Sugar, a key item in the Indian retail sector, has seen a sudden price increase. Prices went up by 3%, making it the highest in six years. This can be attributed to the current El Nino effect causing issues with sugar production in India.
In the last few months, items like tomatoes and onions have seen very high prices in India. Now, sugar prices have also gone up, reaching 37,760 rupees for every ton, the highest in the past six years, as per media sources. This increase is because of less rain, the OPEC oil output cut, and the El Nino effect.
It is expected that sugar production might fall by 31 million tonnes from 32.5 million tonnes because of less rain in Maharashtra and Karnataka, as these states alone contribute about 80% of sugar in India.
India is among the top producers and exporters of sugar in the world, coming second to Brazil, causing a shortfall in sugar supply in Asia.
OPEC's unexpected choice to cut oil production by a noteworthy 1.16 million barrels daily has amplified costs. This twist has nudged sugarcane more towards ethanol creation and less towards sugar reserves.
The push towards increasing biofuel by the government has caused a surge in sugar prices as ethanol blending has increased from 10% in 2021-2022 to 11.41% within 3 months, in the sugar season India is expected to produce 50 Lakh Metric Tonne.
Recap of Sugar Prices
Impact of El Nino Effect
Keeping in view the strong demand for the upcoming festive in October, the government of India has imposed an export ban on sugar. This ban comes due to the return of the El Nino effect with unpredicted weather patterns to various regions, affecting sugar production.
El Nino typically brings floods to Brazil and reduces rainfall in India which typically affects sugar production. Despite global cost upheavals, India's sugar rates have been untouched, thanks to government-set limits. This has provided some relief for consumers within the country, as per media sources.
Historically, during the annual sugar season in September and October, India often experienced a rise in sugar prices because of droughts from the El Niño effect, while Brazil dealt with severe floods.
Current Inflation
In August, India's retail inflation dropped to 7% from July's 15-month peak of 7.44%, mainly because tomato prices went down. RBI estimated an average inflation of 6.2% for the second quarter. Money control states that this can come true if inflation crashes down to 4.2%, which is highly impossible given the current price scenario.
Data from the Department of Consumer Affairs shows tomato prices fell 6.8% in August, while potato and onion prices increased by 2.7% and 12.6%, respectively. The significant onion price hike is linked to limited supply due to heavy July rainfall. Tomato prices, high in July, began dropping by late August because of new crops arriving and government actions. They are likely to decrease more in September.
Historically, during the annual sugar season in September and October, India often experienced a rise in sugar prices because of droughts from the El Niño effect, while Brazil dealt with severe floods.
Policy Impact
After the surprise rise in inflation in July, both market experts and the RBI are hoping for a slight decrease in August. Everyone's got their fingers crossed for September, wishing for numbers that align more with the central bank's initial predictions. On a side note, on August 10, the RBI tweaked their September inflation guess to 6.2% and nudged the 2023-24 forecast to 5.4%. Still, they decided to stick with the 6.5% repo rate, which hasn't seen a change since February. Now, many financial gurus believe that the inflation for July through September might exceed the RBI's thoughts. Yet, there's a silver lining; many are cheering on the RBI's steady prediction of 5.2% inflation for early 2024.