would be a very large and complex empirical task, which we have not attempted.

# _Pricing Policies_

The Agricultural Price Commission (APC), later renamed Commission for Agricultural Costs and Prices (CACP) was set up in 1965 to advise the government on the pricing policies for agricultural commodities, including sugar and sugarcane. As regards _sugarcane,_ based on surveys of farm production costs, the CACP each year recommends minimum prices for each region. Based on these recommendations, the Union government announces statutory minimum prices (SMPs) which are usually lower than or equal to the CACP recommended prices. However each state government also announce its own minimum price, known as the state advised prices (SAP). These prices are usually much higher than the SMPs, and therefore become the effective minimum prices which sugar mills are obliged to pay for sugarcane. The 13 As with other commodities distributed by fair price shops under the PDS, the quota for rationed sugar is based on the number of family members in a household. Ration cards are issued to all Indian households regardless of income.

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SAPs differ from state to state and are related to the levy prices of sugar, which also differ from state to state. There are generally considerable differences between the CACP recommended prices, the SMPs and the state SAPs. Khandsari and gur producers are in practice exempt from both the SMP and the SAP and from all other regulations.

The _levy price of sugar_ is determined by the Union government every year based on cost schedules prepared by Bureau of Industrial Costs and Prices (BICP). The BICP takes into account the SMPs in each region, sugar recovery rates from the cane and conversion costs. Since the prices actually paid for cane by the mills are determined by the SAPs, which generally are considerably higher than the SMPs , the mills incur losses on their sales of levy sugar. They are supposed to offset these losses by their free market sales.

_Thefree market price of sugar_ is indirectly regulated by the central government by changing the free sale ratio, and on a month to month basis by mill-level controls over the amount of levy sugar and free sale sugar that can be sold, as well as controls over sugar inventories held by individual mills and traders. Levy sugar prices have usually been much lower than the free market price. Figure 8 shows the weighted average'<sup>4</sup> levy and free market prices for UP, Maharashtra and Tamil Nadu between 1965 and 1993. Except in the years when there was no levy and all the sugar was sold on the free market (1965-67,1972 and 1978) the free market price always exceeded the levy price. However the premium varied enormously, from 24 paise per kg in 1969 to Rs 3.49 per kg in 1990.

In addition to indirectly influencing the free market price by changing the free sale ratio, the government influences the price received by the mills by varying the excise tax rate. Annual average excise taxes on free sale sugar for the period 1965-94 are given in Annex 5. The rates per quintal varied every year until 1984 when a specific tax or Rs 50/quintal was set, until it was increased to Rs 70/quintal in 1992. Since the quoted free market prices include excise taxes and marketing and traders' margins, these have been deducted from the annual average free market prices to give the estimated average free market prices received by the mills. There are also excise taxes at considerably lower rates on levy sugar, but these are added to the levy prices paid to the mills and are not allowed for in calculating the average ex-factory realization of the mills, which is a weighted average of the levy price and the net price they receive from their free market sales. As well as excise taxes, there is a cess on mill sugar production, and varying state purchase taxes on cane. The sugar mills in UP and a number of other states are also required to pay commission to the sugar cane growers unions in their areas.

Before 1985, khandsari units were subject to excise taxes, but at substantially lower rates than the excise taxes on mill sugar ( see Annex 8). During the 1970s - apparently to deal with evasion - there was also a supplementary excise tax based on the capacity of their centrifuges. Khandsari excise taxes were abolished in the March 1984 budget. Khandsari units have not been required to pay grower commissions, and have not been subject to cane purchase taxes , except for a number of years in the 1970s (see ISMA, _Indian Sugar Year Book_ 1991/92 p.148).

> 14 The averages are weighted by state production valued at importable reference prices. See Annex 2. 23
Although the Indian sugar market has been insulated from the world market by import and export controls, domestic prices have consistently been at or below the prevailing levels of domestic prices in the efficient exporting countries, and much lower than domestic prices in protected markets such as the US and the EU. Some inter-country comparisons of domestic prices for the years 1980, 1986 and 1992 are given in Data S2.

Figure 9: **Levy prices and free market prices for sugar, 1965 -94 (nominal Rs/quintal)** <!-- Start of picture text --> .1~~~~~~~~~~~~~~~~7 E : 1<br><!-- End of picture text -->

**Source :Annex 5.**

**Note : In 1972 and 1978 there was no levy price. All sugar was sold on the free market.**

# _Trade policies_

Before 1994 sugar imports were controlled by import licensing. Scheduled import duties were extremely high, but if imports were allowed, either by STC or by private importers to whom licenses were issued, special tariff exemptions reduced the import duties, in some cases to zero. In any case, as with nearly all other Indian products before the 1991 reforms, the binding controls were the quantitative controls, not the tariffs. No change was made to this basic policy in 1991, but in March 1994 sugar imports were delicensed and tariffs were cut to zero. If maintained, this new policy will have a major impact on the industry and potentially on the world sugar market.

Before 1991 exports of sugar were canalized by STC. Mainly in order to maintain a presence in quota markets, sugar was frequently exported at a loss .To cover these losses, the Sugar Export Promotion Act of 1958 gave STC the power to administer a scheme under which the losses were shared by the sugar mills in proportion to their production. Exports were decanalized i.e. STC's export monopoly was abolished, as part of the 1991f92 reforms, but are still subject to the 1958 Act. Under this Act, the sole exporter of sugar is now an agency nominated by the government, the Indian Sugar Export Import Corporation (ISEIC), which is a 2 4
private association of sugar mills. The procurement of sugar for exports is done by inviting tenders from the mills on an fob port delivery basis. Since this system started, exports of sugar have mainly come from Maharashtra and Tamil Nadu. The total export quota is determined annually by the government, based on its estimate of the likely exportable surplus after considering the requirement of the domestic market and stocks. This quota is distributed among different mills in proportion to their production in the previous season, and any losses or profits on exports are shared in these proportions. In the 1980s until 1994 the export prices negotiated were lower than the domestic free market prices, and so this system in effect distributed the loss borne by the exporting mills over the whole industry. At least part of these losses is because the size of the export quota is uncertain, and because it is allocated only 3 to 4 months ahead of delivery, thereby preventing exporters from making firm future commitments. For both of these reasons it is reported that international traders are not willing to offer Indian mills terms as favorable as they would were India a reliable long term supplier.<sup>1 5</sup>

# _Molasses and molasses policies_

In terms of its sale value, molasses is the principal by-product of sugar cane milling.'<sup>6</sup> The quantity extracted varies between a third and a half of the quantity of sugar, and if both the sugar and the molasses are valued at world prices, the molasses will usually account for between 5 and 10 percent of the sales of a typical mill, depending on the quantities extracted and relative prices. The quantity of molasses produced in the khandsari process is higher than in sugar mills, and the khandsari molasses has a higher sugar content and has a higher value in the domestic free market. Other by-products of sugar milling are bagasse and press mud or cake. In India as elsewhere most of the bagasse is burned as fuel in the mills. Some excess bagasse is sold to the paper industry, and there are some small sales of press mud as fertilizer. In addition to these, huge quantities of cane tops and trash result from sugar cane harvesting, some of which are used as cattle feed and compost.

Data S4 presents the Indian and world production of molasses since 1965. Average annual world production during 1990-94 was about 41 mln MT, of which recorded Indian production was approximately 5 million tons or 12 percent of world production. The Indian share of world production would be higher, however, if khandsari molasses were not excluded from the official Indian statistics. According to the All India Distillers Association,<sup>1 7</sup> in the early 1980s about a quarter of the cane used for gur and khandsari was used for khandsari, and would have produced about a 1.1 million tons of khandsari molasses in these years, equivalent to a third to a half of officially recorded production.

The molasses extraction rate (per MT of cane) of sugar mills varied from 4.1-4.5 percent over the past two decades in India, versus a world average of between 3.8 and 4.4 percent. The

> **_15_** This point was made by a number of the industry groups that testified for the Ministry of Commerce _Extreme Focus Group_ report.

> 6For a general discussion of the by-products of the sugar industry see James Fry (1985). **17** All India Distillers' Association (1986).

25
khandsari process produces less sugar per ton of cane, and has a correspondingly higher molasses extraction rate, estimated at about 5.25 percent.

About a third of total Indian recorded production of molasses ( i..e mill molasses) is from UP, and about a quarter from Maharashtra. If khandsari molasses were included in the statistics, more than half of national production would turn out to be from UP. Compared to the national average (4.51 percent in 1992), the extraction rate from cane is much higher in UP (5.1 percent in 1992) and considerably lower (4.03 percent in 1992) in Maharashtra.. This corresponds to higher sugar extraction rates in Maharashtra than in UP, and suggests that in this respect the industry is considerably more efficient in Maharashtra, since the sugar content of cane is much more valuable than its molasses content.

