Mr Chaudhuri's formula

Let the market determine sugar and ethanol prices

The view expressed by a committee headed by Saumitra Chaudhuri, member of the Planning Commission and Prime Minister’s Economic Advisory Council, that ethanol prices should be market-determined and not fixed to suit any particular sector (read the sugar industry) makes immense sense. Equally sensible is the advice that blending ethanol with petrol should not be mandatory and must be left to the discretion of oil marketing companies. The Chaudhuri committee has said the first priority in ethanol allocation should be given to the potable alcohol sector, followed by the chemical industry, and then blending with vehicular fuel. The panel wants the price of ethanol to be linked to petrol prices. The committee rightly believes that the interests of the well-established alcohol-based industries cannot be sacrificed for petrol doping or for helping the sugar sector. Given the wide annual fluctuations in the output of molasses-based ethanol, which synchronise with the availability of sugarcane and sugar production, a mandated fixed proportion for petrol blending, as is the case now, is neither practical nor advisable. It is only fair that all the end users of alcohol should have access to ethanol at market-determined prices.

The sugar industry’s concerns are understandable. It has come to rely substantially on earnings from a key by-product: ethanol produced from molasses. The industry’s claim for a better deal on ethanol also derives strength from the fact that the fate of millions of sugarcane farmers is linked to the economic health of sugar mills. While the industry’s misgivings are not wholly unfounded, given the uncertain economics of sugar, the industry must find other means of shoring up its bottom line and not depend on ethanol alone. The best way is to free the sugar industry from needless controls, including the obligation of supplying part of its total sugar output to the government as levy at prices far below the production cost and paying arbitrarily fixed prices for sugarcane, the main raw material for sugar production. Though laying down a benchmark price for cane seems essential to safeguard the interests of the cane growers, this should just be the floor price that the sugar mills must pay to the farmers on cane delivery. The actual or final price should be determined by the mills’ total realisation from sugar as well as its by-products under totally free market conditions. For molasses, it should be kept in mind that ethanol production is not the only gainful use — there are flourishing, though volatile, domestic as well export markets that the sugar industry can tap. Even ethanol has buyers other than oil companies. Total decontrol can, therefore, help the sugar industry shed its reliance on realisation from any particular product or by-product for its survival. The government should, thus, factor in the entire sugar sector – and not molasses alone – while formulating a policy on ethanol pricing and its utilisation.