PDS sugar price hike to have far-sighted positive implication on mills

In a far sighted benefit to sugar mills, the Central government has asked states to raise price of the sweetener sold through public distribution system (PDS) or ration shop.

Currently, state government procures 10% of crushing units’ output known as levy sugar at an average price of Rs 19.05 a kg. Adding to that an average transportation cost of Rs 2 a kg, total landed cost for states works out to Rs 21 a kg. Of this, however, the state government shares a Rs 13.50 a kg while the central government reimburses the balance of Rs 7.50 a kg after six-eight months.

While the central government’s share varies depending upon the Fair and Remunerative Price (FRP) fixed by it for cane payment, the state government’s contribute remained fixed at Rs 13.50 a kg since 2002.

“The Central government has made several attempts since 2002 to convince states for raising their contribution, but failed all the time,” said a senior industry official.

No state government would be willing to raise their burden when the Centre continued to raise FRP every year, he added.

The Cabinet Committee on Economic Affairs (CCEA) approved the hike in the Fair and Remunerative Price (FRP) of sugarcane to Rs 170 per quintal for 2012-13 marketing year (October-September). This is set to raise overall share of the Central government proportionately.

The Ministry of Consumer Affairs has estimated that the cost of sugar purchased for PDS would jump by over 19% to Rs 25 a kg this year from Rs 19.05 a kg during the previous year.

“In order to pass on the increased burden, the centre wants states to bear the brunt which is highly unlikely,” the official added.

Under the existing norm, sugar mills are bound to sell 10% of their output to state governments to sell through PDS. In effect, the state procured around 2.60 million tonnes of sugar during the last marketing year of India’s overall output of 26 million tonnes. Hence, sugar mills in India are subsidizing around Rs 14 a kg for sugar currently being sold through ration shops based on the current prevailing price at Rs 35 kg in the open market.

Explaining the long term objective of the Centre, another industry official said, “A reduction in burden for the central government would possibly translate a partial compensation of sugar producers’ burden which would benefit the industry in the long run.

In case the Centre’s proposal is rejected by states, the industry will not benefit at all, he added.

Either way, the rise in FRP is expected to accelerate the retail price of sugar raising thereby inflationary concerns.