The sheer number of farmers growing cane is too important a constituency that ruling parties in states like Uttar Pradesh would stop pandering to, for the sake of an ideal, long-delayed reform. Its entry would allow the Centre alone to fix incentivised prices of an important cash crop, without the states getting involved. It is because of the stifling of factory operations by the governments at the Centre and in cane-growing states that the Indian Sugar Mills Association (Isma) president, Narendra Murkumbi, has described sugar as the “most controlled of all industries”.
If the states have found cane an option to patronise farmers, the controls spelt by the Centre come from the perception that sugar prices leave a major impact on family budget. This, though, is not the case. In the new series of the rural and urban combined consumer price index, sugar has a weight of 1.91, against 14.59 for cereals, and 5.44 for vegetables. It is against this and also that bulk buyers like confectioners lift around 70 per cent of sugar, Murkumbi recommended reforms to allow factories to go through surplus seasons without getting bruised. The reforms will have the extra merit of not treading the path of states.
Murkumbi has acted sensibly by leaving issues like cane-area deregulation and cane price-fixing, where the states are involved. He pleads for taking two steps ahead in the industry’s deregulation. That the monthly release mechanism is retrograde has been proved between October 2009 and February 2010, when prices rose to unacceptable levels on fears of shortage in production. It does not allow factories to do sales planning, thus affecting cash flows. Due to this, the industry is often laden with more than acceptable levels of stocks. We have learnt from Murkumbi that the food ministry, in a note to the cabinet, has expressed reservations about the mechanism.
The surprise spurt in production at a later stage during 2009-10 allowed the 2010-11 season to open with comfortable stocks of 4.98 million tonnes. The production estimate for this season has now been scaled down to 24.2 million tonnes, from the earlier estimate of 25 to 25.5 million tonnes. After providing for domestic use, and exports made under obligation of past imports, and under OGL, as also imports of 340,000 tonnes, the country will open the next season in October with stocks of around six million tonnes. As is happening with the Food Corporation of India, sugar factories are also constrained for space, and Isma estimates the “value of stock balance with mills at a back-breaking Rs 30,000 crore.”
No surprise then that factories, instead of recovering production costs estimated at Rs 2,900 and Rs 2,700 a quintal for Uttar Pradesh and Maharashtra, respectively, are engaged in some panic selling. Improvement in prices is there, since the recent announcement of the second tranche of a 500,000-tonne export. But an industry burdened by mounting stocks will get real relief if the government removes the stock holding limit on the traders. At the same time, it should allow further exports of one million tonnes to enable factories to benefit from exceptionally high world sugar prices, caused by concern about the Brazilian crop. The ideal opening stock for a season here is considered five million tonnes.
Another reform Murkumbi advocates is doing away with the levy sugar obligation, equivalent to 10 per cent of production. The government has a subsidy obligation of about Rs 70,000 crore on food, calculated to rise to Rs 100,000 crore, once the Food Security Act comes in. If it agrees to buy the levy amount directly from the market, its subsidy bill will be up Rs 2,500 crore. It is surprising that the industry has not been relieved of the levy burden, which incidentally obtains here only, despite the finance and commerce ministries no longer seeing merit in it.
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Former Isma president Om Dhanuka says while the two overdue reforms will give much relief to factories, the industry’s real redemption will depend on establishing “linkages between prices of cane and sugar and its by-products. Hopefully, the committee headed by Dr Rangarajan will soon be recommending an ideal linkage formula.” Whatever the dispensation under the Dr Rangarajan formula, farmers will have the assurance of minimum prices in all situations. But, in the event the market favours sugar and its by-products, their rewards will be more.
According to Dhanuka, the principal objective of such linkages is to spare the industry of cyclicality (periods of high production followed by low production). Cane, a one year crop, has to compete with wheat, rice and cotton to catch the fancy of growers. Good working of factories on a sustainable basis will alone ensure fair returns for growers as also timely settling of cane bills, says Dhanuka.