Finance ministry finds proposal to abolish levy sugar bitter

FinMin says the move would raise the govt's subsidy burden by Rs 800-1,000 cr

The finance ministry has raised objections to the food ministry's proposal to do away with levy sugar as part of its partial decontrol measure, saying it would raise the government's subsidy burden by Rs 800-1,000 crore.

Officials said the finance ministry is concerned that if the levy sugar mechanism is abolished, the entire burden of distributing cheap sugar through ration shops will fall on the government, which it can ill-afford at this time. At present, the burden is shared between sugar millers and the Centre. The government sells 2.6-2.7 million tonnes of sugar annually at cheap rates through ration shops.

To meet this requirement, sugar mills are required to sell 10 per cent of their annual production to the Centre at rates much lower than the market price.

The government spends around Rs 23-25 for each kg sold through ration shops (this includes Rs 19.50 as the purchase price and the rest as incidental charges), while it earns just around Rs 13.50 per kg by selling the sweetener. This practically means that the government incurs a subsidy of around Rs 10-11 for every kg sold through ration shops.

But, if the levy sugar mechanism is dismantled as formulated in the draft Cabinet note, the government will have to either purchase sugar from the open market for sale through ration shops or compensate states for selling sugar at cheap rates.

Some officials said the food ministry had also suggested the overall subsidy component for sale of cheap sugar be frozen at Rs 5,500 crore (Rs 2,500 crore current subsidy plus Rs 3,000 crore expected increase in the purchase price because of revision of sugarcane rates). To compensate for the enhanced subsidy, the government should increase the excise duty on sugar manufacturing, they added. At present, it levies an excise duty of around 0.70 paisa on each kg of sugar.

"There has been a proposal to increase the excise duty, but it could lead to to an increase of around Rs 1-2 in the retail sugar price," an official said, requesting anonymity. He said a change in import and export duties was also being considered.

While agriculture minister Sharad Pawar favoured an increase in excise duty, the finance ministry is opposing it.