From at least 1961 until June 1993 the selling prices, storage and distribution of mill molasses were subject to detailed government controls. In June 1993 both the central government and state controls were removed, but soon after modified controls were reimposed in a number of states . During the period of full controls, in UP Maharashtra and a number of other states these controls were implemented by "Molasses Controllers" appointed by state governments. In other states, including Tamil Nadu and Karnataka, the controls were administered by the central government under the Molasses Control Order of 1961. Under these controls, mill selling prices were set at very low levels, equivalent to a tenth or less of international prices. ( See Annex 10). The allocation of each mill's molasses at these very low prices was also directly controlled. (Most about 90 percent ) was allocated to distilleries producing industrial and/or potable alcohol. Because alcohol production is more profitable than selling molasses at these low prices, many sugar mills set up their own distilleries. By contrast, khandsari molasses were effectively free of controls, and were sold at free market prices which could be 10 or 15 times higher than the controlled prices. The controls over distribution were intended to prevent the mill molasses being used in illegal distilleries which evade the very heavy excise taxes on rum and other alcoholic drinks. The subsidized prices were intended on the one hand to allow the imposition of revenue maximizing excise taxes on potable alcohol, and on the other to subsidize the production of industrial alcohol. Industrial alcohol prices were also controlled and in turn subsidized other downstream using industries, notably producers of acetic acid and low density polyethylene.1<sup>9</sup> It is well known that a large proportion of the khandsari molasses is used in illegal distilleries, but as khandsari production is concentrated in UP, and transport costs on molasses are high, decontrol of the distribution of mill molasses was and still is opposed on the argument that it would substantially increase the supply to illegal distilleries in other sugar producing regions, especially in the south and west.

is Another reason for the establishment of mill distilleries is that molasses deteriorates quite rapidly unless it is properly stored in stainless steel tanks. At the low controlled selling prices it does not pay the mills to incur this investment, so there are complex rules under the Molasses Control Order which oblige them to so. Using the molasses to produce alcohol reduces or avoids the need for storage facilities. However, the result has been the establishment of distilleries of sub-optimal scale or low capacity utilization in larger distilleries, since the molasses produced by individual mills is generally insufficien **t** o fully occupy an optimally scaled distillery. **19** Goldar, B.N. and Gulati (1991),p.9<sup>4</sup> .

**20** In January 1971 mills were allowed to sell 20 percent of their molasses on the free market. According to the All India Distillers' Association (1986) " illicit distillation ... became rampant... and in turn made a serious dent in the Excise revenue of the States" and caused a deterioration in the law and order situation. This led to the re-imposition of full control in February 1972. On the other hand, the mills would be better able to compete with the khandsari producers for sugar cane if

26
Under this system the Central Molasses Board was responsible for allocating molasses from surplus to deficit states and for determining how much if any should constitute a surplus for export. In doing this it relied on estimates provided by the molasses controllers in the individual states, but because of the very low prices the surplus states preferred to use as much as possible of their molasses within the state, and hence tended to underestimate their production, while the deficit states benefited from allocations at these low prices and therefore tended to exaggerate their demand. The allocation to deficit states and for exports was therefore the outcome of complex negotiations in which lobbying by various interest groups and political considerations are dominant, and prices only have an indirect role.

After this general system of price and distribution controls was abolished in June 1993, the UP government introduced a system under which 65 percent of each mill's production has to be sold at the controlled price and to designated buyers. Haryana and Bihar also retained modified price and distribution controls. The Maharashtra government replaced the previous controls with a system of different excise taxes according to end use.

Until the 1991/92 reforms, molasses exports were canalised by STC and were limited to the quantities determined by the Central Molasses Board. As part of the reforms, molasses exports were decanalised i.e STC's export monopoly was abolished. However the general Molasses Board controls remained in place, and the STC export monopoly was replaced by a system in which all exports are compulsorily channeled through the national association of sugar mills working with a private exporter.22 STC retained a role in monitoring exports, including a requirement that it approve each export order in advance. The sugar mills which supply the exported molasses receive only the low controlled price,<sup>23</sup> and the very substantial profits remain with the sugar mill association and the private exporter. This system is enforced by the government through the Molasses Control Order and with the support in particular of the Ministry of Chemicals and Fertilizers.24 Before the 1991/92 reforms, imports of molasses were not restricted but were subject to very high import duties which were prohibitive. These tariffs were reduced in steps along with the general tariff reductions started in 1991/92, and in March 1995 they were cut from 50 percent to 10 percent. Given the present extremely distorted domestic molasses policies, it is possible that some imports will occur with this relatively low tariff, but not if future reforms rationalize the domestic market and allow India's very substantial export potential to be realized.

India's molasses exports between 1965 and 1995 are shown in Data S5. Under the restrictive policies described above, exports have been small and irregular. Because the control system has made it impossible to make firm long term export commitments, markets developed they could sell their molasses at free market prices ( see Goldar and Gulati (1991)), and there would be **less** khandsari molasses produced.

> 21 See Centre for International Economics (1996), Box 4.3 for a discussion of these developments.

22 The company owned by the sugar mills is the Indian Sugar and General Industry Export Import Corporation ( ISGIEIC). The private exporter is the Indian Molasses Co. For a number of years prior to decanalisation, STC had been using these two companies to arrange its molasses exports.

23 However the exporting mills receive some minor benefits in the **form** of the standard export incentives e.g. Special Import Licences (SILs) which allow the use of a small percentage of the foreign exchange earned to import otherwise banned consumer goods.

24 Alcohol exports were also decanalised during the 1991/92 reforms, but the STC export monopoly was also in this case replaced by a government backed export monopoly of the All India Distillers Association.

27
during the 1960s, particularly in South Korea, Japan and Taiwan, were lost to more reliable suppliers like Thailand and Pakistan. In the 1990s India mainly supplied Europe on an irregular basis.

28
**INCENTIVE INDICATORS**

# **NOMINAL PROTECTION, 1965-94**

The estimates of nominal protection and the other incentive indicators are based on the methods used and the estimates for the period 1981 -89, in the research project study of sugarcane and sugar by Goldar and Gulati (1991). This is supplemented by the findings of a later research project study focusing on gur and khandsari by Kalra and Gulati (1992). In the first section, we first comment on the nominal protection estimates for sugar and molasses, both of which are internationally traded, so that references prices can be estimated from their international prices. The section on sugar also provides separate estimates of nominal protection to khandsari. The second section deals with the nominal protection to sugar cane. Sugarcane is not traded internationally, and in addition a large part of the production is used to produce gur, which is internationally traded but in negligible quantities relative to Indian production. As regards the cane that is supplied to the sugar mills, the extent to which it is protected or disprotected is the indirect combined result of the protection or disprotection of sugar and molasses. In order to estimate a reference price for sugarcane, it is therefore necessary to estimate what the sugar cane price would have been at the same exchange rate with free trade in sugar and molasses, and also with free trade in the principal tradeable inputs which affect the margin required to transform cane into the tradable products. As regards the cane that is used to produce gur and khandsari, the domestic markets are segmented and the prices paid for the cane differ substantially from the prices paid by the sugar mills, and so we have made separate NPC estimates which reflect the differences between these domestic prices and the reference prices of the cane consumed by the mills.

## **_Nominal protection: mill sugar_**

# Methods

Following the Goldar and Gulati study, we have made estimates for the three states with the largest sugar production: UP, Maharashtra, and TN. Between them, they accounted for about 70 percent of national sugar production in the early 1990s, and represent diverse farming and other conditions, including private and parastatal mills in UP buying from smallholder farmers and competing under severe handicaps with unregulated khandsari units, mills in Maharashtra which are owned by cooperatives of the sugar farmers who supply them with cane, and a number of private mills in TN which are to a large extent supplied from their own estates. The price comparisons for the three states respectively use wholesale prices in Kanpur, Bombay and Madras, in each of which sugar is traded in large quantities. Marketing costs, trading margins, and transport costs have also been estimated for each of these three markets. Since sugar has been imported in some years and exported in others, NPCs have been estimated both under the hypotheses that the commodity is an import substitute, and on the hypothesis that it is an exportable.. The price comparisons are averages for the Indian "sugar year", covering the period 29
from October to September. This period straddles two Indian fiscal years, and in comparing the sugar NPCs with NPCs of other products, we have counted the "sugar years " as belonging to fiscal year which includes the first six months of the sugar year. For example, the sugar year beginning October 1986 and ending September 1987 has been assigned to the fiscal year 1986/87 (referred to as 1987) which ends on March 31, 1987. The domestic prices and the international prices are an average of the month-end average price for the twelve months. The Rupee/USD exchange rate is also an average of monthly rates for the same period. As indicated in the Annex Tables, the domestic prices for sugar are from various issues of the _Bulletin on Food Statistics,_ and world prices of raw and white sugar are from the International Sugar Organization (ISO) _Yearbook_ In our analysis for the importable hypothesis, we follow Goldar and Gulati and assume that sugar produced in Maharashtra would compete with imported sugar at Bombay, sugar produced in Tamil Nadu would compete with sugar imported at Madras, and sugar produced in Uttar Pradesh would compete with imported sugar at Calcutta, a major sugar deficit area. Again following Goldar and Gulati, under the exportable hypothesis, Indian sugar is assumed to compete with sugar from other major exporters in Egypt. Egypt was chosen in part because it actually imported Indian plantation white sugar for a number of years (see Table 5). Secondly, in the early 1990s about 60 percent of world exports of refined sugar went to Asia and Africa (Data S6) and Egypt was considered to be reasonably representative of freight costs to these markets.

