The sector’s problems are a direct result of state interference in the pricing of cane. Band-aid measures won’t work
The sugar industry is emblematic of how excessive policy intervention, driven by vested interests, can hobble a promising sector. The existing situation, where cash-strapped sugar mills are saddled with excess inventory while farmers face ₹7,000 crore in unpaid cane dues, has come about mainly because of the populist Central and State government policies that have prevented market forces from operating in the industry. The Centre’s package, under which a subsidy of ₹4.50 per quintal will be paid directly to cane farmers based on the fulfilment of export quotas by mills, only adds to policy complexity. It may well prove as unsuccessful as others that came before it.
The primary problem besieging the sugar industry is that procurement prices for cane, which are decided by the Centre and the States (the former sets a Fair and Remunerative Price- FRP and the latter ‘advise’ a higher price) have been climbing relentlessly for the last five years, while market prices for sugar have simply collapsed. The FRP for cane has soared from ₹139 per quintal in FY11 to ₹230 now, while sugar prices are down from ₹30 to ₹25 a kg. With even the most efficient sugar mills unable to make a profit, they have been defaulting on their cane dues. In the past, a collapse in sugar prices would inevitably shrink cane plantings in the next season, reducing the surpluses. But this time, the rout in other agri-commodities has incentivised farmers to plant more sugarcane. The Centre has tried to resolve this structural imbalance, through a series of band-aid measures. It extended low-interest loans to sugar mills to clear cane dues, hiked the import duty on sugar and even offered a sugar export subsidy of ₹4,000 per tonne. But with this subsidy falling afoul of the WTO, it has now come up with a new scheme which forces sugar producers to adhere to a ‘mandatory’ export quota. A cane subsidy of ₹4.50 per quintal will be set off against cane dues, if mills fulfil this quota. But with the global sugar market in a glut and prices languishing below domestic levels, it is difficult to see how exports can accelerate.
Given this, the only long-term solution is for the Centre to adopt the market-linked formula for cane pricing, recommended by the Rangarajan committee many years ago and for the States to refrain from counter-productive populism. The Centre’s encouragement for the conversion of cane into ethanol for fuel blending and to generate eco-friendly power from bagasse are steps in the right direction. But here again, individual States have impeded progress by ‘reserving’ molasses for use in potable alcohol (a money-spinner for States) and paying low tariffs of ₹3-5/unit for cane-generated power. All the Centre can do is to deploy its negotiation skills to persuade the States, at least the ones ruled by its own allies, to stop interfering in this beleaguered sector.
(This article was published on November 20, 2015)
