More trouble for sugar

The pricing of sugarcane, as with other agro-commodities, has invariably been influenced by political considerations as much as economic ones.

That is why many state governments often laid down a "state advised price" (SAP) for sugarcane that was markedly higher than the statutory minimum price (SMP) fixed by the Centre, and bullied the sugar mills to pay the higher price to farmers.

This prompted the sugar industry to challenge this practice in the Allahabad High Court and secure a ruling in the mid-1990s that the SAP had no legal validity and, hence, was not enforceable. Though this order did not deter many state governments from continuing to fix cane prices in arbitrary fashion, the sugar factories managed to flout their diktat.

Now the Supreme Court, through a majority judgement, has upheld the states' right to fix cane prices. This has altered the situation dramatically, portending trouble for an industry that had begun showing signs of recovery after a poor run of three years.

Though the apex court's ruling has come when both the cane crushing season and the election process are ending, it has nonetheless paved the way for fresh political abuse of cane pricing.

The sugar industry is unable to decide how to respond to this development. This is largely because the enormity of the judgement's implications is yet to be fathomed. What is unclear is whether the industry will have to pay past arrears accruing from non-payment of SAPs. If that is the case, the industry will have to shell out crippling sums.

What is also not clear is whether those states which in the past have not been fixing their own SAPs, will now begin doing so. If that happens, a disease that has been confined to a few states will spread.

Under the circumstances, the sugar industry has started demanding fiscal sops of various kinds. These include cheaper bank credit and extension of cash credit limits; industrial restructuring schemes at par with steel and textiles; loan rescheduling as has been done for the plantation sector; and lower interest rates on money drawn from the Sugarcane Development Fund. This list will grow.

Whatever the merits of these demands and their ability to blunt the financial impact of the Supreme Court judgement, one thing that is apparent is that the ball is now in the Centre's court. It will have to do something to avert chaos in this important agro-based industry.

Since, the real issue on hand is largely legal, though its ramifications are totally fiscal, it will have to be tackled through amendments to the law.

Thus, the new government will have to either amend the concerned laws to take away the state governments' right to fix an SAP (which may face political resistance and which may in any case be difficult to pull off) or expedite the deregulation of this sector. The second option, for obvious reasons, makes better sense.