Long cramped by heavy controls and the politicisation of prices by state governments with an eye on the electorate, the beleaguered sugar industry is hoping to benefit from the Centre’s pro-reform mood. Ajay Modi looks at the mills’ woes and what impact the proposed policy changes could have
A meeting of the Union Cabinet is slated for Tuesday, September 25. Given the new-found reformist zeal of the Manmohan Singh-led United Prog-ressive Alliance government, every-body expects some more heartwarming announcements after the meeting. The industry which could be next on the government’s radar for liberalisation, after retail and civil aviation, is sugar — though it has an annual turnover of Rs 85,000 crore and India is the second-largest producer of sugar after Brazil, it remains a heavily controlled sector.
Thus, the price at which mills can buy sugarcane from farmers is determined by the government every year, 10 per cent of the output has to be sold at ration shops at prices fixed by the government (since this sugar is meant for poor households, it is priced ridiculously low and mills incur huge losses on it) and even the open market prices are under government control as it decides every month how much stock every mill can offload.
Mills can pack sugar only in unhygienic jute bags, not inexpensive synthetic bags; so, sugar mills end up subsidising the country’s ailing jute industry. The government lays down the cane area for each mill — it cannot buy came from outside this area.
Export and import are tools used by the government to control domestic prices. The use and movement of molasses and ethanol is also heavily regulated to protect the interests of the liquor industry. And, of course, you need a licence from the government to set up a sugar mill.
The sugar mills are caught between the two interests of the government — high remuneration to sugarcane farmers and sugar at low cost to consumers. While the Centre fixes a fair and remunerative price, states are free to fix their own price. States like Uttar Pradesh have used the sugarcane price as a political trump card since time immemorial.
Mayawati, the last chief minister of Uttar Pradesh, last year (it being election time) 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 Rs 2,660 crore on the mills. Mayawati’s gift to the 4 million or so sugarcane farmers of the state was funded fully by the mills. Still she lost.
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That’s not all. The loss on sale to the public distribution system was Rs 7,000 per tonne last year, as calculated by the Commission for Agricultural Costs and Prices; as mills supplied 2.7 million tonnes of sugar, the total loss stood at Rs 1,900 crore. As a result, mills owe sugarcane farmers Rs 493 crore in Uttar Pradesh. Given these controls, mills often complain that it is not possible to plan for the long term.
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But the scenario could change. To begin with, the government may increase the price that the mills are paid for PDS sugar by Rs 3,000 per tonne. That will cut some losses. But a lot more needs to be done. Brazil, which decontrolled its sugar sector in phases between 1991 and 1997, has achieved great success in the sector. Brazil’s output has increased manifold since then, and it is now the world’s biggest producer.
In 2010, Sharad Pawar, the Indian food and agriculture minister, made a visit to the South American nation to study the industry and its develop-ment after decontrol. Attempts to decontrol the Indian industry had been made in 1971-72 and in 1978-79, only to be rolled back.
While the industry has been strongly pushing for decontrol for several years, voices from the government have now started to support the demand. Chakravarthy Rangarajan, the chairman of the Prime Minister’s Economic Advisory Council, and Ashok Gulati, the chairman of the Commission for Agricultural Costs and Prices, support the idea of decontrol. Nitin Gadkari, the president of the Bharatiya Janata Party, the main opposition party at the centre, has also supported decontrol of the sector.
However, Akhilesh Yadav, chief minister of the biggest sugarcane-producing state in the country, Uttar Pradesh, has opposed the idea in his meeting with Rangarajan, who heads a committee set up earlier this year by the prime minister’s office (PMO) to evaluate reforms for the industry. (Yadav, whose Samajwadi Party is also opposed to foreign investment in retail, is per-haps evaluating the political cost of sugar decontrol.)
The committee has recommended total decontrol of the sugar industry by doing away with the levy sugar obligation (which is sold through the public distribution system), the monthly release mechanism and freeing of export and import. While recommending the centre’s fair and remunerative price as the base price for sugarcane, the panel has suggested a profit-sharing mechanism so that farmers, too, can benefit from higher sugar prices. The report is yet to be submitted formally but a brief has been circulated to the food ministry.
The committee has also recommended doing away with the state’s power to reserve sugarcane area for mills, implying that farmers can sell to any sugar mill they wish, says a person familiar with the development. It has also suggested that the current minimum distance of 15 km between two mills be removed.
The most important suggestion is on sugarcane pricing, that can in effect mean an end to the states’ power to set a different and higher price — which often has nothing to do with economics.
The committee has said that state governments should buy sugar for the public distribution system from the open market and the central government should pass on the cess of Rs 240 it collects on every tonne of sugar to state governments to fund the market purchase.
Currently, the cess goes to the Sugar Development Fund. This fund is used to grant low interest loans to industry for sugarcane development, plant modernisation, ethanol production and power projects. Rangarajan has suggested doing away with this fund.
The Commission for Agricultural Costs and Prices (CACP), too, has suggested that the government should do away with the “levy quota” on sugar mills. This, in the Commission’s opinion, has cramped the mills’ ability to adequately compensate sugarcane farmers.
Instead, CACP 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 long carried the burden of the government’s welfare programmes.
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According to Narendra Murkumbi, managing director of Renuka Sugars and former president of the Indian Sugar Mills Association (ISMA), the two foremost challenges for the industry are the rigid regulations and the cyclicality in production. “Both these problems are linked. The lack of freedom to make decisions on a sound, commercial basis is amplifying the financial distress in the industry. This leads to ever sharper swings in sugar production from year to year”. One of the great challenges for the industry is the lack of freedom to operate on normal commercial basis like every other industry in the country, he adds.
“These constraints have collectively made the industry weak and poorly capitalised. We are also seen by investors and banks as lacking the ability to have significant impact on our own well-being and future prospects. A free environment will allow companies to be more competitive and efficient,” says Murkumbi.
According to ISMA director general Abinash Verma, sugar is the only industry in India to bear the burden of the government’s social welfare programme. “The government should buy sugar from the market for PDS like it does in case of wheat and rice. The government may have to incur an additional subsidy of Rs 2,000 crore annually, which is marginal compared to its Rs 80,000 crore food subsidy bill”, he said.
Verma believes that this is an opportune time to decontrol the sector. “We have adequate supply to maintain domestic price and mills have just started making some margins. They will be able to make timely payment to farmers”. The country will have an opening sugar stock of 6 million tonnes when the new season begins next month.
According to various estimates, sugar production is likely to be around 24 million tonnes in the next season, thereby taking the total availability to 30 million tonnes against a domestic demand of 23 million tonnes.