The estimation of average domestic prices for sugar is shown in Annex 5. The price is for S-30 grade sugar,25 which during the period accounted for between half and two thirds of total production. The ex-factory realization (domestic price) for sugar mills is the weighted average of the adjusted free sale sugar price and the levy sugar price, where the weights reflect the proportion of production that is required to be supplied to FCI at the controlled low levy price. The levy prices are ex-factory and no adjustment for marketing expenses or excise or other taxes is needed. Usually there was just one announced levy price for each sugar year, but sometimes increased prices were announced during the year, in which case we have taken the simple average of the two prices. Levy prices vary between states, and in UP and Maharashtra they also vary by region. In UP we have taken the simple average of the levy prices of the western, central and eastern regions, and in Maharashtra the simple average of the prices in the southern and northern regions. In contrast to the levy prices, the reported free sale (i.e. free market) prices have to be adjusted by deducting marketing and traders' margins, excise taxes and a cess (in 1982 and after) to give the prices actually received by the mills. The marketing and traders' margins include a transport cost element to allow for transport from the sugar producing areas to the cities in which the wholesale prices are quoted i.e in the case of UP, to Kanpur; in the case of Maharashtra, to Bombay; and in the case of Tamil Nadu, to Madras. The major part of this adjustment, however, is for excise taxes, which are specific taxes per quintal of sugar. During the 1960s and 1970s the ad-valorem equivalents of these taxes were very high- about 30 percent of the free market price in the mid 1970s-but declined to much lower levels during the 1980s. By 1994 they were equivalent to about 6 percent of the free market price. In adjusting for excise 25 Since 1985 Indian sugar has been graded according to grain size(L, M or S = Large, Medium or Small) and color (29 or 30). S-30 grade corresponds to D-30 under the previous grading system. Free market wholesale prices are regularly reported for these grades. For details see the _Indian Sugar Year Book_ 30
taxes, we have used the full excise tax rate per quintal during each year as reported in _Cooperative Sugar,_ but we have not been able to adjust for an extremely complex system of excise tax rebates which were varied from year to year over the period, with the principal purpose of encouraging the mills to increase the amounts of cane crushed at the beginning and ends of the crushing seasons (usually October / November and May to September respectively) when the sugar content of the cane is low.26 Depending on the production during these periods and the size of the rebates, we have somewhat underestimated the average prices the mills actually received, with a larger underestimation during the 1 960s and 1 970s when excise taxes were high, but much less during the 1980s and after when excise taxes were much lower. Another complication for which we have not been able to allow, is the policy which started in 1975 of encouraging new investment in sugar milling by allowing lower levy ratios (in some cases zero) in the initial years (usually the first 5 to 10 years of production) to sugar produced from new mills or from expansion investments in existing mills. This system was also used to encourage investment in areas where the cane has a relatively low sugar content by graduating the levy ratios according to high, medium and low recovery areas. New and expansion investment has also been encouraged by giving excise tax rebates in addition to the crushing period rebates mentioned above. Both of these policies were frequently changed over the period, 27 often from year to year . We should also comment that it has not been possible to allow for illegal unreported free market sales by mills which may be tempted by the big margin of free market over levy prices in many years, not to mention the possibility of evading excise duties and the cess on such sales.<sup>28</sup> If data were available that would permit all of these complications to be taken into account, the average ex-factory realization prices would be somewhat higher than the prices we have estimated. According to the Goldar and Gulati study ( p. 93) the extent of the resulting underestimation of sugar protection was probably not large during the period covered by their study (1981-89), but it may have greater in the 1960s and 1970s because of the considerably higher excise tax rates during those years. Some indication of the upper limit to the resulting underestimation of the NPCs for mill sugar is given by the estimated NPCs for khandsari in UP ( see below) since khandsari is not subject to the levy controls, excise taxes are lower, and all of it can be sold on the free market.

When comparing the price of a commodity in a domestic market with prices in international markets, as far as possible the two prices should be for a similar specification, variety and quality. This raises a problem in computing the nominal protection for Indian plantation white sugar, since world trade is mainly in raw and fully refined white sugar, and international price data for plantation white is not consistently reported. Based on some limited comparisons of international prices, Goldar and Gulati assumed that the premium paid for India's plantation sugar over the price of raw sugar is 90 percent of the premium of international prices of fully refined sugar over the international prices of raw sugar. We have made the same assumption. Specifically ,the world price fob Europe of plantation white sugar price has been

**26** Details of the excise tax rebates schemes for early and late crushing are given for each year since 1961 in the _Indian Sugar Year Book_

**27** Details of these schemes are also given in the _Indian Sugar Year Book_

**2S** The 1984 black economy report identifies this as one of several major sources of unreported incomes in the sugar industry. The others are unreported sales of molasses and payments for cane at prices below the official controlled prices. See Acharya and Associates (1984) Ch. VI, and Goldar and Gulati (1991) pp .91-92.

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estimated to equal the as raw sugar price (c.i.f. Europe) plus 90% of the excess of the price of fully refined sugar (fob Europe) over the raw sugar price.

Under the importable hypothesis, the reference price for sugar is derived as the world free market price of sugar ( fob European ports) plus freight to India, plus port (unloading etc) costs to give an ldf price at the three Indian port cities, minus domestic transport costs from the market centers in the producing areas to the port markets. Freight (European ports to Indian ports) and port costs were estimated to be USD 38 per MT for the year 1990 and Rs 8.39 per quintal for the year 1981, respectively. These costs have been used to project costs for the other years using the tramp and port cost index respectively ( see methodology notes ). The transport cost for each state is calculated by projecting the 1981 cost using a weighted average of the rail and road indices. The 1981 cost of transport was Rs 15.03, 4.74 and 4.74 per quintal for UP to Calcutta, Maharashtra to Bombay port and TN to Madras port, respectively. The weights are based on the study of transport costs by Sharma (1991) in which he estimated the shares of rail and road transport as a function of distance ( see methodology notes) According to his study, nearly all the sugar would be carried by road, even for as long a distance as the 1441 km between Kanpur in 29 The shares shipped be rail would be: Kanpur in UP to Cal (1441 km), UP and Calcutta. Th hrssipdb alwudb apri Pt acutta(14ki) 13.1 percent; producing areas in Maharashtra to Bombay (220 kms), 1.5 percent; producing areas in Tamil Nadu to Madras (280 kms), 2.8 percent. See Annex 8 for details.

Under the exportable hypothesis, to compute the f.o.b. export price of sugar, we again follow the Goldar and Gulati study. They add freight to Egypt from European ports to the estimated fob Europe price, and subtract the transport cost from India to Egypt to get the estimated fob price in India. This is further simplified by assuming that the freight from Europe to Egypt is the same as the freight from India to Egypt, so that fob prices in India are taken to be the same as fob prices in Europe. Port costs are then deducted from these estimated fob prices to give export prices delivered to the Indian ports. Finally, domestic transport costs to the ports from the producing areas are deducted to give the estimated export reference prices at the mills in the producing areas.

Results: NPC estimates for mill sugar The detailed estimates of nominal protection for sugar for the period 1965 to 1994 are given in Annexes 1 to 6. Fig 10 illustrates the weighted average NPC for mill sugar in the three states on both the importable and exportable hypotheses during this period. Fig 12 shows the weighted average domestic and reference prices (expressed in constant 1981 Rupees) which correspond to these NPCs, and Fig 11 shows the estimated free market world prices of plantation white sugar (fob Europe) expressed in constant 1981 US dollars. Since the export reference prices are lower than the import reference prices, the exportable hypothesis NPCs are higher than the importable hypothesis NPCs. During the period there was a downward trend ofjust under 0.6 percent a year in real domestic prices, but there was no statistically significant trend in world or in reference prices owing to the very large fluctuations that occurred ( Tables 6 and 7). On average over the whole period (Table 8) sugar had positive protection, but the NPCs fluctuated 29 **Apart** from the greater flexibility and reliability of road transport, the preference for road over long distances despite very poor road conditions, delays at octroi points etc, is related a variety of inefficiencies in the operations of Indian Railways and in particular to the preference it gives to bulk shipments of commodities such as wheat and coal shipped by parastatals.

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considerably. These fluctuations are mainly explained by the large swings in reference prices. While there were some years in which there were large changes in domestic prices (e.g. with partial decontrol of prices in the 1967-68 crop year, and as a result of severe floods in the 197172 crop year) , domestic prices have been much more stable than reference prices, both on average over the period as measured by the coefficient of variation, and in terms of year to year variations, as measured by the Z statistic (Table 7). The big changes in reference prices were mainly due to even larger swings in world free market prices, which were offset-but only to a small extent- by offsetting changes in the Rupee /dollar exchange rate (cf. Tables 6 and 7).

