Demand for and Supply of Sugar in India1

Part A: Demand for Sugar in India

In India, sugar is an essential item of mass consumption and the cheapest source of energy,
supplying around 10 percent of the daily calorie intake. India is the largest consumer of sugar.
Consumption was 31 million metric tonnes in 2019-2020. With a continuous increase in per
capita sugar consumption and the ever increasing population, this crown is set to stay for a long
time. India is also one of its largest producers. With over 600 sugar factories and annual
turnover of Rs 150 billion, it is the second largest agro-processing industry in India, after
textiles.
Following table provides the data on average price, Consumer Price Index, Retail Price and
Demand for Sugar in India from the year 2002 to 2019. To understand the factors affecting
sugar demand, a manager of the sugar factory uses the following data to estimate demand.

Year Total pci_rupees Average Retail CPI Retail Average Pci_IA

Offtake Price Price Price_IA Price_IA
2002 2020 35202 1269.36 1503.94 39.58 3799.86 3894.19 107994.26
2003 1760 40862 1471.23 1400.00 41.09 3407.56 4348.02 120762.21
2004 1850 46920 1754.07 1700.00 42.63 3987.53 4995.71 133631.61
2005 1960 53429 1894.93 1977.50 44.44 4449.49 5177.07 145971.26
2006 2160 60297 1513.71 2109.80 47.02 4487.09 3908.95 155709.34
2007 2690 76858 1519.02 1900.00 50.02 3798.79 3687.67 186585.16
2008 2310 74630 2182.16 2690.00 54.19 4963.84 4889.31 167215.10
2009 2160 82361 3160.51 3520.00 60.09 5857.95 6386.40 166426.02
2010 2340 101464 2909.71 3220.00 67.29 4785.00 5250.15 183077.39
2011 2560 108979 3140.33 3530.00 73.25 4818.80 5205.19 180635.77
2012 2310 107916 3398.39 3770.00 80.08 4708.00 5153.05 163635.37
2013 2630 108344 3207.20 3640.00 88.81 4098.59 4384.86 148127.17
2014 2670 117632 2772.27 3230.00 94.45 3419.68 3563.82 151218.46
2015 2650 120003 3490.54 3710.00 100.00 3710.00 4238.27 145709.73
2016 2460 129492 3987.15 4230.00 104.94 4030.84 4613.32 149828.37
2017 2590 148109 3465.29 3850.00 107.55 3579.56 3912.06 167204.26
2018 2930 149918 3422.50 3910.00 112.78 3466.84 3684.65 161401.27
2019 3100 157264 3557.25 4000.00 121.42 3294.30 3557.25 157264.00
Note: AveragePrice in Rs./Quintal , Totalofftake (Demand) in lakh quintal CPI : Consumer Price Index: All Items for India,
Index 2015=100, Annual, Not Seasonally Adjusted

Firstly, a representative model to estimate sugar demand can be described using the following
equation:
Sugar Demand = b0 - b1 PriceSugar + e
The equation relates a dependent variable Y to independent variable X. In the given case, Y
represents the demand for sugar, and X its price. Further, the equation also includes an error
term e which represents the collective influence of any omitted variable that may also affect Y

1
Prepared by Nisha Koppa and Gopal Naik for class discussion. Not to be circulated.

1
and this is assumed to be unobservable (for instance, prices of other good, tastes and
preferences etc.). Here, the inflation adjusted price and pci (per capita income) series (Retail
Price _ IA) is used instead of actual prices. The corresponding estimates of the above equation
looks like the following:
Further, a same regression but by using retail prices of sugar was run:
Sugar = b0 - b1 RetailPriceSugar + e
Sugar= 3158.35 - 0.1513 RetailPriceSugar
(5.98 ) (-1.46) R2= 0.06

Here, in brackets we report the t-values used for test of significance. However, the rule of
thumb for statistical significance is t-value greater than 2. A negative coefficient estimate
portrays that the relationship between dependent and explanatory variable is inverse.

Figure 1 : Predictions with Retail Price of sugar

Observed Vs Estimated Values

3000

2500

2000

1500

TotalOfftake TotalOfftake_predicted2

The below figure shows the plot of predicted/fitted values vs. actual values of demand for
sugar. Do you think this is a good model to predict sugar demand?
Does curve really represent the demand for the product? In Table, however, there is data
available for other variables like average per capita income, inflation and also adjusted the
average price of sugar using the CPI index. Can you think of more factors included in e which
can effect demand?

Moving further, the manager also includes income as an independent/explanatory variable

and plots estimated sugar demand vs. observed sugar demand.

The new equation including the price of sugar and income as another independent variable is
given as:

Sugar = a – b RetailPriceSugar + c Income + e

We get the estimated equation,

2
 Sugar = 1701.51 – 0.2862RetailPriceSugar + 0.01377 Income
(3.43) (-3.68) (4.33) R2= 0.56

Figure2: Prediction with Retail price of sugar and Per capita income

Observed Vs Estimated Values

3000

2500

2000

1500

TotalOfftake TotalOfftake_predicted2

Comparing Figure 1 and Figure 2 which models estimates better?

