UP has no option but to pay farmers directly
Given the millions of farmers involved in cultivation of sugarcane in Uttar Pradesh, the government now needs to take some urgent steps since the mills have upped the ante and given a formal notice saying they don’t plan to crush sugar this season. While the problem has undoubtedly been aggravated by the fall in sugar prices, the larger problem is that state governments—and Uttar Pradesh is the biggest culprit here—have preferred bad politics over good economics. So, at a time when the Central government’s Commission for Agricultural Costs and Prices (CACP) would study costs and then come to a Fair and Remunerative Price (FRP), state governments would typically top this up with a bonus in the form of a State Advised Price (SAP). Except, the bonus had to be paid by sugar mills, not the state. In the event, mills habitually delay payments to farmers—the current arrears of R2,300 crore are two-thirds the all-India dues—except, this time around, the losses of mills are at an all-time high. Bajaj Hindusthan, UP’s biggest sugarcane producer declared losses of R509 crore in the September quarter, Balrampur Chini R122 crore and Simbhaoli Sugar R56 crore.
Though farmers wanted a R320 per quintal SAP, the sugar mills’ protest forced the UP government to retain the FY14 SAP at last year’s level of R280 per quintal—CACP’s FRP for FY14 is R210. But with mills saying they can’t afford to pay anything more than R220, UP’s belated attempt at even partial discipline is largely irrelevant. What complicates matters is that banks have stopped funding sugar mills on grounds their business is unviable. While the central government is looking at a sugar package since Maharashtra sugar mills also need a bailout, a more viable solution is needed. Decontrolling molasses could be one solution—right now, in states like Uttar Pradesh, around a fifth of the molasses is reserved for the liquor industry and sold at a subsidised rate. According to calculations by CACP chairman Ashok Gulati, however, all such options including ethanol blending in petrol will take up the maximum viable price of cane to around R250 per quintal in Uttar Pradesh and R275 in Maharashtra where recovery rates—the amount of sugar got from crushing cane—are higher. In such a situation, the only alternative, in addition to whatever package the cash-strapped Centre can come up with—it will decide in a week’s time—is for the Uttar Pradesh government to come up with a special bonus to farmers to make up for the difference. Given the R16,000-18,000 crore or thereabouts that the state makes from the industry by way of taxes each year, a R50 bonus on 80 million tonnes of cane adds up to a much smaller R4,000 crore. Though UP can ill afford to make such payments, this too is only a temporary solution. In the long run, the state has to live with the Rangarajan formula where farmers get a total of 75% of whatever is earned by the mills, not a penny more—and this gets paid in full after the mills sell their sugar. There’s no more scope for politics.