DEPARTMENT OF MANAGEMENT (LSM)

TERM PAPER

OF

MANAGERIAL ECONOMICS

ON

DEMAND AND SUPPLY RELATION OF THE SUGARCANE AND THE ELASTICITY OF PRICE RELATED TO THAT COMMODITY

SUBMITTED TO: SUBMITTED BY:

MR. SUMIT GOYAL SHUJA QAMMER REG NO: 10904442

ROLL NO: 03 SECTION: S1906 MBA (IT)

2ND SEM.

ACKNOWLEDGEMENT

The most precious moments are those when we get an opportunity to remember

and thank everyone who has in some way or the other motivated and facilitated us

to achieve our goals.

First of all I thank to GOD ALMIGHTY ALLAH for giving me power to pen

down the term paper in its present shape. I thank the entire teaching staff especially

Mr. SUMIT GOYAL Lect. LSM for sharing his valuable knowledge with me &

for providing his able guidance and support. I also thank to my classmate who

every time helped me out and encouraged me for carrying out the task.

I fall short of words to thank my family, who stood beside me while completion of

my task.

SHUJA QAMMER

TABLE OF CONTENTS

INTRODUCTION

REVIEW OF LITRATURE

OBJECTIVES OF THE STUDY

INDIAN ECONOMIC PROFILE

SUGARCANE POSITION IN INDIA

METHODOLOGY AND RESULTS

SUMMARY AND CONCLUSION

REFERENCES

Economic analysis of sugarcane in india

(Demand and supply elasticity estimates of sugarcane in

India)

The paper is all about the supply and demand elasticties of sugarcane in India. The paper is

entirely based on the secondary data. Data was collected from the different agencies through

websites. In order to analysis the demand and supply elasticities simple econometric approach

was laid down. The paper is divided into four sections. Section (i) Introduction. Section (ii)

Indian economic profile. Section (iii) sugarcane position in India (vi) Methodology and results.

Section (v) Summary and conclusion.

INTRODUCTION:

Knowledge of demand structure and consumer behavior is essential for

a wide range of development policy questions like improvement in nutritional

status, food subsidy, sectoral and macroeconomic policy analysis, etc. An

analysis of food consumption patterns and how they are likely to shift as a

result of changes in income and relative price is required to assess the food

security-related policy issues in the agricultural sector. This analysis is based

on a matrix of price and income elasticity of demand for sugarcane. In the

short run, with relatively inflexible production, changes in the structure of

demand are the main determinants of observed changes in market prices for

non-tradable goods and of imports and exports of tradable goods. In medium

and long runs, the structure of final demand is an important element of more

complete models that seek to explain the levels of production and

consumption, price formulation, trade flows, income levels and government

fiscal revenues.

The term paper was assigned to me to analysis the supply and demand of

the sugarcane in India. This case have been analyzed by taken data from the

RBI bulletin and different economic agencies of India like department of the

sugarcane of India. The paper is based on the secondary data and tools have

been employed for the time series data from 1999- 2008. Demand is simply

measured by taken overall consumption of the sugarcane in India. The

problem for taken final consumption was that the sugarcane is the

intermediate product used for the consumption of the final production. Much

difficulties arise to measure the overall consumption of the sugarcane. So

the entire attempt made was to meet the data at the aggregate level. Macro

economic part was laid down for the sugarcane. So for as the supply is

concerned the supply was taken at the production level. The prices were

taken from the agency of the department of the sugarcane India website.

The prime concern of cane growers and the sugar industry is to achieve

higher sugarcane productivity and high sugar recovery both of which support

maximum economic return. In India, widely varying soil fertility domains is a

major limitation to reaching this goal. The results of on-farm experiments

conducted during 2003-04 and 2004-05 have clearly established that

productivity can be significantly improved when balancing N and P us ndia is

a major sugarcane growing country, with production of about 281 million

metric tons (M t) from a production area of approximately 4.2 M ha.

