India can’t find a sweet spot for its sugar policy

**Akshara** (0:04)
In today's episode, we'll break down one interesting story in depth, followed by a shorter story. First, we'll talk about India not finding a sweet spot for its sugar policy. And then we'll talk about whether hydrogen can actually power Indian trains.
Welcome back to The Daily Brief by Zerodha, where we cut through the noise to help you understand what's actually happening in the most important stories from business and markets. I'm your host Akshara, and today is Wednesday, 26th August. Coming to the first story. So in February, India had a sugar problem. We had too much of it. And the government had already allowed mills to export 15 lakh tonnes of sugar during the 2025-26 season. But in February, it added another 5 lakh tonnes, taking the total export quota to 20 lakh tonnes. So the official reason was to manage India's surplus sugar availability. And mills eventually exported only around 8 lakh tons against that quota. But by August, the problem had done a complete 180-degree flip. Domestic spot sugar prices had jumped roughly 10% in a month and climbed to a record high. Now, the government's response was almost the opposite of what it had been doing a few months earlier. It prohibited further exports, began physically verifying mill inventories, restricted how much traders and large consumers could hold, and opened a duty-free window for 10 lakh tonnes of raw sugar imports until October 31st. So this reversal makes sense once you look at what happened to the production estimates. Sugarcane growing states had initially projected production of around 343 lakh tonnes, but the government now expects roughly 306 lakh tonnes, which is about 11% lower than the original estimate. The government was not alone in getting it wrong. The US Department of Agriculture or USDA also cut its India estimate by 53 lakh tons. Now, the exact numbers vary depending on who you ask, but directionally, all estimates were lower than initial expectations. But what's worth asking is why did it take so long for this mismatch in expectations to become so obvious? See, the season had started strongly, and production was running well ahead of the previous year, especially in Maharashtra and Karnataka. But early production can be deceptive. And sugar output depends on both how much cane reaches mills, as well as how much sugar mills recover from every ton of that cane. So a mill can crush a lot of cane early, without the total crop for the year being any larger, and it may simply be processing the available crop faster. So that's broadly what happened. By 15th April, 2026, India had produced 275 lakh tonnes of sugar, which is just around 8% more than a year earlier. But only 19 mils were still operating against 38 at the same point the previous year. Then, by 30th April, output was still 7% ahead of the previous year, yet only 5 mils remained operational against 19 a year earlier. So the strong first half didn't necessarily mean the crop was much larger, but just that a greater share of it had arrived early.
And at the same time, the quality of the crop itself had weakened for several reasons. Excess rain hurt parts of Maharashtra, and crop disease damaged cane in UP and Maharashtra. Weaker cane quality also lowered recovery, which meant the same ton of cane produced less sugar. The USDA too cited excessive rainfall when it cut its India estimate.
In UP specifically, even the cane that was available didn't necessarily reach sugar mills. The state's cane availability for crushing was estimated to be 2-3% lower, and some mills closed around 15 days earlier than scheduled, while others reportedly received around 25 lakh quintals less cane. Now, industry representatives said some farmers had sent cane to kanchari or raw sugar units, which could offer better prices and immediate payment. This connects to a problem we explored the last time we covered sugar, which is that sugar mills must pay farmers a government-regulated price for cane, while the price they get for sugar keeps changing.
When sugar and ethanol sales do not cover costs, mills can run short of cash and delay payments to farmers, and that can make kanchari units, which often pay immediately, more attractive. Now, this alone wouldn't explain all of the shortfall, but it is another reason why estimating cane output alone is not enough. Now, beyond this, the data around sugar production itself is too fragmented to get a fully accurate picture. Mills report production, sales and stocks to the government, and traders now update inventories through the Department of Food and Public Distribution's online portal. But, there's still no single public live balance that tells you how much sugar was produced, sold, exported, dispatched, or remains in stock. So, even now, nobody quite agrees on whether India has a genuine sugar shortage. The government initially argued that the price rise was not justified by demand and supply, and it blamed hoarding, speculative transactions, and paper trades in which sugar was sold without physically leaving the mill. And the industry has pushed back too. The National Federation of Cooperative Sugar Factories estimates net production at 279 lakh tonnes after around 24 lakh tonnes of sugar equivalent was diverted to ethanol. And it expects the next season to begin with around 35 lakh tonnes of stock. So, against monthly demand of roughly 22 lakh tonnes, that should ideally bridge the market until fresh sugar arrives. But technically, both sides can be right. India could have enough sugar in the national balance, while the market for sugar that was unsold and ready to move was still tight. So once the buffer became thin, coding or delayed selling could make that tightness much worse. That is why the government's response focused first on finding and moving the sugar that was already inside the country. And then on 24th July, officials were asked to physically verify mill inventories and reconcile declared stocks with sales, dispatches, mill returns and GST-linked information. Any discrepancy could even affect a mill's future domestic sale quota. And then came stock limits. From 1st August to 30th November, 2026, sugar dealers are required to report inventories every week and stay within prescribed holding limits. From 1st September to 30th November, businesses consuming more than 10 tons of sugar a month were also barred from holding more than 15 days of their normal requirement. Now, these measures can stop people from sitting on inventory, but they cannot create more sugar out of thin air. That's where wheat imports come in. So the government opened a duty-free window for 10 lakh tons of raw sugar until 31st October, and unlike stock limits, imports actually add to supply. But not immediately. Sugar from Brazil can take around 40 to 45 days to reach Indian ports before unloading, refining, and inland transport. And industry representatives expect only some consignments to arrive before 15th October.