Direct transfer of sugar subsidy is a bold move

The farmers, the millers and the consumers are not very excited by the move but the pilot project seems to be a noble initiative

In a bold first of its kind move, the union cabinet on Wednesday approved a food ministry proposal wherein it decided to transfer around Rs 4.50 for every quintal of cane crushed, into the bank accounts of sugarcane farmers directly without any intermediary. 

As per the rules, the subsidy would be given only to farmers attached with those mills, who have fulfilled 80 per cent of their allocated export obligation for 2015-16 season. 

The quota was allocated to ensure that mills compulsorily ship out around 4 million tonnes of surplus sugar from the market in 2015-16, thereby lowering the burden on closing stock, which in turn would support the prices. 

By transferring this subsidy directly into the bank account of sugarcane farmers and thereafter linking it with fulfillment of export obligation, the Centre seems to have addressed several issues in one go. 

First and foremost, the subsidy would not attract WTO objections as it will be transferred directly into the bank accounts of farmers and hence would not be seen as trade distorting. Secondly, it would help the sugar mills lower their outstanding dues accruing to farmers as they now will have to pay Rs 4.50 per quintal less than the Fair and Remunerative Price (FRP) fixed for 2015-16 season which is Rs 230 per quintal. In other words, the minimum amount that sugar mills will now have to pay the farmers will be Rs 225.50 per quintal. 

And, third and perhaps the most significant impact of the measure could be on the wider issue of rural distress and with money being transferred directly into the bank accounts of farmers, the Centre would be seen as friendlier to them and not working for big corporate houses as is being alleged by the opposition. 

A rough bank-of-the-envelope calculation shows that assuming the average per hectare yield of sugarcane across the country is around 700 quintal; a minimum amount of RS 2,000 could be transferred directly into the bank accounts to most sugarcane growing farmer families in 2015-16. 

Of course, this dole can vary depending upon the amount of sugarcane sent for crushing by an individual farmer and also whether the said mill has managed to fulfill 80 per cent of its export obligation and if it has ethanol manufacturing facility, 80 per cent of the targeted production for 2015-16.

Nonetheless, the first-ever attempt to transfer a incentive or subsidy directly into the bank accounts of growers is commendable and if successful could open the door for more such experiments, (already there is a talk that next crop where Centre plans to interfere directly is cotton, where also farm-gate prices have slumped in the last few months).

But, instead of being cheered by all, all three stakeholders in the sugar sector, the farmers, the millers and the consumers seems to have been cautious in their appreciation and they have valid reasons for the same.

For the farmers, an incentive of 0.45 paise a kilogram is miniscule, given that his expenditure on production of sugarcane and also the extent of dues accruing from the millers is far higher. 

For the sugar millers too, this subsidy would be of little help in wiping off the dues because their actual paying capacity is not more than Rs 190 for each quintal of sugarcane purchased from farmer because of slump in domestic prices. So a relief of Rs 4.50 a quintal on the FRP of Rs 230 is hardly anything. 

The indirect benefit that this subsidy would have given to facilitate exports is also not much as given the low international sugar prices, an export subsidy much more than Rs 4.5 per quintal was required. 

For consumers also, this subsidy does not make much of difference. On top of this, if as per reports, the Central burden of Rs 1,147 crore will be adjusted from the Sugar Development Fund (SDF), then it could be counter-productive as SDF is meant to modernise mills and also help farmers adopt new cane varieties.

But, given that such an initiative has never been attempted in the past, the pilot seems a noble initiative.