Figure 10: **Nominal protection coefficients for mill sugar, 1965-94** <!-- Start of picture text --> Z~ ~ ~ ~ ~ ~ ~ ~ i-s ~ ~~~.:.- - .<br>- -\IMPORTABLE<br>.-. \ ; ~< ~ -4EXORTABLE<br>4?<br><!-- End of picture text --> Source and notes: Weighted averages of NPCs in UP. Maharashtra, and TN See Annex 7 for details.

Figure 11: **Estimated world prices of plantation white sugar in 1981 USD, 1965-94** <!-- Start of picture text --> .:.tjti 'a !jj9j..'.h:'._^'-,'-'. :S --7 M '.,>'. ?_..--wgj<br>7_ ;,<br>jtA<br>Soreadnts Fob, Erp.SeAnx7fodtal<br>/\ ', :33<br><!-- End of picture text -->
Figure 12: **Domestic and reference prices for plantation white sugar in 1981 rupees, 1965-94** <!-- Start of picture text -->
-B  REF-IMP<br>- REF-EXFP<br>t.~~~NiNf~A  YY.,S..J.<br><!-- End of picture text -->

Sources and notes: Weighted average prices for UP, Maharashtra and TN. See Annex 7 for details.

Table 6: **Mill sugar: descriptive statistics for constant 1981 price series**

|Mean|Standard<br>Deviation|Coefficient<br>of<br>Variation|Z Statistics|LS Growt|
|---|---|---|---|---|
|World free market<br>345.8<br>price, USD / MT<br>Domestic prices, Rs /quintal|261.2|0.76|0.61|-0.50|
|Average mill price<br>363.3|70.1|<br>0.19|0.19|<br>-0.57_**_|
|Import reference<br>343.4|190.8|<br>0.56|0.44|0.53|
|Export reference<br>285.0|188.7|<br>0.66|0.53|0.66|
|Source and notes: See Annex 7 for details|||||

** Indicates 5% level of significance

* Indicates 15% level of significance

Table 7 shows the average NPCs for mill sugar in each of the three states during the four sub-periods we have distinguished in this study ( see methodology notes). It also shows the weighted average NPCs of the three states, which we have taken to be an approximation of the average all India NPC. The estimates indicate significant protection to mill sugar for most of the period. Except for some years of high international prices, the exportable hypothesis NPCs also indicate that, at the prevailing Rupee/dollar exchange rates, it has generally not been profitable to export sugar.

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There are quite marked differences between the NPCs in the four sub-periods. The early period from 1965 to 1973 was characterized by high nominal protection which reflected high but declining domestic prices and very low international prices. The second period of negative nominal protection from 1974 to 1980 was dominated by massive gyrations in world free market prices which first surged more than three times above domestic prices, collapsed to levels below domestic prices, and finally almost doubled in 1980. During the third period of moderate positive nominal protection from 1981 to 1987, world prices once again collapsed and a prolonged period of low prices which bottomed in 1985 ensued. In the last period of negative or low NPCs between 1988 and 1994, real domestic prices and real international prices expressed in dollars did not change very much from their levels in 1987, but real reference prices increased substantially owing to the acceleration of the rate of devaluation of the Rupee which commenced in about 1987. This suggests that the positive nominal protection during a number of earlier years was to some extent offsetting exchange rate overvaluation.

Table 7: **Mill sugar: average state level NPCs on importable and exportable hypotheses for standard subperiods,1964-94**

|Phases|UP|**Impor**<br>:Mahara-l<br>:shtra|**table**<br>TN|All<br>**India**|UP|**Exporta**<br>:Mahara;<br>:-shtra|**ble**<br> <br>TN<br>l|**All India**|
|---|---|---|---|---|---|---|---|---|
|65-73|2.17|1.85|1.96|2.03|3.11|2.57|2.72|2.85|
|74-80|0.82|0.79|0.77|**0.80**|0.96|0.92|0.90|**0.94**|
|81-87|1.48|1.36|1.36|1.40|2.00|1.80|1.79|1.87|
|88-94|0.95|0.91|0.86|0.92|1.20|1.14|1.08|1.15|
|65-94|1.41|1.27|1.29|1.34|1.90|1.67|1.69|1.78|

Sources and Notes: See Annexes 1 and 3 for details. The averages are simple averages of the NPC estimates for the individual years.

During the period studied, nominal protection was considerably higher in UP than in Maharashtra and Tamil Nadu, where the NPCs were about the same. This difference shows up for all the subperiods, and on both the importable and exportable hypotheses. At first sight it might seem that the reason is that in most years levy prices were higher ( by about 5 to 10 percent ) in UP than in Maharashtra and Tamil Nadu, but this was offset by consistently higher free market prices in UP, so that in most years the average of the prices on free market and levy sales did not differ much as between the states. The principal reason is the much longer distance between the UP sugar growing areas and the ports (as represented by Calcutta) by comparison with the relatively short distances between the sugar areas in Tamil Nadu and Madras, and between the sugar areas in Maharashtra and Bombay. Because we assumed that UP as well as Maharashtra and Tamil Nadu sugar would supply the port cities, the considerably higher transport costs from UP mean that mills there would receive lower net prices if, in free trade conditions, they would either be competing with imports in these cities, or exporting. This is reflected in reference prices which are generally _5_ to 10 percent lower than the reference prices in 35
the other two states, and hence the NPCs in UP are higher. It should be noted, however, that this result follows almost entirely from the particular assumption made about the geographical distribution of sugar under free trade. An alternative plausible assumption is that UP sugar would not be exported and would compete with imported sugar in UP itself and in other inland areas in the north west and north east. In that case transport costs to these inland markets would be added to the landed duty free price of imported sugar at the ports, and NPCs in UP would tend to be lower rather than higher than the NPCs in the other two states.

# _Nominal protection: khandsari_

# Methods.

As noted above, there are no complete all-India statistics of khandsari production. However, the study by Kalra and Gulati (1992) reports statistics of cane crushed in UP by khandsari units for the period 1981-90. Assuming an average sugar extraction rate of 6 percent, annual khandsari production in UP during this period would have varied between about 600,000 and 800,000 tons which would correspond to all-India production of between 1 million and about 1.3 million tons.<sup>3 0</sup> . Wholesale prices of khandsari at Bareilly in UP are published and can be used to estimate ex-factory prices. The details of these estimates are shown in Annex 8. Annual average wholesale prices are available for the 1965-94 period, except for 1965-69 and 1976-80. The missing prices for these years were interpolated by applying the wholesale price index for sugar, khandsari and gur to the recorded khandsari prices for 1970-75 according to the formula _Pi = WPIi / nj Pn / WPIn_ where Pi is the estimated price in year i, WPIi is the _n_ wholesale price index for sugar, khandsari and gur in year i, and Pn, n= 1970... 1975, is the average wholesale price of khandsari in year n. Excise taxes plus a marketing margin estimated at 1 percent of the wholesale price are then deducted to give an estimate of the ex-factory price received by the khandsari units. As noted previously, khandsari has been exempt from excise taxes since March 1984 31 and before that were always much lower than the excise taxes applied to mill sugar, and the marketing margins (taken from Goldar and Gulati) are also lower, so the downward adjustments of free market prices to give estimated ex-plant prices are also proportionately less. We should also note that excise tax evasion by khandsari units is generally considered to be more prevalent than by the mills, and so the extent to which actual realized khandsari ex-mill prices and the corresponding NPCs are underestimated, is also greater.

As regards the reference prices of khandsari, there are no separate records of international transactions or prices. However it is reasonable to suppose that the observed differences between the free market prices of mill sugar and khandsari in India represent an approximate consumer 30 According to Kalra's study, the sugar recovery rate from traditional non-sulphitation khandsari units is about 5 percent, and from the larger sulhpitation units about 7 percent. In the absence of any information on total production by these two routes, we have assumed an average extraction rate of 6 percent. The rough estimate of all-India khandsari production is obtained by assuming that khandsari units crushed the same proportion of the total cane used for khandsari and gur in the other states as in UP, and that the average khandsari extraction rate was also 6 percent.

31 Goldar and Gulati adjust for a khandsari excise tax after 1984, but this appears to be incorrect.

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evaluation of the quality difference. In the 1 970s ( see Annex 8) khandsari prices were usually about 20 to 30 percent lower than free mill sugar prices, and in the 1980s and 1990s this difference had narrowed to between 10 and 20 percent, presumably reflecting improvements in the quality of khandsari. Lacking better information, we have estimated the reference prices of khandsari for UP ( both importable and exportable) by assuming that under free trade the percent quality discount would be the same as the observed percentage discount. That is, the reference price is assumed to be the reference price for mill sugar already calculated, minus the observed percentage quality discount in that year.

# Results: nominal protection for khandsari

The NPCs for khandsari in UP between 1965 and 1994 are given in Annex 8 and illustrated in Figs 13 and 14, where they are also compared with the weighted average NPCs for mill sugar in the three states. The khandsari NPCs follow the same pattern over time as the mill sugar NPCs, but except during the four years 1965-68, they are consistently higher, principally reflecting the fact that the khandsari producers have not been subject to the levy price system, but also that khandsari was exempt from excise taxes after 1984,and subject to lower excise taxes than mill sugar before that.

