The Government’s irresistible desire to control sugar prices is doing much harm to the industry. Upholding market dynamics should be the way forward
In the run-up to the Assembly elections in Uttar Pradesh in 2017, the BJP had promised immediate payment of all sugarcane arrears (money that sugar mills owe to the Government for cane supplies). For future purposes, too, it had assured to release all dues by the 14th day, counting from the day the sugarcane is delivered to the mill. The BJP Government has been in office in Uttar Pradesh for over two years now and has since ensured payments of a whopping Rs 50,000 crore, which includes Rs 10,500 crore for the marketing year October 1, 2016-September 30, 2017; Rs 34,000 crore for the year October 1, 2017-September 30, 2018; and Rs 5,500 crore for the marketing year commencing October 1, 2018. Meanwhile, fresh arrears continue to pile up. This raises several questions.
What causes arrears to surface year-after-year? What is the implication for the consumers? Can there be a lasting solution? What is the way forward? The root cause behind the arrears can be traced to sugar mills being forced to purchase sugarcane from farmers at the so-called State Advised Price (SAP), which is Fair Remunerative Price (FRP), notified by the Centre. In Uttar Pradesh, the current SAP is Rs 315 per quintal. Left to themselves, the mills would have paid a price linked to their realisation from the sale of sugar and its by-products. Under conditions of excess supply (during 2018-19 marketing year availability is estimated to be about 40 million tonne, including production 30 million tonne and opening inventory of 10 million tonne), against a consumption of 26 million tonne, the realisation is low. The cane price, too, ought to have been low. But the mills are forced to pay a much higher price.
This has led to a piquant situation whereby at a market-based realisation of Rs 26 per kg ex-factory (June 2018), they could not even fully pay for sugarcane cost, forget meeting expenses on other inputs and fixed cost. So, they could not make payments in full. The Centre has taken several measures viz, hike in import duty, creating a buffer and increase exports among others to regulate supplies and in turn lift the market price. As if this wasn’t enough, it made a brazen intervention by fixing a minimum ex-mill price at Rs 31.5 per kg. This may help sugar mills clear arrears (every rupee increase in the price generates about Rs 2,500-3000 crore) but this is an abhorrent policy decision. How can a producer be told not to sell below a certain price?
Wherever price controls exist (example fertilisers), the Government normally fixes the MRP. The manufacturer cannot charge more even as he is free to sell at any price lesser than this. But to require that he must not sell below a certain threshold is not just an anathema to market forces but is patently anti-consumer. Through their flawed decisions, the Centre/State have created an anomalous situation whereby they are forcing the sugar mills to charge from consumers a price which is significantly higher than justified by underlying supply-demand conditions. This to only help them pay the artificially high sugarcane price to the farmers. Indeed, this benchmark price will only increase as fresh arrears pile up. Already, the mills have petitioned to the Centre for a hike of Rs 5-6 per kg. Finding a lasting solution to the problem cannot be divorced from the fundamental factors that have contributed to it — the most critical factor being the practice of fixing FRP/SAP of sugarcane at an artificially high level. This practice must be shunned. Sugar mills should have the freedom to determine payments to farmers based on their revenue under a market-based framework.
In 2013, the Rangarajan Committee on sugar deregulation had recommended shift to a revenue-sharing mechanism between farmers and millers and linked the fair and remunerative price for sugarcane to yearly realisations from sugar and its byproducts, through a fixed formula. It sought to address the flaw under the subsisting arrangements but this a half-hearted move. Anything short of complete deregulation of sugar industry won’t work. The way forward is to let market dynamics drive various stakeholders, including farmers. Even if farmers get lower price for cane, it will be better than receiving short payments, which forces them to borrow at high interest and get in to the debt trap. This apart, the Government can always give direct income support to the needy. This will also prompt farmers to diversify crops that are in greater demand and, hence, fetch higher price. This will be good for conserving water as sugarcane is a water-guzzling crop and any shift away from it will help conservation. It will also save on electricity consumption as farmers work less on pump sets.
The new Government should take a call on this long-pending reform that will extricate the farmers from the present “high SAP-arrears-debt trap” and at the same time protect the interest of consumers and sugar manufacturers. A collateral gain will be by way of savings in water and energy, reducing oil imports/current account deficit, preserving environment and maintaining ecological balance.
(The writer is a policy analyst)
