Sugar prices soar following spike in tomato costs

Sugar prices in India touched the highest in six years on Tuesday (September 5), increasing by over 3 per cent in just two weeks. This is mainly due to some important regions of the country not getting enough rain. Even though sugar has a bigger impact on the CPI Index than tomatoes, it might not contribute as much to inflation worries as it appears.

In July, inflation in India reached its highest level in 15 months, at 7.44 per cent, mostly due to higher food prices, especially tomatoes. The expectation of continued extreme weather conditions is likely to keep the inflation rate high until October.

What experts say

Gaura Sengupta, an economist at IDFC First Bank, told Outlook that while tomatoes have a smaller representation in the CPI index (0.57 per cent) compared to sugar (1.36 per cent), they can have a bigger impact because their prices can fluctuate significantly due to their perishable nature. In contrast, sugar prices tend to be more stable from month to month.

In July, tomato prices shot up by over 200 per cent compared to the previous year, reaching an eight-year high due to limited rainfall. This sharp increase caused concerns for the government, which had to take steps to alleviate the price pressure.

However, with government intervention and the arrival of fresh tomato crops, prices in August dropped by 6.8 per cent in a sequential manner. Tomatoes make up approximately 10 per cent of the vegetables index, which in turn accounts for 6.04 percent of the overall CPI Index.

While sugar prices have been rising throughout this year, their impact has been somewhat overshadowed by the effects of other food categories like vegetables, cereals, and pulses.

Suman Chowdhury, Chief Economist at Acuite' Ratings & Research, noted that the recent increase in sugar prices alone is not important enough to significantly affect the overall CPI inflation. However, when you consider the combined impact of higher prices in categories such as cereals, pulses, milk, and sugar, it can keep food inflation elevated for a longer period, despite the moderation in vegetable prices.

In August, the prices of rice and wheat went up by 2.7 per cent and 1.3 per cent, respectively, on a monthly basis, while pulse prices increased by 1.4 per cent. "Cereals and products" account for 9.67 per cent of the CPI Index, with "pulses and products" making up 2.38 per cent.

The Reserve Bank of India has predicted retail inflation to be at 6.2 per cent for the second quarter of the financial year. This estimate is lower than the expectations of some economists, who believe that the index will remain significantly above the RBI's tolerance range in that quarter.

Gaura Sengupta also mentioned that while uneven monsoon performance could exert further upward pressure on CPI through sugar prices, it's unlikely to be as volatile as tomatoes. The primary drivers of food inflation continue to be cereals, vegetables, and milk, which have a greater weight in the CPI.

Ban on sugar exports?

Due to the increasing sugar prices, analysts predict that the Union government may impose a ban on sugar exports for the first time in seven years. Previously, the government had stopped the export of rice and wheat to stabilise their prices.

This move to restrict sugar exports from India is aimed at ensuring an adequate supply of sugar during the upcoming festive season when demand typically rises.

In the fiscal year 2023, India earned $5.7 billion in revenue from sugar exports, out of a total revenue of $770 billion. Considering these numbers, the cost of the export ban may not exceed 1 per cent of its overall revenue.

However, this decision could be disappointing for sugar importers worldwide, as India is currently the second-largest exporter of sugar, with Brazil being the largest.