Figure 13: **Khandsari and mill sugar NPCs in UP, 1965-94. Importable hypothesis.** <!-- Start of picture text --> :-U- KHANDSARI'<br>.Cw;e \ / i o ~~SUGAR , ;<br>i swA- / I-. .<br><!-- End of picture text --> Sources and notes: See Annex **8.** Over the whole period the average NPC for khandsari as an import substitute was 1.72, versus an average NPC for mill sugar of 1.41. As noted earlier, the khandsari NPCs approximate the upper limit to the possible values that mill sugar NPCs could take if it were possible to allow for concessions on quantities subject to levy pricing, excise taxes, unreported sales etc. It should be recognized, however, that the NPCs for khandsari and mill sugar are not the same as the NPCs 3 7
for the corresponding processing activities, since in order to calculate that, it is necessary to allow for the nominal protection of molasses.

Figure 14: **Khandsari and mill sugar NPCs in UP, 1965-94. Exportable hypothesis.** <!-- Start of picture text -->
-:KHANDSARI  :<br>-- o--SUGAR<br><!-- End of picture text -->

Sources and notes: See Annex 7 & 8.

Table 8: **Khandsari and sugar NPCs in UP on importable and exportable hypotheses for standard subperiods, 1965-1994**

||65-73|74-80|81-87|88-93|**65-94**|
|---|---|---|---|---|---|
|_Importable_||||||
|Sugar|2.17|0.82|1.48|0.95|**1.41**|
|Khandsari|2.55|1.14|1.85|1.11|1.72|
|_Exportable_||||||
|Sugar|3.11|0.96|2.00|1.20|1.90|
|Khandsari|3.66|1.33|2.49|1.40|2.31|

Sources and notes: See Annex 8.

# **_Nominalprotection: molasses_**

The prices of molasses and the details of the estimates of the nominal protection of molasses are shown in Annexes 9 and 10. As noted previously, the price of the molasses sold by sugar mills is controlled and supplies are allocated by the state Molasses Controllers. The prices have been set at very low levels, both in relation to international prices and open market prices of khandsari molasses in India. In 1965 the ex-factory price of Grade I molasses was fixed at 67 38
paise per quintal. This was increased to Re 1 per quintal in 1971, to Rs 6 in 1975, and to Rs 12 per quintal in 1988, at which level it still remained in 1995. This compares with free market prices which were reported to be of the order of Rs 100 to Rs 150 per quintal in the late 1980s and early 1990s, and international prices estimated to be over Rs 1 00/quintal during the same period. The controlled domestic prices and estimated fob export prices all expressed in constant 1981 Rupees are compared in Fig. 15. In real terms, there was a big increase in the controlled domestic price in 1975, but it was still less than one fifth of the fob price. After 1975 it declined in real terms and in 1994 was lower than it had been in 1975.

Figurel5: **Controlled domestic prices and estimated fob prices of Indian molasses in 1981 Rupees, 1965-94** <!-- Start of picture text --> 80 +FOB PRICE AT INDIAN PORT<br>c 70 -u-CONTROLLED PRICE<br>'2<br><!-- End of picture text -->

**Source: Annex 10.**

Since molasses exports have consistently been suppressed both by direct controls and indirectly by the allocation of supplies at low prices to distilleries and industrial alcohol producers, we have treated it as an exportable in estimating its nominal protection. Both domestic and international transport costs are high relative to international prices, and the assumptions made about the exporting areas in India and the international markets that would be supplied have a considerable influence on the estimates. As regards world prices, we found thatexcept in years with very low volumes- Indian unit export values have fairly closely followed changes in US tank car prices at New Orleans, which are the industry standard indicators of world prices (see Annex 9). Indian fob export unit values are also close to export unit values in Pakistan, which consistently exports much larger quantities than India. As only about two grades of molasses have been exported, we have used the export unit values to represent average fob 3 9
prices in estimating the NPCs for molasses, _except_ in years when the volume exported was less than 50,000 tons. In these years we have used the Pakistan export unit values, on the grounds that the Pakistan molasses are approximately the same grade as the Indian molasses, and because it seems reasonable to suppose that India would supply markets in the same areas as the Pakistan markets if the export controls were to be lifted.

Figure 16: **NPCs for mill molasses, 1965-94. Exportable hypothesis** Sources and notes: See Annex 10. Weighted average of the NPCs for UP, Maharashtra and TN.

The estimation of export reference prices and the NPCs for molasses are shown in Annex 10. Based on the estimated fob prices, the export reference prices in Maharashtra and Tamil Nadu are obtained by deducting port costs (i.e. storage, loading, customs clearance etc) and marketing and transport costs from the producing areas to the ports of Bombay and Madras respectively However, relative to the fob prices, transport costs from UP were much higher than from the producing areas in Maharashtra and Tamil Nadu, and deducting them as well as port costs from the fob prices would have given negative reference prices in a number of years. To handle this, we arbitrarily assumed that under free trade without the molasses export and distribution controls, UP molasses would not be exported but would supply inland markets in the most distant of which it would compete with Maharashtra molasses. In addition we made the further simplifying assumption that the transport costs to these markets from the UP producing areas would be the same as the distance from the Maharashtra producing areas. On these two assumptions, the reference price for UP is the same as the reference price in Maharashtra.. By coincidence, the estimated producing area -to -port transport costs in Maharashtra and Tamil Nadu were identical, and so the reference price in all three states was the same. Since the controlled ex-mill prices were also the same, the estimated NPCs turned out to be identical in the three states.

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# _Nominal protection:_ **_mill_** _sugarcane_

Estimates of the nominal protection of sugarcane crushed by the mills in UP, Maharashtra and Tamil Nadu are given in Annexes 11, 12 and 13. The first requirement for these estimates is the price received by farmers for their cane, but obtaining this turned out to be far from straightforward. As noted previously, statutory minimum prices ( SMPs) for cane are set by the central government. These are based on a standard price for 8.5 percent sugar content and a scale of reduced or increased prices for lower or higher sugar content. In addition the state governments each year announce their own minimum prices for 8.5 percent cane which are generally well above the SMPs . In most years, the prices that are reported as actually paid exceeded these minimum prices. Only the range of prices paid is reported, however, not the weighted average price or the detailed distribution of prices by sugar content. In estimating the average cane price for the nominal protection estimates, we have followed Goldar and Gulati and taken the simple average of the reported price range during the year,<sup>3 2</sup> and assumed that this corresponds to the average price of cane giving the average sugar extraction rate for that year. For example, in 1993 in UP, we take the average ( Rs 47.5/ quintal ) of the range of reported prices of Rs 46 to Rs 49 per quintal, and assume that this corresponds to the weighted average price paid for cane that gave an average sugar extraction rate of 9.7 percent during that year. This procedure could over or underestimate the average price actually paid. In addition, it does not allow for the cost to cane growers of payment arrears that are typically substantial during periods of high cane production and low sugar prices.

To estimate the reference price of sugar cane we follow Goldar and Gulati and deduct an estimated reference processing margin from the reference price of sugar.<sup>33</sup> The reference processing margin is estimated by starting with the actual average processing margin for the year and adjusting for the cost of tradable inputs and for molasses sales. The adjustment for tradable inputs deducts the excess of the observed cost of tradable inputs over their estimated cost in reference prices from the observed processing margin. In the accounting practices of the sugar mills, molasses sales are credited against processing expenses. The adjustment for molasses assumes that if the mills were to receive the generally considerably higher reference price for molasses rather than the low controlled price, their processing margins would be lower to this extent. Accordingly the difference between the average sale value of molasses and its value in reference prices, is deducted from the observed processing margin.

Reference processing margin = APM - (PRM - PD) a - (PR - ]:DD) where, Actual processing margins = APM = PD - PD /RR PDS = Ex-factory realization (domestic price) of sugar 32 In UP during some years the price ranges are reported separately for eastern, central and western UP and in Maharashtra for southern and central Maharashtra. As we do not have data on production by region, we have taken the simple average of these reported prices in each case.

33 This procedure is also used in studies of sugarcane protection in Egypt and in Pakistan by Cuddihy( 1980) and Dorosh and Valdes (1989). In order to control for substantial fluctuations in observed processing margins, including years in which the mills have incurred large losses, Goldar and Gulati also apply the same adjustments to a "normative" processing margin based on estimated long run processing costs and normal profits.

41
PD = Domestic price of sugarcane RR = Sugar recovery rate per quintal of sugarcane

**PM** = Reference price of molasses

PD= Domestic price of molasses a = Molasses recovery per quintal of sugar = 0.48 in UP, 0.35 in Maharashtra, 0.43 in Tamil Nadu.

