Govt wastes sugar crisis, plumps for populism
While announcing an interest subvention of 12% on a Rs 7,200 crore loan to the sugar industry and doubling of the ethanol-blending levels to 10% will help alleviate some of the sugar industry’s troubles, the government has lost a perfectly good crisis to push critical reforms in the industry. In the case of Uttar Pradesh for instance, while the industry says it can pay up to Rs 225 per quintal for sugar cane, the state government wanted it to pay much more but finally settled for a price of Rs 280 and then announced a rebate of Rs 11 on this, leaving an uncovered gap of Rs 44 per quintal. Friday’s measures theoretically add up to around Rs 15-20 per quintal, so don’t really solve the problem; all they do is to postpone them to another day. Also, given the oil PSUs just blend around 2-3% of ethanol in petrol versus the mandated 5%, a committee announcing a hike to 10% is unlikely to mean much without some serious follow up—the 5% rule has been in place for years but has been observed only in the breach. Without this, today’s measures really add up to little.
But the Rs 7,200 crore of bank loans, roughly a third of which will probably accrue to Uttar Pradesh mills based on current production levels, will stave off the immediate crisis of farmers since it will help pay off the Rs 2,300 crore of arrears (Rs 3,400 crore across the country) and leave some more for immediate capital needs. As for the amounts the sugar mills need to pay the farmers at the uneconomic Rs 280 per quintal price for the cane they are buying now, all that will happen is that the mills will pile up IOUs once again. By the end of season, UP mills will probably end up owing the farmers dues of Rs 7,000-8,000 crore—but for now, farmers will call off their agitation as they are getting a higher price and the mills are buying the cane.
What was needed, however, was more serious reform of the type outlined by the Rangarajan committee. Under this formula, states were to stop announcing a state advised price (SAP) that was higher than the Centre’s fair and remunerative price (FRP)—Rs 280 per quintal and Rs 210, respectively, in the case of Uttar Pradesh—and instead, farmers were to get 70% of the value the mills got after selling all the products they made from the cane. Friday’s unilateral concessions announced by the centre, however, don’t force states to even move in this direction. Similarly, states short-change sugar mills by forcing them to sell molasses to country liquor and other buyers at far below the market price—once the SAP system goes and farmers get 70% of the total value of produce, this reservation would have had to go. To be fair, this is not the only opportunity the government has lost to push serious reform—at least three electricity packages have been wasted so far, and the fate of the fourth has to be seen.