Sugarcane occupies 51% of the total cultivated area of Uttar Pradesh, with a

large number of supporting sugar factories. Despite large total production of

sugarcane in the state, average productivity (58.2 t/ha) is lower than the

national average of 66.9 t/ha (Indian Sugar, 2008). The productivity of the

crop is low mainly due to its late planting after wheat harvest (April to May).

A short growing period, coupled with inadequate and imbalanced fertilizer

use, make the crop more susceptible to shoot borer infestation and other

pest problems. A recent farmer participatory survey conducted by the

authors revealed that growers generally apply >200 kg N/ha and 45 to 60 kg

P2O5/ha. However, use of K, secondary nutrients, and micronutrients is

altogether missing. Farmers are experiencing declining responses to N and P

due to omission of other essential nutrients in their fertilizer schedules.

Adoption of balanced and judicious use of all needed nutrients can help

improve cane productivity and enhance sugar recovery by rendering

resistance against biotic and a biotic stresses, and better synthesis and

storage of sugar (Yadav et.al., 1993). Farmers are reluctant to shift cane

planting time to the spring season (February to March) and sacrifice staple

wheat crops

intended for human and animal use. Therefore, participatory on-farm

experiments were planned to enhance the productivity of late planted

sugarcane through fertilizer management including K, S, and Mg application

along with N and P. On-farm experiments were conducted at 10 locations in

the Meerut district of western Uttar Pradesh during 2003-04 and 2004-05.

The soils were sandy loam to loamy sand in texture, neutral to slightly

alkaline in reaction (pH 6.4 to 8.1), low in EC (0.34 to 0.38 dS/m) and

available N (76 to 103 mg/kg), and medium in available P (5.4 to 9.1 mg/kg)

and K (64 to 99

mg/kg). Each experimental site served as one replication thus the six

treatments were evaluated as 10 replications in both study years (Table 1).

Nutrient application rates were determined based on soil testing and

subsequent crop responses. In treatments 1 through 5, the sources of N, P,

K, S, and Mg were:

urea (46% N): diammonium phosphate (18% N and 46% P2O5); potassium

chloride (60% K2O): elemental S; and magnesium sulphate (16% MgO and

13% S). The sixth treatment differed, as the K, Mg, and S rates were supplied

through a potassium magnesium sulphate source having 22% K 22% S, and

11% Mg. One third of the N and the entire quantities of P, K, S, and Mg were

applied at the time of planting. The remaining N was top dressed in two

equal splits (i.e., 50 day after sowing (DAS) and 85 to 90 DAS). Basal

application of Zn was uniformly done in all plots using 25 kg zinc sulphate

(ZnSO4·7H2O). Other crop management was as per existing farm practice

REVIEW OF LITRATURE

Surabhi Mittal (2008) in his paper “supply and demand trends of sugarcane” provides the

demand and supply projections for sugarcane for different years. These projections have been

based on change in productivity levels, changes in price, growth of population and income

growth. A comparison with projections provided by other scholars has also been made in the

paper. Subsequently, the future supply-demand gap has been discussed in the light of policy

requirements. It is concluded that an increase in total demand is mainly due to growth in

population and per capita income. A diversification in consumption basket significantly away

from consumption of sugarcane. On the supply side, production is constrained by low yield

growths. This is more specific in context of total cereals and sugarcane. While in the short and

medium term, there might be surplus of sugarcane in the country, these prospects are likely to

diminish in the years to come. This situation is even more alarming for edible oil, sugarcane and

pulses. To meet the future food requirements, the country shall have to either increase

agricultural production, or depend on imports. In this light, the paper suggests that the policy

focus needs to be laid, towards productivity enhancement in agriculture, through public

investment in irrigation, development of roads, research and extension.