I= Cost of intermediate inputs in reference prices PR = Cost of intermediate inputs in domestic prices In order to estimate the cost of tradable inputs in sugar milling, Goldar and Gulati used state-wise cost data for sugar factories for the year 1983-84 published in the Annual Survey of Industries (ASI). They then estimated the weighted average nominal protection of twelve items that accounted for the dominant part of the intermediate input cost. These are: coal, coke, motor spirit, diesel oil, fuel oil, lubricating oil, lime, limestone, sulfur, and gunny bags. Price indices and other information were then used to separately estimate the cost of these tradeable inputs and their nominal protection in each of the three states for each of the years 1981 to 1989. However, the total cost of tradable inputs was only around 10 percent of the total processing margin in most years, and for the long term estimates we simply projected Goldar and Gulati's results for 1984 forwards and backwards using the wholesale price index and assuming the same NPC (1.22) in every year over the entire period as they estimated for 1984. This is clearly not accurate but the resulting errors in the reference processing margin are too small to justify more detailed research When Goldar and Gulati used the above formula to compute the reference prices of sugar cane, during the period of very low world prices between 1985 and 1987, under the exportable hypothesis they turned out to be very low or even negative. If the prices of sugarcane were to fall to these very low levels farmers would not grow it at all, and there would be no counterfactual price against which protection could be measured. To avoid this, Goldar and Gulati (p.83) calculated the paid out cost of intermediate inputs in cane growing in the three states during 1985, and assumed that processing margins would be squeezed sufficiently so that cane prices would not fall below these levels. The computed minimum prices in 1985 were Rs 3.58, Rs 6.52 and Rs 3.82 per quintal in UP, Maharashtra, and Tamil Nadu respectively. In the long term estimates of nominal protection for cane given in Annexes 11, 12 and 13, these minimum prices were projected backwards and forwards using the general wholesale price index., and for the calculation of NPCs replace the computed reference prices in years in which the latter are below these minimum levels or negative. The minimum prices rather than computed prices were used in particular during the periods of low international sugar prices between 1965 and 1971, and again between 1985 and 1987.

The details of the NPC estimates for mill cane in the three states are given in Annexes 11, 12 and 13. Weighted averages of the NPCs in the three states were than calculated on the importable and exportable hypotheses as shown in Annexes 14 and 15. The weights in each case are the quantities of cane crushed by sugar mills valued at reference prices. For each state, these tables also show the estimated domestic prices paid by the mills, and the estimated reference prices.

42
Annexes 14 and 15 present the aggregated results on the importable and exportable hypothesis respectively. Cane was heavily protected during the periods 1965-72 and 1984-88, The NPC was as high as 5.24 in 1966 on the the importable hypothesis and it was 6.14 in 1985 on the exportable hypothesis. The lowest NPCs for this period were 0.23 and 0.24 in 1975 (importable and exportable hypotheses respectively). This was largely due to a low computed reference price of cane. The reference prices followed a similar trend to sugar reference prices. The NPC dipped in 1975 for cane as it had done for sugar. As is apparent form Figure 17, both NPCs move together.

Figure 17: **Weighted averages of NPCs for mill sugarcane in UP, Maharashtra and TN,** 1965-94 <!-- Start of picture text --> 5 -4-t O IMPORTABLE<br>-'!! EXPORTABLE<br><0; 4 -2 n - "' -- '.' I 'N'<br>.. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ - sY .~ vN. WwX4N....'6 N,NE°<br><!-- End of picture text --> Sources and notes: See Annexes 14 and 15. The importable and exportable hypothesis NPCs are identical during 1965-68 owing to identical reference prices based on minimum cane cultivation costs (see text).

Annexes 11, 12 and 13 show the sugarcane NPCs in UP Maharashtra and TN. Period averages are given in Table 9. The NPCs are consistently higher in UP than in the other two states. Part of the explanation for this is the lower reference price of sugar in UP, discussed previously. For example, in 1991/92, if UP's sugar reference price had been the same as Tamil Nadu's, i.e. Rs 842.8 per quintal instead of Rs 806.6 per quintal, then the NPC to cane producers on the importable hypothesis would have been 0.75 instead of 0.79. Another reason for the higher cane NPCs in UP, is that the mills have to compete with khandsari and gur units for sugarcane. For example, in 1991/92, about half the cane was used by khandsari and gur units compared to about 37 percent used by sugar mills. As there are no controls on gur prices or the prices of khandsari sugar and khandsari molasses, the gur and khandsari units are able to pay relatively high cane prices despite their technical inefficiency, which in turn forces the mills to pay higher cane prices than the prices they generally pay in other states 43
Table 9: **Period average NPCs for sugarcane for three states, 1965-94**

|||**Impo**|**rtable**||||**Expo**|**rtable**|||
|---|---|---|---|---|---|---|---|---|---|---|
||65-73|74-80|81-87|88-94|65-94|65-73|74-80|81-87|88-94|165-94|
|UP|3.95|0.78|2.87|0.98<br>|2.27<br>|4.09|1.15|3.57|1.64|1 2.71|
|Maharashtra|2.38|0.78|1.76|0.83<br>|:1.50<br>|2.64|1.11|2.70|0.82|1.36|
|TN|3.45|0.68|2.13|0.73|:1.86|4.46|0.92|3.75|1.17<br>|2.70<br>|
|All India|**3.47**|**0.76**|**2.30**|**0.90**|**1.96**|**3.67**|**1.10**|**3.26**|**1.45**|:**2.46**|

Source: See Annexes 11-15 for details The wide fluctuations in nominal protection have been almost entirely due to very large fluctuations in world free market sugar prices and therefore in cane reference prices (Table 10 and Fig 18). Since 1965 in real terms, domestic cane prices have declined very slowly at about 0.2 percent annually, whereas reference prices have increased at about 1.5 percent a year.

Figure 18: **Domestic and reference cane prices in 1981 rupees, 1965-94** <!-- Start of picture text --> i l--/ S \ 9 0 DOMESTIC -- REF-EXP REF-IMP'<br>~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ~~~~ 1~~~~~~~~~.~<br><!-- End of picture text --> Sources and notes: See Annex 16 44
Table 10: **Sugarcane: descriptive statistics for constant domestic and reference price series**

|||Mean|Standard|Coefficient|Z Statistic|LS|
|---|---|---|---|---|---|---|
||||Deviation|Of Variation||Growth|
|Domestic||19.69|2.42|<br>0.12|0.13|-0.29**|
|Reference|_Importable_|21.28|19.78|<br>0.93|0.79|1.26*|
||_Exportable_|16.99|18.51|<br>1.09|0.97|0.62|

Source and notes: See Annex 16 for details

- ** Indicates 5% level of significance

- Indicates 15% level of significance

The sugarcane NPCs estimated in our study are on average slightly lower than the NPCs estimated in the Goldar and Gulati study for 1981-89 (Table 11). The differences are principally due to:

- Different sources for the world prices of raw and refined sugar and hence the estimated world price of plantation white sugar.

- Except in 1985 and 1986, higher sugarcane reference prices in our study due to higher sugar reference prices. Our estimated NPCs in 1985 and 1986 are higher than Goldar and Gulati's principally because of higher estimated reference mill processing margins.

- Differences in the estimated reference processing margins due to different sources for estimating the fob prices of molasses.

Table 11: **Sugar and sugarcane: alternative NPC estimates, importable hypothesis, 1981-89**

||1981|1982|1983|1984|1985|1986|1987|1988|1989|AVG|
|---|---|---|---|---|---|---|---|---|---|---|
|**SUGAR**|||||||||||
|Goldar & Gulati|0.80|1.25|1.36|1.51|1.85|1.69|1.72|1.39|0.94|1.39|
|Ours|0.74|1.23|1.21|1.42|1.79|1.66|1.59|1.30|0.92|1.32|
|SUGARCANE|||||||||||
|Goldar & Gulati|0.65|1.22|1.43|1.92|3.27|2.93|2.89|1.72|0.87|1.88|
|Ours|0.55|0.98|1.11|1.77|3.81|3.10|2.52|1.52|0.83|1.80|

Sources and notes: See Annexes 1 and 14 and Goldar and Gulati (1991) for details.

# **_Nominal protection: gur and khandsari sugarcane in UP_**

As noted previously, in the 1990s about a third of India's total sugarcane production was used to produce gur and khandsari. More than half of this cane was grown in UP, where one fifth was purchased by khandsari producers and four fifths was used for gur.In one of the research 45
project studies, G.D. Kalra (1992) analysed gur production in UP and made separate estimates of the nominal protection of the cane used to produce it for the period 1981 to 1991. His estimates worked back from estimated reference prices for gur, which in turn were derived from fob export prices at Bombay and from UP to Nepal. However world trade in gur (i.e. non-centrifugal sugars -see previous discussion) and the quantities periodically exported from India (of the order of 15,000 tons ) were negligible in relation to UP gur production (over 4 million tons in the 1990s). We therefore decided that it would be more meaningful to compare the domestic prices of sugarcane used in gur production, with the reference prices of mill sugarcane, since the latter are derived from world prices of sugar and molasses, in which there is substantial international trade. The counterfactual scenario for these NPC estimates is therefore a situation in which there is free trade in mill sugar and molasses, and in addition the abolition of the controls (including minimum cane prices imposed on the mills) which prevent free competition for cane between the gur and khandsari units on the one hand and the mills on the other.

