GoM Raj in ethanol

Chaudhuri committee's more sensible ideas

The draft report of the committee on ethanol pricing, chaired by a member of the planning commission, Saumitra Chaudhuri, has made some sensible suggestions and focused on important issues pertaining to ethanol pricing. The committee has very correctly questioned the rationale of a group of ministers (GoM) fixing a price of Rs 27 per litre for ethanol meant for petrol doping by oil marketing companies. How can any GoM resort to such arbitrary price fixing? Interestingly, at some meeting of the GoM when a minister concerned was absent, his place was taken not by a junior from the same ministry but by a colleague from the same political party, drawing attention to the blatantly political manner in which vested interests used the GoM for price fixing. Fortunately, the Saumitra Chaudhuri committee has brought economic rationale back into commodity pricing. The committee has also recommended that the quantum of ethanol made available for biofuels be capped at 400 to 500 million litres. This is in keeping with emerging opinion worldwide that biofuels development should not be at the expense of food crops and food security.

Ethanol is also used by the chemical industry. Hence, three very distinct economic interests are intermeshed in ethanol pricing — the sugar industry, alcohol-based industries and the chemicals industry. The sugar industry has understandably spoken out against the views of the Chaudhuri committee. The industry’s economics have been hit this year with lower ex-factory prices of sugar and higher sugarcane prices. Revenues from byproducts like ethanol become important. At stake is the industry’s capacity to make prompt cane price payments to sugarcane farmers which is vital to sustain their interest in cane cultivation. At the same time, however, the claims of the chemical and alcohol-based industries over domestically produced ethanol can also not be disregarded. The need, therefore, is to strike a fine balance between the interests of ethanol producers (largely the sugar industry) and consumers (such as potable alcohol and chemicals industries, besides oil marketing companies).

Fortunately, government-determined pricing of ethanol is not the only mechanism to ensure such equilibrium. Other available options ought also to be explored. One way to improve the economic health of the sugar industry, without over-pricing byproducts, is to lift the bar on sugar exports. This will let the sugar industry benefit from the current rally in global sugar prices. Further, there is no reason why the sugar industry should subsidise the consumption of sugar through the public distribution system (PDS). If the government wants to supply sugar to some consumers through PDS, it should simply buy it from the market, rather than impose a levy on the mills. The time has, in any case, come for complete decontrol of sugar, the ending of all price fixing and quota systems, and an end to the subsidised, even free, sale of water to cane farmers, which has encouraged over-consumption of groundwater in central India. Instead of taking this last bastion of the licence-permit Raj into the new world of market economics, the central government is trying to impose a GoM Raj on it. More power to Mr Chaudhuri’s pen!