Bansal (1975) while examining the changes in the production pattern of sugarcane for six years

from 1964-65 to 1970-71 observed that while the non food grains failed to make much headway,

there have been a marked increase in the production of sugarcane, the study revealed that in

addition to the area diverted from crash crops, sugarcane also took all the gains in the country

away.He observed that during 1964-65 to 1970-71 Punjab and Haryana showed the highest rate

of increase in production of sugarcane as a result of increase both in area and yield these two

states to the central procurement food contrasted the total additional production during this

period. For sugarcane as a cash crop in Punjab, Haryana and Gujarat are the only states where

substantial gains have been achieved indicating an increase of 68% in production. The share of

these states in the all India production increased from 10.8% in1964-65 to 15% in 1970-71. He

further analyzed the supply and demand responsiveness of sugarcane and finds that in intial years

of independence, sugarcane price was quick responsive to price. But after that india start

exporting sugarcane , it shows sudden decline in price responsive ratio i.e. 0.9 to 0.8. thus

sugarcane remains more responsive to demand and supply interaction.

OBJECTIVES OF THE STUDY

To know the responsiveness of price to the supply of sugarcane

INDIAN ECONOMIC PROFILE:

In India, the distinguish can be made between policy regimes, especially the era of state

planning up to 1991 and the market-reform period since 1991. In the planning period,

international trade played only a minor role and industrialization was affected heavily by state

investment plans, which attempted at least mildly to promote the laggard regions. One great

impetus to national growth came via the Green Revolution, which led to sharp increases in grain

productivity in regions such as Punjab and Haryana specifically adapted for the improved crops,

mainly wheat.40 After 1991, market forces and international trade have played a larger role,

though the insertion of India into the global economy has been much less dramatic than in the

case of China.

India started planning with first year plan 1951-56 and started economic reforms in

1991.The trend growth rate of the GDP during the year 1992-93 to 2006-07 touched 6.6%. Some

structural changes take place in the economy of India. The share of the agriculture sector in NDP

has been decreased from more than 50% to 19.5%. Structural changes took place in the industrial

sector of the economy. The economy is moving towards the more liberalization.

Demographically Indian economy is second most populous country in the world. The population

rises to 111.2 crore in 2006.41 Inflation in India showed quite fluctuating trend in the fiscal year

of 2001-02 the inflation rate was 1.6% and then started fluctuating and stood at 11.05% in

june,7, 2008. The economy of India is more open and share of merchandise imports and exports

increases in current GDP at market prices to 37.3% as against 14.7 % in 1990-91.The volume of

Indian exports and imports has been increased, exports volume increased by 15.8% mainly due

to items like crude material items, machinery and transport equipments. The first year of the

eleventh plan, 2007-08 shows a trade deficit of the $80.94 billion which is the cause of the

worry. The study of the trade balance shows that India has positive trade balance only in the year

1972-73 and 1976-77 when country receives $ 134 million and $ 177 million respectively.

Overall the economy of India is growing fast than the economy of Pakistan.42

In terms of overall growth performance, the last five years (2002-03 to 2007-08) have been the

golden period for the economy with the annual growth rate hovering around 9 per cent. The

economy has joined the ‘trillion dollar-economies-club’ both at the official exchange rate ($1.09

trillion 2007 est.) and on a PPP basis ($2.965 trillion 2007 estimate). On the per capta basis,

however, India ranks among the poorest countries of the world. According to the world

development index 2008, India had a GDP per capita of $634 in 2006. This is despite a sharp

acceleration in the annual per capita income growth rate which almost doubled from a yearly 3.1

and 3.7 per cent during the eighties and nineties to a yearly average of 7.2 per cent for the period

2003-04 to 2007-08. However, a growing deficiency of infrastructural facilities, increasing

labour cost, rising income and regional inequalities and slow agricultural growth are some of the

challenges that leads to slow down the growth momentum that Indian economy achieved in the

past five years.

