Without reforms, a sugar bailout is a bad idea
Given over four million farmers are involved, given it is an election year and given that Mulayam Singh Yadav is a valuable ally, chances are the government will soon approve a sugar bailout package to ensure private sugar mills in Uttar Pradesh start their crushing soon. While interest-free loans are a part of the package being worked out, it is not clear how much this will help since, going by the mills’ public statements, they are staring at a gap of over R55 per quintal—their balance sheets for the last quarter reflect their poor financials. Other components of the package will probably include getting the oil firms to mandatorily lift ethanol from sugar mills, possibly even easing of the levy molasses to be sold to the country liquor industry at subsidised rates in states like Uttar Pradesh.
What the Centre needs to keep in mind, however, is that the sugar crisis in Uttar Pradesh is entirely of the state’s own making, though chief minister Akhilesh Yadav is on quote saying the problems of the sector are due to the wrong policies of the Congress. For years, while the central government’s Commission for Agricultural Costs and Prices (CACP) studied input and output prices and came out with a fair and remunerative price (FRP), states like Uttar Pradesh routinely announced a much higher state advised price (SAP) in order to please the farmers lobby, and this is what drove mills into the red—look at the table of mills with large losses and with high payment arrears to farmers, and they are all in states like Uttar Pradesh which have very high SAPs. Apart from the CACP, the issue has also been examined by the Prime Minister’s Economic Advisory Council which recommended that farmers be given a fixed share of the industry’s revenues. It recommended the mills pay a certain amount upfront once the farmers gave them the cane—this could be the centre’s FRP—and then, a few months later, when the mills have sold all their cane by-products, farmers could be given the rest, to ensure they got 70% of the total.
In which case, if the government does choose to give sugar mills a package that allows them to pay the farmers the SAP of R280 per quintal as compared to the FRP of R210, it must do so only if the state promises to reform. Only if the state, and this applies to others as well, promises to implement the Rangarajan committee recommendations should a bailout be given. In the past, the centre has come out with various bailout plans for the power sector without insisting—and then monitoring—on firm deliverables, and the result of that was the government needed to come out with another R2 lakh crore power sector bailout package some months ago. The centre can’t keep sugar-coating bad economics forever.