Decontrol a solution to sugar industry's weaknesses

Nothing could be more encouraging for the sugar industry than its voice on major issues like control removal and making exports a sustainable proposition finding resonance in the corridors of New Delhi. The point could not have been missed at the recent annual meet of Indian Sugar Mills Association (Isma) with the Union food minister Sharad Pawar endorsing industry leader Vivek Saraogi’s proposition that decontrol would create ideal condition for new capacity creation at a “much faster rate.”

No doubt that it is only through decontrol that the structural weaknesses of the industry could be removed encouraging significant new investment, including foreign capital. Perhaps also as Saraogi cites the example of the Brazilian sugar economy post decontrol, we will see here the doing away of controls leading to capacity consolidation, a crying need what with 650 factories, and equally importantly to some significant improvements in per hectare yield of cane and sugar recovery from cane. Pawar does not tire of reminding the industry that as there is “very limited scope” for getting more land under cane in competition with food crops, it must bank on some major cane productivity and sugar recovery rate increase.

Besides an essential requirement cutting across income groups, the demand for sugar has got to do with rise in purchasing power of a large section of the population and changes in food consumption habits. Pawar is right that the country’s future incremental demand for the sweetener is to be satisfied by breaking the stagnation in cane productivity ranging from 67 to 71 tonnes a hectare and recovery rate of 9.5 to 10.5 per cent. He wants the crop yield to be lifted to over 80 tonnes a hectare, if not to 100 tonnes, which is not a tall order and sugar recovery rate to 12 per cent.

Pawar has no problem if the industry here in its wisdom makes a model out of Brazil where factories get as much as 12 tonnes of sugar from a hectare of cane field against 6.5 t o 7.2 tonnes here. In fact, there is much to be learnt from Brazil in cane farming. But Pawar is right that for success to come, the Brazilian lessons “must be adapted to realities of our land holding patterns, our social commitments towards our farmers and consumers.”

The bane of our sugar economy, as Saraogi points out, is the five-year cycle of cane and sugar production marked by exports in times of plenty and imports when pinched by shortages. Our experience since 2005-06 is illustrative of some wild swings in production underpinning instability in supply. We need a strategy in place to make a break with what Saraogi describes as “infamous Indian cyclicality.” Industry official Om Dhanuka says “not only do we need to reward farmers adequately to sustain their interest in cane, but new disease-resistant high yielding varieties of cane will have to be introduced. Sugar factories will have to partner government agencies in farm extension work.”

What the industry first needs is removal of controls. No one is, however, to join issue with Pawar that with all the stakeholders involved, including state governments he first needs to build a consensus on decontrol. Ahead of that, he has taken a few industry friendly steps like allowing bulk consumers to keep stocks for 90 days requirements against 15 days earlier. Isma Director General Abinash Verma has suggested a calibrated approach to decontrol.

To start with Verma wants New Delhi to do away with at least two controls beyond the pale of state governments. Don’t expect Uttar Pradesh, the country’s largest cane growing and second-biggest sugar producing state, with a domineering Chief Minister like Mayawati not to have its own cane prices despite the centre fixing the floor through fair and remunerative prices (FRP). Four other states are giving company to UP in this. Distortions in the sugar economy happen as some states will have their own cane prices while others will go by FRP.

The industry stands to get relief if New Delhi dispenses with the regulated monthly release system for sugar. In the first place, the government armed itself with the power to decide how much sugar is to be released in a particular month to keep prices under check, especially in a short supply season. While the beneficial impact of this kind of market intervention can never be ascertained, the logistical issues and avoidable paper work, the release mechanism entails for the industry are common knowledge. Under the present regime, there are occasions when traders refuse to lift sugar from factories if prices move to their disadvantage after they have agreed to buy.

It cannot be anybody’s case that the government should not offer sugar at discounted rates to the poor. But where is the logic of singling out sugar factories to bear the subsidy burden running into nearly Rs 2,800 crore involved in the exercise when the government’s food subsidy bill is about Rs 60,000 crore. The correction lies in doing away with levy system. Let the states buy sugar directly from the market for public distribution and claim subsidy from the centre.