Esimated Demand
8000

7000

6000

5000

4000

3000

2000

1000

0
0 500 1000 1500 2000 2500 3000

A double log form of the equation estimated is as follows.

lnSugar = 2.26 – 0.6074RetailPriceSugar + 0.894 Income

(1.04) (-3.63) (4.68) R2= 0.58

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Covid-19 and the falling International Prices
As Covid-19 grips the world, India's sugar consumption during the peak demand season is set
to fall for a second straight year after various states imposed restrictions including restaurant
and shop closures to halt rising cases of COVID-19. Sugar demand, which usually rises by
more than 1% each year, fell 0.8% in 2019/20 to 25.3 million tonnes because of one of the
world's strictest lockdowns imposed last year in March.
Alternately, while the private sugar industry body Indian Sugar Mills Association is optimistic
about the pick up in India’s sugar exports, there have been a fall in export prices of sugar. For
instance, the export price of white sugar was $425/tonne in February, and has now come down
to $355/tonne. Similarly, the price of raw sugar has declined from 15.3 cents per pound to
11.70 cents per pound during the same period.
Demand from bulk consumers had recovered to normal levels by the end of 2020 but started
falling again in April due to uncertainty over coronavirus-led lockdowns. Furthermore, a falling
demand for sugar, could increase inventories in India - the world's biggest consumer of the
sweetener- and may put downward pressure on local prices. Lower domestic sales could force
mills to export more sugar in the next marketing year, putting pressure on global prices as well.
Government Intervention2
India has been witnessing one of the worst episodes of agrarian distress during the last few
years, and sugarcane farmers were majorly hit by this. But critical analysis reveals that the
type of government intervention in the sugar sector is also a key reason for the distress among
farmers in sugarcane belts.
While sugar companies are faced with mounting stocks and plummeting prices, farmers have
a record sugarcane crop on their hands. The combination is sure to send the sugar industry
into a downward spiral of losses and payment arrears. And the state governments have
compounded the problem by announcing higher cane prices. According to the Sugarcane
Control Order, 1966, the central government fixes the minimum price for sugarcane
(Statutory Minimum Price) that must be paid by producers of sugar for the sugarcane
purchased from farmers. However, some states announce State Advised Price (SAP), which
is usually higher than SMP. The reasons behind states announcing the SAP are differences in
the cost of production from one region to another and productivity levels.

This situation has arisen due to banning of sugar exports by the Government last year to rein
in domestic prices. That resulted in a pile-up of unsold stock as production has exceeded
domestic demand over the past few years. Meanwhile, the prospects of a sharp increase in
global production and large inventory have dampened international prices to below cost for
most Indian manufacturers. The government is now considering subsiding sugar exports and
creating a buffer stock, to clear the surplus. On the investment side, the subsidy regime
announced by states such as Uttar Pradesh has created excess capacity. Overall, government’s
intervention has compressed the sugar cycle, thereby creating a crisis.

2
https://economictimes.indiatimes.com/government-intervention-damages-
sugar/articleshow/1817963.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

4
Questions
1. From the estimates write a sugar demand equation in terms of only price.
2. Prepare a plot of sugar demand for various levels of prices. What will be the sugar
demand if the price per quintal of sugar is Rs 40.
3. Now, write the sugar demand equation in terms of prices and income.
4. Show what happens to plot of sugar demand in item 2 if the average income goes up
by Rs 5000

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Part B: Supply of Sugar
While actual supply of sugar depends on the stocks carried over from the previous period,
current production and imports, the current production is the largest component of supply in
Indian domestic sugar market. The production of sugar depends mainly on the availability of
sugarcane and prices of sugar. Availability of sugarcane in turn depends on the sugarcane
production which is again dependent on various factors such as support prices, prices of
competing crops, rainfall, arrears pending with the sugar factories etc. Here we estimate only
the sugar supply relationship and to do that the following time series data are collected.

Data on Sugar production, sugarcane production, sugar price and wholesale price Index
Year Sugar Sugar WPI Sugar AdjSugar
Production price Cane Price
in lakh (Rs/kg) production
quintals lakh
qunitals
2002 2015 1350 0.4456 28738 3029
2003 1355 1300 0.4701 23386 2765
2004 1269 1567 0.5001 23709 3132
2005 1927 1792 0.5226 28117 3428
2006 2837 1858 0.5572 35552 3335
2007 2636 1425 0.5832 34819 2444
2008 1454 1625 0.6302 28503 2579
2009 1891 2683 0.6542 29230 4102
2010 2439 3000 0.7167 34238 4186
2011 2634 2933 0.7807 36104 3757
2012 2514 3308 0.8382 34120 3947
2013 2436 3283 0.8882 35214 3696
2014 2831 3208 0.9063 36233 3540
2015 2513 2733 0.8837 34845 3093
2016 2026 3658 0.9163 30607 3993
2017 3233 3983 0.9433 37991 4223
2018 3316 3358 0.9836 40542 3414
2019 2741 3475 1 35814 3475
Average 2337 2586 1 32653 3452

The estimated equation is as follows:

Sugar production = -1693.56 +0.12 SugarcaneProd + .02875 SugarPr R2 = 0.93
(-5.45) (14.05) (0.38)
The log-log equation estimated is as follows:
lnSugar production = -10.99 + 1.73 lnSugarcaneProd + 0.09 lnSugarPr R2 = 0.93
(-8.18) (13.69) (0.75)

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Therefore the estimated supply curve is as follows:
Year Estimated Supply (lakh Sugar Price
qtl)
2002 2289 3029
2003 2281 2765
2004 2292 3132
2005 2300 3428
2006 2298 3335
2007 2272 2444
2008 2276 2579
2009 2320 4102
2010 2322 4186
2011 2310 3757
2012 2315 3947
2013 2308 3696
2014 2303 3540
2015 2291 3093
2016 2316 3993
2017 2323 4223
2018 2300 3414
2019 2302 3475

Supply of Sugar
4500
4000
3500
3000
2500
2000
1500
1000
500
0
2260 2270 2280 2290 2300 2310 2320 2330

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Questions
1. Write the sugar supply equation only in terms of sugar price? How important sugar
price is in determining sugar supply?
2. If rainfall is good in a particular year what impact it would have on the supply of
sugar? When will this impact be observed?
3. What is the equilibrium price?