Figure 19: **UP: Comparisons of the NPCs of cane used in mill sugar production and cane used in gur production.** <!-- Start of picture text --> .1o N - -+CANE FROM GUR<br>* ........- CANE FROM SUGAR<br><!-- End of picture text --> Sources and notes: See Annex 17.

The details of these estimates are shown in Annex .and the resulting NPC series for sugarcane is compared with the NPC series for mill sugarcane in Fig 17. The prices paid for cane by gur producers are not reported, but consistent annual series of wholesale gur prices are available for the entire period from 1965 to 1995. As gur has always been exempt from excise and other taxes, on the assumption that gur production is competitive, Kalra uses these prices to infer the average price paid for cane for 1981 to 1991 by deducting transport costs from the gur producing units (which are typically in the cane producing areas) to the wholesale markets and estimated average processing charges including a competitive profit margin. In calculating the processing charge he assumes a constant ratio of gur production to cane processed of 10 percent 46
Based on recorded wholesale prices for gur, we have extended Kalra's estimates forwards from 1991 and backwards from 1981 by applying a transport cost index to his estimated transport costs in these years, and the general WPI to his estimated processing charges. This gives estimated average cane prices paid by gur producers for the entire 1965-1995 period. In most years, these prices turn out to be considerably lower than the average prices paid by the mills If there were unhindered competition between the mills and the gur producers these prices would be about the same, and any apparent differences would reflect quality, timing and other differences, especially variations in sugar content. However the thrust of regulatory and price controls during the period was on the one hand to protect the mills from competition in buying sugarcane by allotting to each mill protected "catchment areas", and secondly to force the mills to pay above market prices by the use of the annual minimum "state advised prices". Given these policies ,under normal conditions with mill purchases rationed it is plausible that open market purchases of cane are at lower prices for the same or similar cane qualities. On the other hand, in periods of cane scarcity, it is plausible that the gur and khandsari producers can outbid the fixed government-determined prices. These interpretations are consistent with standard accounts of the effects of government policies on cane pricing, especially in UP,<sup>34</sup> and so for the NPC estimates we have assumed that the average quality of the cane used by the gur producers is the same as the average quality of the cane crushed by the mills. Similarly, we have made the additional assumption that the prices paid by khandsari units for cane are the same as the implied prices in gur production. This again seems reasonable since there are no regulatory controls affecting competition for cane as between the khandsari and gur units.

# **Nominal protection of sugar and sugarcane compared**

According to our estimates (see Table 12 and Fig 20) cane has been more protected than sugar in high protection periods i.e. periods of low world sugar prices, and sugar has been slightly more protected than cane (or less disprotected ) than cane during low protection periods i.e when free market world prices have been relatively high. Part of the excess of cane NPCs over sugar NPCs in periods of low world sugar prices is due to the assumption of minimum cane reference prices in some of these years.

Table 12: **NPCs for sugar and cane compared, 1965-94**

|||65-73|74-80|81-87|88-94|65-94|
|---|---|---|---|---|---|---|
|**Importable**|Sugar|2.10|0.80|1.40|0.92|1.36|
||Cane|3.08|0.66|2.13|0.90|1.78|
|**Exportable**|Sugar|3.00|0.94|1.87|1.15|1.82|
||Cane|3.53|0.87|3.11|1.43|2.32|

Source: See Annexes 1, 3, 14 and 15.

34 See for example Harrison, Hitchings and Wall (October 1981) or the _Indian Sugar Yearbook._ 47
Figure 20: **NPCs of sugar and cane on the importable hypothesis** <!-- Start of picture text -->
-4-CANE  -hSUGAR<br><!-- End of picture text -->

Source: see Annexes 7 and 16 for details.

# **EFFECTIVE PROTECTION FOR SUGARCANE, 1981-90**

Annex 18 gives estimated EPCs for sugarcane for UP, Maharashtra,and TN for the the period 1981 to 1990. The methodology is discussed in detail in Goldar and Gulati (I199 1). The ,nrincipal interest of these estimates is to quantify the extent to which the protection of cane farmers' tradable inputs and the subsidies on their non- tradable inputs, offset or arnplify the incentive to sugarcane production resulting from protection of sugar and molasses. As the proportionate effects are more or less the samne in relation to nominal protection whether it is estimated on the importable or on the exportable hypothesis, we report only the importable hypothesis estimates. We also also have not reported the EPCs, ESCs and corresponding PSE indicators for sugar. All of these additional indicators could be easily estimated from the existing data in the spreadsheets.

The production cost structure of sugarcane used by Goldar and Gulati and also in these estimates is given in Annex 19. The principal tradable inputs are fertilisers, seeds and farm machinery. Between then they accounted for over one third of the total operational cost and 10.3, 15.3 and 14.7 percent of the the average wholesale price of sugarcane in UP, Maharashtra and TN. In terms of cost, the most important tradable input is fertiliser, followed by seeds . In all three states, the cost of "machine labor" was less than 7 percent of the total cost of tradable inputs.

To calculate effective protection, the domestic price of each tradable input was first divided by its NPC to give its value in reference prices. (Annex 20). Following Goldar and Gulati, in the absence of informnation on the international prices of sugarcane seeds, the NPC of seed was approximated by the NPC of sugarcane itself. The NPCs of fertilizers are from Gulati (I1990 ) and the NPCs of tractors, which are used to represent farm machinery in general, are from Kalra and Gulati (I1992). The weighted average NPC of the three tradable inputs and their 4 8
combined share in the estimated reference price of cane in each state , and on average for the three states, are shown in Annex 18. The averages for the three states are illustrated in Fig 2 1. The steep increase in the share of the costs of the tradable inputs in the reference price of sugarcane in 1985 and 1986 was due to the decline in world sugar prices in those years and the corresponding decline in the reference price of cane to very low levels. The changing weighted average NPC of the tradable inputs was mainly influenced by the nominal protection of fertilisers, but also partly reflects changes in the NPC of seeds which was assumed to equal the cane NPCs.

Figure 21: **TRADABLE INPUTS USED IN SUGARCANE FARMING: AVERAGE NPCs AND SHARE** OF **TRADABLE INPUT COST IN REFERENCE PRICES** <!-- Start of picture text -->
1.20  ...  ... ..... ..  . . . ...  .<br>0  0.80  -- - -- - ---------<br>0.60  - . . . . .NPC<br>O  -in-  ~~~~~~~~~~~~~~~~~~~~~~~OIRIOR<br>_  0.40  ------  ----------  -----  - - .......  ........  ''~  '-''-  .....  ~ ''''~-  ......... ''  'dF  O RO<br>o.2 0  -- -- - -- -- - -----  .. ....  ...........l<br>0.00<br>1981  1982  1983  1984  1985  1986  1987  1988  1989  1990<br>Crop years<br><!-- End of picture text -->

Sources and notes: Annex 18. NPC is the weighted average NPC of the tradable inputs used in cane farming. OIR is the total value of the tradable inputs used in the three states valued in reference prices. OR is the total value of cane output in the three states valued in reference prices.

The EPCs in each of the three states and the weighted average of the three, which we use as an approximation of the all-India average EPC, are given in Table 13 and the state level EPCs are plotted in Fig 22. On average during this period effective protection was much higher in UP than in the other two states, but this is principally due to the assumptions made in estimating the reference price of sugar in UP, discussed previously. Another reason is that during 1985-87 the minimum reference prices used for cane in UP (also discussed previously) were lower than in Mahrashtra and TN and the reference processing margin there (value added in reference pricessee Annex 18) was squeezed more than it was in the other two states.

49
Table 13: **Effective Protection Coefficients for Cane**

||1981|1982|1983|1984|1985|1986|1987|1988|1989|1990|Avg.|
|---|---|---|---|---|---|---|---|---|---|---|---|
|UP|0.56|1.05|1.11|1.98|8.13|6.18|3.98|1.80|0.94|0.80|2.65|
|Maharashtra|0.46|0.79|0.95|1.39|2.29|1.81|1.74|1.35|0.73|0.53|1.20|
|TN|0.47|0.83|1.18|1.67|3.47|2.35|1.45|0.88|0.48|0.60|1.34|
|**All India**|**0.54**|**0.99**|**1.12**|**1.89**|**5.66**|**4.21**|**2.85**|**1.60**|**0.84**|**0.75**|**2.04**|

Sources and notes: See Annex 14.

Figure 22 **Effective Protection Coefficients for Sugarcane** <!-- Start of picture text --> w~~~ UP<br>| Maharashtra<br>- TN<br><!-- End of picture text -->

Sources and notes: See Annex 18.

s

# **EFFECTIVE SUBSIDY FOR** SUGARCANE, **1981-90**

Effective subsidy coefficients ( ESCs) are are estimated by adding the value of non - traded subsidies (NTS) to the numerator of the effective protection calculation i.e. the subsidies on non-traded inputs are treated as though they are equivalent to an increase in the selling price of the sugarcane . The subsidies quantified in this way (Annex 22) are the subsidised supply of canal irrigation water, the subsidised price of electricity (mainly used for pumpsets) and subsidised credit.The estimated values of these subsidies for 1981-87 are from the Goldar and Gulati study. The estimates for 1988-90 have been extrapolated from these using the wholesale price index. On average over the period the canal irrigation subsidy forms was nearly 80 percent of the total subsidy to cane cultivators in UP, 67 percent in Maharashtra and 50 percent in TN. The credit subsidy was relatively more important in Tamil Nadu and Maharashtra than in UP, accounting for 10, 24.6 and 49 percent respectively of the total subsidy in the three states. In real 50
terms, the total per quintal value of the three subsidies increased gradually over the period (Fig 23).

