Sugar slowdown

Deregulation was incomplete, and the industry suffers for it

The woes of the sugar sector seem unending. The gains it had anticipated from the abolition of the mandatory levy on sugar output and a few other reformist measures announced last April have not materialised. Meanwhile, costs have risen, eating into profits. Costs have been pushed upwards by steep annual hikes in sugarcane prices; moreover, three straight high-output years have led to a drop in sugar prices. What is worse, the global prices of sugar, too, have moved downwards. This has eroded the prospects of sugar exports as an outlet for bulging sugar inventories, even though the rupee has lost value.

The worst affected is the sugar industry in those northern states where the system of state-advised sugarcane prices is in vogue. The state-advised price is fixed arbitrarily, usually on populist considerations, disregarding the fair and remunerative prices announced by the Centre on the advice of the Commission for Agricultural Costs and Prices. A striking case in point is the sugar sector in Uttar Pradesh, the country's second-largest producer of sugar. Successive state governments have raised the state-advised price year after year without regard to market dynamics. As a result, the state-advised price soared from Rs 165 a quintal in 2009-10 to Rs 280 in 2012-13 (against the fair and remunerative price of Rs 171), even as sugar prices climbed, on an average, only from Rs 2,800 a quintal to Rs 3,100 during this period. This has caused a liquidity crunch in the industry, leading to the building up of cane price arrears to the tune of Rs 2,600 crore. The sugar mills claim it's not easy to clear these arrears, despite legal and political pressure. Even banks have turned wary of lending to the sugar industry in view of its ill health.

The solution to the sugar sector's distress is indeed not hard to trace. It lies in the report of the high-powered committee headed by the chairman of the Prime Minister's Economic Advisory Council, C Rangarajan. Besides outlining a set of reforms that would ultimately free the sector from needless controls and regulations, the panel suggested a revenue-sharing formula between millers and cane growers as an alternative to the state-advised price. This requires the mills to pay the fair and remunerative price to cane growers at the time of cane delivery and later share with them 70 per cent of the value of the sugar and its by-products. Such a system, which allows mills' profits to be shared with cane farmers, would obviate any need for the states to set a state-advised price. Some of the states, notably Karnataka and Maharashtra, either have already switched to the revenue-sharing mechanism or are moving in that direction. However, the Union government is, for unexplained reasons, yet to accept and implement this and many other key recommendations of this panel. A final call on these issues needs to be taken expeditiously for the benefit of the sugar sector, including the industry and farmers.