Sugarcane pricing

Proposed reforms are good but much more needs to be done

The government and its think tank NITI Aayog are reported to be working on the mechanism to set up a price stabilisation fund for the sugar sector, apart from modifying the revenue-sharing formula mooted by the Rangarajan committee to tilt it in favour of sugarcane farmers. While the proposed fund would be used to shield cane growers and sugar producers against price risks, the revenue-splitting arrangement would replace the present system of setting sugarcane prices. Moreover, the cane farmers’ earnings are planned to be tied to the level of sugar recovery from the cane produced by them. All these, if carried out well, could prove to be game changers. By connecting sugarcane prices with those of sugar, they would ensure that these are determined by market forces. Besides, they would also incentivise farmers to grow better sugarcane varieties. And, most importantly, they would restrain recurring financial crises in the sugar industry. Such crises normally are the outcome of a disconnection between input and output prices and invariably lead to accumulation of cane price arrears.

However, the misgivings about the implementation of these measures stem from the government’s piecemeal approach for fear of displeasing the politically powerful cane and sugar producers’ lobby. While many other recommendations of the Rangarajan panel have been accepted and implemented, the most critical one concerning revenue sharing has been kept under wraps. This system offers several advantages. Being a purely market-driven mechanism of price discovery, it allows sugarcane output to respond to market demand. As a result, it would reduce the chances of overproduction of sugarcane and a consequent price slump and liquidity crunch in the sugar industry. However, in the case of any abrupt price crash, due to domestic or global factors, the price stabilisation fund would come in handy to recompense the losses. However, this requires the fund and the revenue-sharing mechanism to be launched simultaneously as counselled by the NITI Aayog’s task force on sugar. Each is handicapped without the other.

That said, the bitter fact that cannot be disregarded is that fresh hurdles in the introduction of these reforms cannot be ruled out. There is no certainty that the industry would readily accept an upward revision in the farmers’ share in earnings. The proposal on the anvil is to hike the cane growers’ quota by 5 per cent above the Rangarajan panel’s recommendation of pitching it at 75 per cent of the proceeds from the sale of sugar, or 70 per cent from those of sugar and its by-products put together. This level, obviously, is far higher than the global average of 62 to 66 per cent. Any further increase in this would automatically lead to a commensurate squeeze in the industry’s profits. Besides, it would make sugarcane cultivation more attractive for the farmers. The country can ill-afford any expansion in the area under this water-guzzling crop. To address this issue, the NITI Aayog has suggested capping the farmers’ land use for sugarcane at 85 per cent of their holdings and offering them cash incentives to shift to less water-consuming crops. But the farmers would need to be taken into confidence before taking such a step to avoid the kind of backlash that the three laws on agri-marketing reforms have evoked.