A good start, need to go all the way on Rangarajan
Of all the measures announced by the government to alleviate the sugar crisis, scrapping the excise duty on ethanol for blending with petrol is the most significant. The cane arrears of around R20,000 crore are the result of decades of serious political mismanagement and cannot be fixed overnight by any policy—immediately after the government announced its sops, the sugar mill association asked for an FCI-type public stockholding of surplus sugar! But what the government has now done is to provide sugar mills a lucrative source of revenue. As compared to the current supplies of around 35-40 crore litres of ethanol for blending, the potential is around 220 crore litres a year since 10% blending is allowed by law. While this was not viable at the earlier prices, with a landed price of R48 a litre (for the oil PSUs) and no excise duty (that works out to around R5 per litre) on the blending, the business is suddenly a lot more viable. At these prices, the industry will now find it profitable to use its supply of B-molasses—the first cut of molasses after the initial conversion to sugar—to produce ethanol. If the sugarcane mills want oil companies to uphold their end of the bargain, and over a sustained period of time, they also need to ensure they do not divert supplies to the alcohol industry—once such supplies are assured, the government can even look at Brazil-style policies where the amount of ethanol-blending is raised/reduced based on the amount of surplus/deficit sugarcane production in the country.
In the long run, of course, the industry will have to ask for more serious changes. In this context, it is not clear why an import duty hike to 40% was even asked for since India’s imports are minuscule —at even the 25% import duty, imported sugar is far more costly than domestic sugar. Reducing the period of the Advance Authorisation Scheme—mills were allowed an 18 month period in which duty-free imports of raw sugar could be processed for re-export—on the other hand, will hurt the nascent export business. Till some months ago, the industry’s biggest problem was the state advised price (SAP) for sugarcane which was much higher than the Centre’s fair and remunerative price (FRP), and made sugar mills unviable—that is why they had such huge arrears. But with even the FRP now higher than domestic sugar prices—R24 per kg versus R23 per kg, respectively—the problem has got even more serious. Since higher-priced ethanol is only a partial solution, the industry can never be viable unless sugarcane prices are linked with the final realisation of sugar mills. This is what the Rangarajan committee sought to do but since, at that time, the FRP was low, it recommended giving farmers the FRP first, and the rest later. That solution is no longer viable, and needs to be revisited.