Sugar price decontrol is just a first step
The government’s decision to free up sugar prices is an important first step in freeing up sector—based on what the Cabinet cleared on Thursday, sugar mills no longer have to give the government a tenth of what they produce at a fixed levy price, to feed the public distribution system. While this will add around R2,700 crore to the government’s annual subsidy outgo—and add a similar amount to the bottom line of the R80,000 crore industry—this will do little to address the industry’s real problem, of not being able to pay farmers due to irrational policies followed by various state governments. Industry arrears to farmers more than doubled to R5,698 crore at the end of FY12 from R2,592 crore at the end of FY11, and to more than four times the FY10 arrears of R1,461 crore.
The reason for this is simple, and this is the operative part of the decontrol that the government did not clear—while the central government fixes a fair and remunerative price (FRP) for sugarcane based on the recommendations of the Commission for Agricultural Costs and Prices (CACP), many state governments raise this dramatically to pander to the farm lobby. Fix the prices too high and it makes the mills sick and also ensures they can’t pay the cane farmers. While the CACP-fixed FRP for cane was R170 in FY12—this has been raised to R210 per quintal for the current year—the state-advised price (SAP) was R225 in Tamil Nadu and R280 in Uttar Pradesh. Which is why, for instance, most sugar mills based out of Uttar Pradesh are in the red.
What the government needed to do, but didn’t do, was to follow what had been recommended by the CACP and largely endorsed by C Rangarajan, chairman of the Prime Minister’s Economic Advisory Council. Both advised the government move away from the FRP/SAP system to one where the farmers got a share of the final price of sugar and the various by-products made from the cane they grew. Rangarajan recommended giving farmers the FRP immediately on supply of cane and then, once the mills got the money for other products they processed and sold, farmers could be paid the rest—at an aggregate level, they were to get 70% of the gross realisations. Politicians also decide where farmers can sell their cane to—each mill has a cane area reserved for it. It can buy cane from only here, has to buy all the cane, and farmers can’t sell to anyone else. Rangarajan recommended a 3-5 year phase-out after which all parties would be free to contract between themselves. Thursday’s decontrol was a welcome step but until all of Rangarajan’s suggestions are accepted, it may not add up to much.