Don't cheer just yet

Scrapping the monthly sugar release mechanism from the next cane crushing season (beginning October 1, 2005) will indeed be a bold move towards sugar deregulation.

But it is still too early to read too much into what the government reportedly proposes. For, this is not the first attempt at sugar deregulation and, like the previous ones, there is yet no guarantee that it will bear fruit.

The monthly release mechanism as an instrument of supply-driven price control has been in vogue since 1942, when the Sugar and Sugar Products Control Order was first issued, and has since entrenched itself deeply into the system.

The first bid to do away with it was way back in 1978-79, by the Morarji Desai-led Janata Party government, but it had to be retracted soon.

The NDA government, too, took a decision in February 2002 to dispense with it by the end of fiscal 2003 but it could not implement it. Apprehending a drastic post-deregulation price fall, the sugar mills began offloading their stocks by obtaining court orders even before the release system could be formally repealed.

The result was chaos in the sugar market, which forced the government to concede the sugar industry's plea for a continuation of the release mechanism.

Though similar tumult may not occur in the sugar market now, thanks to sugar inventories being low, the industry's nervousness about unbridled market forces is already discernible.

As such, the government is bound to come under considerable pressure from the politically powerful sugar lobby to keep this issue in abeyance, if not abandon the proposal altogether.

Regardless of what course events take between now and October next year, even a significant step like the withdrawal of the release mechanism is unlikely to serve the desired purpose of creating free market conditions so that futures trading in sugar can succeed.

This will require policies like the 10 per cent production levy on sugar and minimum support prices for sugarcane (fixed by the Centre as well as some states) to go as well.

These are essentially instruments for influencing product prices and, therefore, inimical to futures trading, which serves as a means of price discovery and stability under free market conditions.

There may well be political justification for retaining the 10 per cent levy in order to maintain the supply of cheap sugar to households below the poverty line and to those living in the geographically disadvantaged north-eastern and hilly regions.

Yet, this levy will confound the market as long as it exists. Where minimum support prices are concerned, there is little justification to retain them.

The sugar mills will keep cane growers happy in their own interest. Otherwise, farmers will shift to other crops. Even in areas where alternative crops are not as lucrative, growers can divert their produce to gur and khandsari units.

Thus, there is merit in going the whole hog on sugar deregulation, rather than the piecemeal approach that has been pursued for so long with so little to show by way of results.