No reform, again

Package for sugar industry consists only of temporary measures

The bailout plan for the sugar industry, announced by the government on Monday, is essentially an expanded version of the package doled out by the previous government last year in that it is devoid of any reform-oriented component that can provide an enduring solution to the sector’s woes. It can, at best, ease the industry’s current liquidity crunch by clearing sugarcane price arrears, which have mounted to Rs 11,000 crore. The core issue of a disconnect between the prices of sugar and those of sugarcane, which leads to build-up of such arrears year after year, has been left unaddressed. Also, the package may prove inflationary in the short run, as has been reflected in the increase of Rs 1-2 a kilogram in sugar prices in different regions immediately after its announcement. In the longer run, however, sugar prices will be dictated by market fundamentals that are unlikely to change much due to this temporary fiscal relief.

The four-pronged package involves the continuation of the subsidy of Rs 3,300 a tonne on sugar export till September; a hike in import duty from 15 per cent to 40 per cent; additional interest-free loans of up to Rs 4,400 crore to sugar mills; and raising the level for blending ethanol with petrol from five per cent to 10 per cent. The rider attached to the implementation of these measures – that the industry give a written undertaking to clear sugarcane price arrears – should be readily acceptable to mills, which are likely to gain substantially. Cheaper finance and higher realisation from exports and domestic sales will help mills’ finances, and help them stave off punitive action by state governments. The anticipated subsidy-driven upturn in exports and the virtual drying up of raw sugar imports due to a deterrent tariff are also likely to enhance the industry’s capacity to pay sugarcane growers’ dues. These are also expected to bring down inventories, which are estimated at 20 to 25 million tonnes — almost equivalent to one year’s domestic consumption.

Many of the measures are problematic. For example, the move to double ethanol blending with petrol is intended, prima facie, to boost ethanol demand and increase the income of the mills that produce it from molasses. However, it is noteworthy that even the current five per cent ethanol blending target has not been fully met in many parts of the country. The measures, in fact, show a callous disregard for resource shortages. India is scarce in land and water, and so biofuel based on field crops – such as ethanol for fuel blending – is always going to be a bad idea. And giving incentives for the export of sugar ignores the fact that it is, in effect, encouraging the export of water, given how water-intensive sugarcane is.

A lasting solution to the sector’s unending problems lies in well-judged reforms, not in piecemeal, regressive measures that provide temporary relief. Real reforms include ending state-advised cane prices, enforcing the Rangarajan committee’s recommendation of revenue sharing between sugar producers and sugarcane growers, and complete decontrol. At present, sugar is being produced and is available in comfortable numbers. It is, thus, the appropriate time to introduce structural reforms. Bailout packages merely treat the symptoms without tackling the disease.