Squeezing sugar mills

End of sugar dual pricing is overdue

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The Commission for Agricultural Costs and Prices has suggested that the government should do away with the “levy quota” on sugar mills, in which they need to set aside 10 per cent of their output for the public distribution system (PDS). Since it’s meant for poor households, this sugar sells at a price that is significantly below the market price. This, in the Commission’s opinion, has crimped the mills’ ability to adequately compensate sugarcane farmers. Instead, it has said that the central government should either buy sugar from the mills at market prices for the PDS or let the state government buy it and reimburse the difference between the market price and the subsidised price. The idea is to transfer the subsidy burden from the mills to the government (one who gets the credit for the initiative must pay for it) and end the dual-pricing regime.

There is merit in the argument. Indeed, the sugar mills have for far too long carried the burden of the government’s welfarism. The subsidy to consumers, which is borne fully by the mills, was calculated at Rs 7,000 per tonne by the Commission. As close to 2.7 million tonnes of sugar was supplied to the PDS, the loss to the mills was close to Rs 1,900 crore. Given the rampant leakage from the PDS, it would be incorrect to assume that the mills’ loss was the consumers’ gain. Indeed, direct transfer of the subsidy to the accounts of the poor households could plug this leak. On the other hand, the arrears to sugarcane farmers in Uttar Pradesh, where you have the largest number of private sugar mills, stand at Rs 493 crore — Rs 461 crore from private mills and the rest from public sector mills.

The Uttar Pradesh mills are carrying stocks from the last sugarcane crushing season, when their production cost on average was Rs 32,000 per tonne. When they sell this sugar for the PDS, they get paid Rs 18,500 per tonne. So their current loss, at Rs 13,500 per tonne, is much higher than what has been calculated by the Commission as the national average. The central government also tightly controls the supply of sugar in the open market (it specifies how much stock each mill can release every month) and uses the import and export levers frequently so that prices remain under check. As a result, the mills face difficulty in making enough money in the open market to compensate the losses in PDS sale. For instance, the current market price of Rs 33,000 per tonne gives a profit of Rs 1,000 per tonne to the mills, compared to the loss of Rs 13,500 per tonne on PDS sale.

In fact, mills get it from both ends. To keep consumers happy, the Centre keeps prices on a tight leash. At the same time, to keep sugarcane farmers happy, the states insist on raising support prices. Mayawati, the former chief minister of Uttar Pradesh, last year raised the price at which mills could buy sugarcane by Rs 400 to Rs 2,500 a tonne. With a crop of 66.5 million tonnes, this caused an extra burden of at least Rs 2,660 crore on the mills. Mayawati’s gift to the four million or so sugarcane farmers of the state was funded fully by the mills. This cannot be allowed to go on forever. Accepting the Commission’s recommendations should be the first step to cleanse the system of political interference.