Banks have done well to sound the alarm in UP
Uttar Pradesh (UP) chief secretary Alok Ranjan’s letter to the finance ministry, asking it to tell PSU banks not to interfere in the state’s policy matters, shows the politico-bureaucratic class in the state continues to function in the old ways—the letter was first reported in FE last week. In this way of thinking, PSU banks are not supposed to look at their viability—profitability is a far cry—they are only supposed to dole out money to pay for irresponsible government policy and when the banks run out of money, capital infusion from the central government is always an option.
In this case, the heads of SBI and Punjab National Bank had written to the state government asking for the implementation of the Rangarjan formula for sugarcane pricing. That is, instead of asking mill owners to pay a higher—and completely unviable—state advised price (SAP) for sugarcane, move to a formula where mills share 75% of their ultimate earnings with the farmers with an initial payment on receipt of the sugarcane equal to the central government’s fair and remunerative price (FRP). The bankers needed to write since they have an exposure of around R6,000 crore to the sugar mills of UP and with the mills running huge losses, the banks have no way of getting their money back. With the sharp fall in global prices of commodities like sugar, the fears expressed by the bankers have become even more real.
Rather than get cowed down by the UP government, the banks would be advised to step up the pressure and refuse to give sugar mills any more working capital—in any case, with Karnataka and Maharashtra already implementing the Rangarajan formula, sugar from these states will be cheaper than that in UP, worsening the finances of the sugar mills. It is not as if the UP government has not had enough time to come out with a policy—during last year’s agitation by the sugar mills, it had promised to come up with a rational sugar policy by April 2014, but nothing has come of that so far. Indeed, even the sugar mills who have threatened not to start crushing sugar until a more rational policy is framed would do well to keep up the pressure—with the mills not buying sugar at the uneconomic SAP, farmers have already started selling to gur producers at much lower prices. Sooner, rather than later, the UP government just has to come to its senses and stop playing cane politics.