Sugar Decontrol: Too sweet to digest

The Rangarajan Committee recommendations have had no impact on sugar stocks

The Rangarajan Committee has recommended a total decontrol of the sugar sector, something what the market and industry was looking forward to. But sugar counters are not rejoicing. Is it because the market believes that like most of the other proposals even this one will not see the light of the day?

A look at the recommendations suggests that though it is good for the industry, it will be a political nightmare and require immense courage to implement, something that is missing with the present government.

The basis of the recommendation for decontrol is taking Fair and Remunerative Price (FRP) as the base price for sugarcane, while suggesting a profit-sharing mechanism so that farmers too benefit from higher sugar prices. The FRP is fixed by the centre but state governments of some of the larger sugarcane growing states also set their own rates called State Administered Prices (SAP). The difference between the two, if any, will be borne by the states. With most of the sugar mills controlled by politicians, SAP prices are used as a vote gathering tool. It is very unlikely that politicians would let go of this important tool. Little wonder then that chief ministers of these states are opposing decontrol.

The centre’s mechanism of arriving at FRP needs to be revamped as it was found that input costs were higher than FRP in a number of cases.

The other recommendation of doing away with the state’s power to reserve sugarcane area for mills, implying farmers can sell to any sugar mill they wish, will have little impact as the cost of transport will be the key arbitrage for a farmer to sell his produce to distant mills. Further, most of the mills apart from procuring sugarcane from the farmer also see to it that they provide water and expert advice in order to get higher yielding canes. It is unlikely that a farmer will move away from the mill in its proximity.

The committee has said that the state government should buy sugar for PDS from open market and the central government should pass on the cess of Rs 24 a quintal it collects on every quintal of sugar to the state government to fund market purchase. There seems to be a mismatch with reality here. The levy sugar prices are around Rs 1,900 per quintal while market prices are Rs 3,400 per quintal. Instead of a shortfall of Rs 1,500 per quintal, the committee is willing to pass on only Rs 24 per quintal.

State governments are in no position to fund this gap and add a new element to their deficits. Though the industry would welcome such a move as they are getting paid less than the cost of raw material, it is unlikely that states would oblige.

Freeing sugar exports is the final element which is being used by the centre as an instrument to control domestic prices. Given the current demand-supply scenario, this probably will be the easiest to implement.

Sugar is still the most controlled industry in the country, with government intervention at every level from sources of cane procurement to the selling prices of the finished product. Two earlier attempts in 1971-21 and 1978-79 to decontrol the sector have failed. Given the political complexities, it is unlikely that the recommendations will become law and the market knows this which is why it chooses to ignore.