Sweeten the deal

Sugar states should adopt the Rangarajan pricing model

The Centre’s counsel to Uttar Pradesh to scrap the outmoded system of state-advised price (SAP) for sugarcane and, instead, go in for the pricing formula suggested by the Rangarajan committee (2012) on sugar sector reforms has come at a time when the market conditions are conducive for this change. Two other major sugar-producing states, Maharashtra and Karnataka, have adopted the Rangarajan method. Under this, mills are supposed to pay upfront the “fair and remunerative price” (FRP) fixed by the Centre and settle the farmers’ final accounts subsequently to share with them either 70 per cent of the realisation from sugar or 75 per cent of the combined revenues from sugar and its byproducts. This system, being market-linked, seems fair to all stakeholders.

Besides, it can potentially end the sugar sector’s lingering woes, such as cyclical ups and downs in production and the consequent instability in prices. Besides, it can avert an accumulation of cane price arrears, which cause a cash crunch for cane growers. This aside, given that the FRP is related to sugar recovery, efficient farmers, as well as mills, stand to gain. Those growing good cane varieties with a sucrose (sugar) content in excess of 10.5 per cent — recovery levels of around 11.5 per cent are fairly common in Maharashtra — may get returns equivalent to or higher than the SAP without impacting the profitability of the sugar industry. The Rangarajan model, therefore, offers a win-win situation for all.

However, there are some crucial caveats that cannot be disregarded. The success of this system depends critically on meticulous accounting and procedures followed by sugar mills. Caution would be needed to ensure that sugar recovery is not underreported by the mills to deny farmers their rightful share in revenues. Also, some states, including Uttar Pradesh, which have enacted their own legislation to protect the SAP regime after the Allahabad High Court declared it illegal, would need to amend their statutes. Or else, the Centre would need to pass its own legislation to override the state laws to facilitate the switchover to the new pricing mechanism.

The Centre would also need to goad Uttar Pradesh and the other sugar-producing states to implement the other recommendations of the Rangarajan panel that have remained unexecuted till now. The most noteworthy among these pertains to cane area reservation for different factories and binding cane growers to selling their produce to the specified mills. This amounts to providing monopoly power to mills over cane grown in their catchment areas and denying farmers the freedom to sell their stocks to any mill of their choice. No state has yet done away with cane area reservation, although Maharashtra has discarded the minimum distance criterion for setting up sugar mills. The Centre has done well to carry out the liberalisation measures that fell in its domain, such as removing levy on sugar mills and abolishing the monthly sugar release mechanism. It is time for the Centre to nudge all sugar-producing states to implement the entire reforms-oriented agenda mooted by the Rangarajan panel to fully unshackle this key agro-industrial sector.