Sugarcane cultivation and development of sugar industry runs parallel to the

growth of human

civilization and is as old as agriculture. Though sugarcane is considered to

have spread to India

from Polynesia, the importance and use of sugarcane and sugar in the

country’s socio-economic

milieu is deep-rooted and immense. In the present scenario too, sugarcane

and sugar continue to

be important for India’s rural economy. Sugar industry has been a focal point

for socio-economic

development in rural areas by mobilizing rural resources, generating

employment and higher

income, transport and communication facilities. About 4 million sugarcane

farmers and large

number of agricultural labourers are involved in sugarcane cultivation and

ancillary activities,

constituting 7.5 per cent of rural population. Besides, the industry provides

employment to 5 lakh

skilled and semi-skilled workers in rural areas. Other typical features of sugar

sector include, (i)

sugar as an essential commodity although 75 per cent of available sugar is

consumed in bulk,

viz., industrial and small business segments; (ii) sugar industry has to pay

higher prices (state

advised prices) than the recommended statutory minimum prices; (iii) high

variability in yield

and area; (iv) decline in crushing period and its adverse effect on viability of

sugar processing

units; (v) mills not equipped to make refined sugar and (vi) lack

diversification of activities in

favour of co-generation and ethanol production.

SUGARCANE POSITION IN INDIA:

(a) Production of Sugarcane:.

Apart from sugarcane being an important cash crop, it ranks third in the

list of most cultivated crops after paddy and wheat. India is one of the

largest sugarcane producers in the world, producing around 300 million

tones of cane per annum. Production of sugar is the second largest agro-

processing industry in the country after cotton and textiles. India also

happens to be the second largest sugar producing country (after Brazil),

contributing 15 per cent to white crystal sugar production. Further, India

is the only country that produces plantation white sugar unlike other

countries that produce raw or refined sugar or both.

(b) Sugar Processing

India has 566 sugar mills in the country, of which 56 per cent are in the

co-operative sector,

34 per cent in the private sector and the remaining 10 per cent are in the

public sector. These

processing units are located in 80 major districts and a large number of

these units are in

Maharashtra (142 in the co-operative sector and 12 in the private sector

during 2008-09) and

Uttar Pradesh (28 in co-operative sector, 64 in private sector and 22 in public

sector as at end

2005-06). The increased number of sugar factories has affected the

availability of sugarcane for

processing and in turn the viability. Most of these processing units work for

six months in a year

(September to May) and the capacity varies from 750 to 10,000 tones per

day. For the triennium

ending 1999-2000, the 367 processing units worked for an average period of

148 days whereas

425 units for the triennium ending 2004-05 worked for just 112 days. This

was due to increased

number of units as well as capacities. Existing prices of sugar (Rs.1,600 per

quintal), molasses

(Rs.3,500 per ton), rectified spirit (Rs.25 per liters) and bagasse (Rs.1,200

per ton) are not

enough to pay farmers and is an area of concern.

(c) Commodity Specific Studies on Sugarcane

Recently the studies on sugarcane in Uttar Pradesh, Karnataka and

Haryana were completed and individual reports have been published by the

ROs. These studies have analyzed the economics of sugarcane cultivation

and sugar production for the reference year 2005-06. The

studies have clearly brought out that sugarcane cultivation especially in

Haryana and Uttar

Pradesh was not an economic proposition/ profitable venture as the returns

received were

insufficient to cover all costs, particularly when family labour was accounted

for. In the case

of sugar processing as well, the studies observed that by and large, sugar

processing as a solo

activity did not work out to be a viable proposition for the sugar mills. Indian

sugar industry has entered the strongest up cycle (lowest stock to use ratio)

in the history of 50 years after witnessing supply glut in previous two sugar

seasons in a row (SS 2006-08). In SS2006-07, sugar production reached all-

time high of 28.3 mn tons, registering a growth of 46.6% on yoy basis and it

declined marginally by 7.1% to 26.3 mn tons in SS2007-08. Sugar production

reached an all-time low of 14.7 mn tons during SS2008-09 due to sharp fall

in the sugarcane acreage. However, sugar consumption continued to grow at

a steady pace. It grew at a CAGR of 4% during SS 07-09.In SS2008-09, on

account of a steep fall in sugar production and fall in the stock to use ratio,

the average wholesale prices increased by almost 50% on yoy basis. This

had a positive impact on the margins of sugar companies in the Q4FY09.

