Small steps on sugar

But relying on output-linked subsidies has adverse effects

Of the various bailout packages doled out by the government to the sugar sector in the recent past, the latest is distinctly different in its basic approach and mode of payment. It involves a production subsidy of Rs 4.50 per quintal of sugarcane to be paid directly to cane growers. It will also benefit the sugar industry which will have to pay correspondingly less to farmers. This marks a new beginning, of paying production-linked crop subsidies in India. So far, agricultural subsidies were routed mostly through inputs like fertilisers, power, seeds, or farm machines. Production subsidies, notably, are permissible under the World Trade Organisation (WTO) rules provided they do not exceed 10 per cent of the total value of crop output. Earlier, the government gave an export subsidy of Rs 4,000 per tonne to the sugar industry to help it ship out raw sugar to raise the cash to pay its dues to farmers - which had mounted to over Rs 21,000 crore by April 2014. But this move had to be retracted as other sugar producing and exporting countries objected, maintaining that such a trade-distorting measure violated WTO norms.

In another bid to help the sugar industry clear cane price arrears, the government had offered it a soft loan of Rs 6,000 crore which was to be deposited directly in the cane growers' bank accounts on behalf of the sugar mills. However, these packages yielded only limited results. The cane price arrears pertaining to the last sugar season still stand at an untenably high level, over Rs 7,000 crore, though the new cane crushing season has already begun. This seems to have spurred the government to thinking that it could pay the subsidy directly to farmers as part payment of the cane supplied to the sugar mills. The government is likely to take a hit of over Rs 1,000 crore on this account. Both the cane farmers and the sugar industry have welcomed it, but they are not fully satisfied and feel that more may need to be done by the government to solve the recurring problem of accumulation of cane price arrears. They deem the subsidy to be too little compared to the fair and remunerative price (FRP) of Rs 230 a quintal for cane.

The government should, however, be cautious in dealing with such pleas. There is a danger that an output-linked subsidy of this kind may encourage overproduction of both sugarcane - a water-guzzling crop that depletes groundwater - and sugar, perpetuating the liquidity crisis in the sugar industry. Instead, it should strike at the root cause of the sugar sector's woes, which is the lack of any link between the prices of cane and sugar. The way out is the revenue sharing model suggested by the expert committee on sugar headed by C Rangarajan. According to this, mills have to share with farmers 75 per cent of the revenue realised from the sale of sugar or 70 per cent of the total revenue generated by sugar and its byproducts. Such an approach would result in demand-driven production of both sugarcane and sugar. This will also protect the interests of all players in the sugar sector, including those of consumers.