Figure **23:Three states 1981-90: weighted average of non-traded input subsidies to cane growing in 1981 prices** <!-- Start of picture text -->
*3.5<br>2 .' o  . . ..  ...<br>205<br>~198 ~<i  9 82,  I1983,,,  194  . 9198  986.-:1987  `1988  I98§g99<br>~  INDIAN  FISC<br><!-- End of picture text -->

Source and notes: Annex 23. IS=Canal irrigation subsidy; ES=electricity subsidy; CS=credit subsidy.

Figure 24: **Weighted averages of three states 1981-90. Shares of non-traded input subsidies in cane reference prices** <!-- Start of picture text --> e a. = i s. :CS<br>PRN; ,.9f,1N4DI.0 l\aN<br>Souce and note:,--nex 23 IS=aa Irrgto susiy ES=\ elcrct usd. CS cedt ubid.I<br><!-- End of picture text --> On average however the total value of the subsidies was quite low in relation to cane prices about 2. _5_ percent on average, varying from about half of one percent in 1981 to a maximum of 5 1
about 6 percent when reference prices were very low in 1985. The shares of the individual subsidies in reference prices are illustrated in Fig 24 .

The details of the ESC estimates are given in Annex 23 and the results are summarised in Table 14. As noted previously, as are the EPC estimates, they have been calculated for the importable hypothesis only. The exportable hypothesis ESCs could easily be estimated from the spread sheet data. Comparing incentives between the three states, the ESCs make little difference to the result suggested by the EPCs i.e that during this period UP farmers were considerably more protected (average ESC = 2.65) than farmers in Maharashtra (average ESC = 1.20 ) and TN (average ESC = 1.48).

Tablel4: **Effective subsidy coefficients for cane, 1981-90**

||1981|1982|1983|1984|1985|1986|1987|1988|1989|1990|Avg.|
|---|---|---|---|---|---|---|---|---|---|---|---|
|UP|0.56|1.05|1.11|1.98|8.13|6.18|3.98|1.80|0.94|0.80|2.65|
|Maharashtra|0.46|0.79|0.95|1.39|2.29|1.81|1.74|1.35|0.73|0.53|1.20|
|TN|0.51|0.90|1.33|1.86|3.84|2.57|1.60|0.97|0.53|0.65|1.48|
|All India|0.60|1.12|1.29|2.21|6.61|4.89|3.33|1.88|0.97|0.86|2.38|

Sources and notes: See Annex 22.

The NPCs,,EPCs and ESCs are compared in Table 15 and Fig 25. In 7 of the 10 years, by all the indicators sugar cane growing was heavily protected. In each year the EPCs was higher than the NPC, indicating that after taking account of the protection of tradable inputs, protection of value added in cane growing was higher than nominal protection of the cane. Likewise, in each year the ESCs are higher than the EPCs , reflecting the increase in the cane growing processing margin resulting from the subsidies on the non-tradable inputs. But the general level of incentives was dominated by the large swings in world prices of sugar as reflected in the nominal protection coefficients. The proportionate effect of the protection of tradable inputs and the non-tradable subsidies on actual relative to reference processing margins, was quite low in the early and later years of the 1980s, but much greater in the mid 1980s when world sugar prices and hence the reference processing margins were very low.

Table 15 **:NPCs, EPCs and ESCs for sugarcane, 1981-90**

||1981|1982|1983|1984|1985|1986|1987|1988|1989|1990|Avg.|
|---|---|---|---|---|---|---|---|---|---|---|---|
|NPC|0.55|0.98|1.11|1.77|3.81|3.10|2.52|1.52|0.83|0.74|1.69|
|EPC|0.54|0.99|1.12|1.89|5.66|4.21|2.85|1.60|0.84|0.75|2.04|
|ESC|0.60|1.12|1.29|2.21|6.61|4.89|3.33|1.88|0.97|0.86|2.38|

Sources and notes: See Annexes 18 and 22.

52
**Figure** 25: **NPCs, EPCs and ESCs for sugarcane, 1981-90**

<!-- Start of picture text --> . .,6 N EPC j<br>i ESC S--<br>I<br><!-- End of picture text --> Source and notes: See Annexes 18 and 22.

# **PRODUCER SUBSIDY EQUIVALENT ESTIMATES FOR SUGARCANE, 1981-90**

The same information included in the EPC and ESC coefficients can alternatively be shown in Producer Subsidy Equivalents (PSE) coefficients, where the effect of the tradable input protection and the non-tradable input subsidies are related to the reference price of the cane, rather than to the reference processing margin or value added. As discussed in the general methodology, PSE I is defined to include the value of the tradable input protection, and PSE2 includes both the value of the tradable input protection and the value of the non-tradable input subsidies. The details of the average PSE estimates for the three states are given in Annex 18, and the resulting coefficients are given in Table 16 and illustrated in Fig. 26, where they are compared with the corresponding NPCs. As with the EPC and ESC estimates, the PSE coefficients have only been calculated for the importable hypothesis case.

5 3
Table 16: **Producer subsidy equivalent coefficients for sugarcane, 1981-90**

||1981|1982|1983|1984|1985|1986|1987|1988|1989|1990|Avg.|
|---|---|---|---|---|---|---|---|---|---|---|---|
|NPC|0.56|1.01|1.15|1.90|4.06|3.41|2.79|1.62|0.83|0.74|1.81|
|PSEI|0.60|1.02|1.15|1.86|3.99|3.38|2.69|1.60|0.86|0.78|1.79|
|PSE2|0.65|1.14|1.30|2.14|4.59|3.86|3.11|1.84|0.98|0.88|2.05|

Sources and notes: See Annexes 18 and 22.

Figure 26: **Producer Subsidy Equivalent ( PSE) coefficients for sugarcane, 1981-90** <!-- Start of picture text -->
- +NPC<br>-M- PSE I<br>A  PSE2<br>t  S~~~~~~NI  FT\LYAS  .*.<br><!-- End of picture text -->

Source and notes: See Annexes 14 and 17.

Relative to other incentives, tradable input protection had a very small effects. During the years of positive input protection between 1983 and 1988 the effect was to very slightly reduce cane grower incentives, and during the other years of negative input protection grower incentives were increased slightly. These influences were greatly outweighed by the non-tradable input subsidies, which increased grower incentives in every year during the period, and reached over 54
half of cane reference prices when these hit bottom in 1985. On average during the 10 years, they amounted to 14 percent of the domestic price of sugarcane in the three states.

It is important to note that there is some upward bias in the incentive indicators discussed above. First, as noted in the Goldar and Gulati study and in our discussion of the NPC estimates, no allowance has been made for arrears in payments by the mills for farmers' cane, which in difficult years for the mills are reported to have amounted to as much as twenty percent or more of the value of the cane purchased. These payment arrears obviously discourage farmers from growin sugarcane, but quite detailed research would be required to to quantify them and their effects.,5 Secondly, the methodology used assumes that the observed sugar mill processing margin in a given year would not change if reference prices for sugar and molasses were to replace the actual domestic prices of that year. If this would mean that domestic sugar prices would be much lower than actual prices, it is likely that the incomes ( i.e. wages and returns to capital ) of the primary factors in sugar milling would be depressed , thus depressing the processing margin and absorbing some of the price reduction, all of which in our estimates is assumed to be absorbed by the cane fanners. This in turn would mean that the cane reference price would be higher than in our estimates, thus giving lower NPC and other incentive indicator estimates for cane growing.On the other hand, as noted in our discussion of the NPC estimates, we have followed the somewhat arbitrary procedure adopted by Goldar and Gulati in assuming minimum cane reference prices in a few years of very low world sugar prices in which the cane reference prices would otherwise be extremely low or negative, which in turn implies absorption of much or most of the low world sugar prices by the mills. To quantify these effects more systematically would require research on actual milling margins over time in response to fluctuations in domestic prices and an attempt to project the observed responses to the counterfactual reference scenarios.

Finally, it is worth noting that the the averages of the sugarcane incentive indicators for the 1981-90 period are heavily influenced by the results for the outlier year 1985, when following Goldar and Gulati, we assumed a very low cane reference price in the largest producing state, UP, which covered only the paid out cost of intermediate inputs. Excluding 1985 brings down the three-state period averages of the NPC, EPC and ESC from 1.69, 2.04 and 2.38 respectively to 1.47, 1.65 and 1.92.

> 35 This would require looking at how the arrears are distributed among farmers and when and how they are eventually settled, as well as the farmers' sources of credit. It would also be necessary to consider differences between farmers in UP and Tamil Nadu and farmers predominantly working with cooperative mills in Maharashtra.

55