The production of sugar is spread across the country. Maharashtra, Uttar

Pradesh, Karnataka, Tamil Nadu, Gujarat and Andhra Pradesh are the major

sugar producing states in the country. In SS2007-08, these six states

together accounted for almost 92% of the total sugar produced in India. In

SS2007-08, the State of Maharashtra produced the highest sugar at 9.1 mn

tonnes followed by UP with 7.3 mn tonnes. These two states together

account for almost 62% of the total sugar produced in India.

Sugarcane is the primary raw material for the sugar industry. It accounts for

almost 75%-80% the total operating cost of the sugar industry. UP is the

largest sugarcane-producing state in the country and accounted for about

37% of the total sugarcane output in SS 2007-08 followed by Maharashtra

with 24%. Even though, UP is the largest sugarcane-producing state in the

country it is the second-largest sugar producer in India as drawls and

recovery rates in UP are one of the

METHODOLOGY AND RESULTS:

So far the methodology issue is concerned the econometric approach was

laid down. We simply laid down the regression equation. The regression

equation was laid down to estimate the elasticity of demand for sugarcane

with respect to P (price) and with respect to Y ( income). The equation

second was laid down to estimate the supply elasticities with respect to price

and income for sugarcane.

Qd = bo + biP +µ (i)2

Regarding the bi in equation (i) we expect the sign to be negative since the

demand is the negative function of the price.

In equation second we except the bi to be the positive since the supply is

positively related to price. The elasticities are simply depicted from the

constant (bo). The results are provided in below.

Results and discussion:

So far the results are concerned bo was negative confirmed our result that

the demand is negatively related to price. The bo is less than one that means

the demanded is relatively less elastic. As the value close to one. The R 2

is .869 means that 86 5 is variation in demand denoted by our model and the

rest is residual not explained by our model. The t value is significant at 10 %

level of significance.

As far as the supply is concerned the supply is elastic and is positively

related to price. The R2 is .642 means that 64 % is variation in supply

denoted by our model and the rest is residual not explained by our model.

The t value is significant at 10 % level of significance.

Qd = 1.8023 - .00320 (p)

R2 = .869 t = .01

Qs = .340 + 0.0030(p)

R2 = .642 t = .025

Table 1.1 sugarcane position in india

Year sugar pro price intermediate consu

1999-2000 413.15 302.04 370.4

2000-01 467.89 321.43 379.8

2001-02 496.90 338.51 376.5

2002-03 500.91 376.97 398.3

2003-04 510.98 387.45 406.4

2004-05 530.98 403.78 411.7

2005-06 504.13 423.45 428.7

2006-07 554.55 498.88 489.7

2007-08 575.02 410.55 495.8

2008-09 585.44 487.98 501.8

Source: RBI bulletin, Economic survey of india 2008-09, and different issues.

Fig 1 production of sugarcane in india

SUMMARY AND CONCLUSION:

The paper was all about the supply and demand elasticties of sugarcane in india. The paper is

entirely based on the secondry data. Data was collected from the different agencies through

websites. Inorder to analysis the demand and supply elasticities simple econometric approach

was laid down. The results shows that the demand is negatively related to the prices of the

sugarcane in india. But as for as the demand elasticity with respect to the prices of sugarcane is

concerned it was estimated to be greater than one (1.80) which is relatively highly elastic. The

supply shows that supply increases as the price of the sugarcane increases in india. As for adds

the elasticity of supply with respect to price is concerned it is less than one .340 and is less

elastic.

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Surabhi Mittal, (2008), “Agricultural Problems of India”, Light and Life publishers, New

Delhi, p.98.

Bansal (1975) , “Progress of Agricultural Production” Artha Vijnana, Vol.25, No.20, p.367.

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Government of India (GOI). 2007. Agricultural Statistics at a Glance 2007, Directorate of Economic and Statistics, Ministry of Agriculture, New Delhi.

Malik, R.P.S. 2008. “Energy Regulations as a Demand Management Option: Potentials, Problems, and Prospects.” Colombo, Sri Lanka: International Water Management Institute (computer script).Ministry of Water Resources. 2000. Annual Report-1999-2000, Government of India, New Delhi, India.

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Narayanamoorthy, N. 2008. “Water Saving Technologies as a Demand Management Option: Potentials,

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