Failing on sugar

Govt keeps stopping short of real reform

The two fiscal bailout packages doled out by the government to the beleaguered sugar sector - interest-free loans worth Rs 6,600 crore and cash subsidy on raw sugar exports - may at best provide some temporary relief to the cash-strapped sugar mills. But they will not cure the real problem: The total disconnect between the input and output prices. In any case, survival on such government support will, in the longer run, do more harm than good. While subsidised exports to expand the marketing window for surplus output will tend to perpetuate a mismatch in the effective demand and production of sugar, unrealistic cane pricing will encourage farmers to grow more sugarcane at the cost of other farm commodities that are in short supply and will contribute to high food inflation. In any case, a water-stressed country like India can ill-afford to cultivate a water-gulping crop like sugarcane on a larger area than is necessary.

The lasting solution for the sugar sector's woes, indeed, lies in striking a balance between the demand - both domestic and export - and output of sugar and sugarcane. This needs systemic reform: Ending arbitrarily-determined high state advised prices (SAP) for sugarcane and the system of binding the sugar mills to crush all the cane on offer. Such unwarranted practices lead to surplus production apart from pushing up production costs and depressing output prices. The way out for resolving the pricing muddle is spelt out in a 2013 report of a committee headed by C Rangarajan, chairman of the prime minister's economic advisory council. The committee had recommended a revenue-sharing formula under which the sugar mills would be obliged to distribute about 70 per cent of their total revenue from the sale of sugar and its byproducts like molasses, bagasse and press-mud to cane suppliers. To meet the immediate cash needs of the cane growers, the industry will have to pay them at the time of cane delivery an amount equivalent to the fair and remunerative prices (FRP) fixed by the Centre.

Such a pricing mechanism will obviate the need for the states to fix cane prices. Its other advantages will include regular payment of cane prices to the growers and demand-driven production of sugar to end cyclicality in sugar output. The consumers, too, will benefit from competitive prices. The principle of revenue sharing among all stakeholders is in vogue in many sugar-producing and -exporting countries and it should be adopted in India as well. Some major sugar producing states, notably Maharashtra and Karnataka, have already begun moving in this direction; the sugar industry seems to be willing to accept the changes. Similar arrangements already work in other agro-processing industries. Most of the recommendations of the Rangarajan committee, including the abolition of sugar levy, have been accepted - but not those about pricing. It is time they too were accepted and implemented.