After Tomato Trouble, Will Sugar Leave A Sour Taste In The Festive Season?

Sugar prices in India reached to a 6-year high on Tuesday, following a jump of more than 3 percent within a fortnight. The main reason behind the rise is the deficient rainfall received in the key areas of the country. However, despite having a larger weight in CPI Index than tomatoes, sugar may not add to the concern for inflation as much as it seems.

Retail inflation in India rose to a 15-month high of 7.44 percent in July due to a rise in food prices, primarily of tomato. Projection of extreme weather conditions are expected to keep the headline inflation number elevated till October.

What Was The Tomato Trouble?

“In terms of weight in the CPI index, tomato has a much smaller weight at 0.57 percent, compared to sugar of 1.36 percent. But, tomato has a much larger impact because its prices can swing to a much larger degree due to its perishable nature. In contrast sugar prices show much less volatility on a month-on-month basis,” said Gaura Sengupta, Economist, IDFC First Bank.

In July, tomato prices surged over 200 percent on year to an eight-year high due to scanty rainfall. The abnormal rise created worries for the government as it had to roll out measures to ease up the price-pressure.

As a result of government intervention and arrival of fresh crops, tomato prices in August fell around 20 percent sequentially. Tomato accounts for around 10 percent of the weight of the vegetables index, which itself accounts for 6.04 percent of the CPI Index.

An Added Pressure On Food Inflation

Meanwhile, although sugar prices have been on a rise throughout this year, its impact has largely been overshadowed by those of vegetables, cereals and pulses.

“The current increase in sugar prices is not significant enough to move the needle on the overall CPI inflation on its own. However, the collective impact of higher prices across several categories such as cereals, pulses, milk and sugar can hold food inflation firm for a longer period despite the moderation in vegetable prices,” said Suman Chowdhury, Chief Economist, Acuite’ Ratings & Research.

Where prices of rice and wheat rose 2.7 percent and 1.3 percent respectively, in August on a monthly basis, prices of pulses were up 1.4 percent. ‘Cereals and products’ carry a weight of 9.67 percent in the CPI Index, with ‘pulses and products’ constituting 2.38 percent.

The Reserve Bank of India has projected retail inflation to be at 6.2 percent for the second quarter of the financial year. The projection is much lower than those of economists, who believe the Index to stay significantly above the RBI's tolerance band in the quarter.

“The uneven monsoon performance could result in further upward pressure from sugar prices on CPI, but it’s unlikely to be as volatile as tomatoes,” said Sengupta. “The bigger drivers of food inflation remain cereals, vegetables, and milk, which have a higher weight in CPI.”

Ban On Sugar Exports Coming?

In view of the rising sugar prices, analysts expect the Indian Government to impose a ban on sugar exports for the first time in seven years. Earlier, it had banned shipments of rice and wheat to ease their prices.

The move to not let sugar leave the shores of India will help the government to meet the expected rise in demand for the sweetener in the current festive season.

In FY23, revenue from sugar exports for India amounted to $5.7 billion, where the total revenue stood at $770 billion. Considering the figures, the cost of the ban may not come more than 1 percent of its revenue.

However, the decision may come as bad news to the sugar importers around the world as India is currently the second-largest exporter of the commodity, with Brazil being the first.