The Hindu Business Line : Sugar needs release from control

Though positive, the proposal to do away with “levy” and “release” mechanism for the sugar industry is only half way to decontrol. It is only when more contentious issues relating to cane pricing, production and marketing of by-products and cross-border trade in sugar are resolved that the industry can be termed fully free, says AARATI KRISHNAN.

Sugar reforms need a push.

Ten years after the Mahajan Committee argued strongly for decontrol of the sugar sector and five years after an actual announcement about decontrol was made in 2003, the subject is once again in the news, with recent reports suggesting that the Cabinet will soon be approached with a set of proposals which may take effect in the sugar season beginning October 1.

Freeing up

The proposals mooted now are certainly welcome, as they will do much to improve operational flexibility for sugar producers, reduce micro-management of the sector by the government and remove the subsidy element on PDS sugar imposed on the industry. But actual “decontrol” of the sugar sector will be complete only when more contentious issues relating to cane pricing, free production and marketing of by-products and cross-border trade in sugar, are resolved. Only a comprehensive package of reforms that addresses the latter, can smooth out the too-frequent boom-bust cycles in sugar, and balance the interests of consumers and cane farmers with those of producers.

The proposals now mooted by the Food Ministry are two-fold. One, the ‘levy’ obligation imposed on sugar producers, under which each producer is required to surrender 10 per cent of the output to the government to feed PDS supplies, is to be dismantled. Two, the monthly “release” mechanism, which decides how much sugar individual mills can sell in the open market, is proposed to be done away with.

Producers win relief

The move to dismantle the levy quota will be the final step in the gradual phase-out of the ‘levy’ system that was set in motion in the year 2000 with the trimming of the levy quota from 40 to 30 per cent.

A removal of the levy quota will allow sugar producers to secure market realisations on their entire output and do away with the subsidy element on PDS sugar which is now imposed on the industry. The levy system requires mills to surrender 10 per cent of their output to the government at fixed prices. Levy prices, fixed zone-wise by the government, have not been revised frequently and have usually ruled below prevailing market prices, effectively requiring the industry to bear a “subsidy” element on sugar supplied through the PDS. Mills inevitably sought to recover this shortfall from their open market sales of sugar, resulting in higher market prices.

But who pays the price?

However, with PDS issue prices of sugar likely to remain below market prices, the subsidy element will have to be borne by someone. Under the proposals being mooted now, it may get transferred to the respective State governments and eventually to the Centre.

These envisage State governments mopping up sugar from the open market and claiming a reimbursement for any shortfall against PDS supplies, from the Centre. The efficacy of this scheme will hinge entirely on whether State governments are willing to operationalise it. There are also other glitches that need ironing out. Procurement of sugar from the open market may not be a costly exercise now, given that open market prices are not ruling too much above PDS issue prices. This is thanks to a comfortable sugar output in 2007-08, which has resulted in comfortable stocks.

However, this happy state of affairs may not last for too long, with sugar output already beginning its downward journey.

Output for the 2007-08 season, at 265 lakh tonnes, was only a shade lower than the 271 lakh tonnes in the previous season. But lower cane plantings suggest that the output for 2008-09 may drop sharply to 220-225 lakh tonnes. Should sugar prices begin their climb, as widely expected by the market, the subsidy burden on PDS supplies could widen significantly, leading to potential conflict on who will bear the shortfall.

Consumer interests

Of course, the question of whether sugar is indeed an ‘essential commodity’ that needs to be supplied at subsidised prices through the PDS, can be re-examined. The argument that sugar accounts for a relatively low proportion of the household budget does hold merit.

A recent KPMG report estimated that a 10 per cent increase in sugar prices would result only in a 1 per cent increase in the monthly food expense for a low income household.

Nevertheless, given the tendency of domestic sugar prices to swing from one extreme to another, policy measures are needed to protect consumer interests during periods of limited supply.

Policymakers have hitherto addressed the problem of spiralling sugar prices by imposing periodic export curbs on sugar producers. Not only does this smack of ad-hocism, it effectively prevents Indian sugar producers from establishing themselves as credible suppliers in the world market.

Instead, a review of the tariff barriers on sugar and policies that allow unrestricted import of sugar, whether in raw or refined form, may ensure that the country has flexibility to bridge any domestic shortfall through imports.

‘Release’ from releases

The second move of doing away with the release mechanism for sugar sales is also a positive one, as it will go a long way in reducing regulatory intervention in the routine operations of sugar makers.

The announcement of monthly “free sale quotas” (the total amount of permitted monthly sales by the industry) and the issue of “release orders” to individual mills regulating their sugar sales appear archaic in a free market regime. It has been argued that the release mechanism is necessary to even out the imbalance in sugar supplies between the peak (October-March) and lean months for production of sugar.

However, many other sectors relying on agricultural inputs face similar seasonal swings; managing predictable seasonal cycles should be the responsibility of the producers and not of the government.

The existence of a fairly active futures market for sugar also ensures that producers have adequate tools to hedge themselves against intra-season price risk.

A long road

Though both these proposals are positive, they will only take the sector part of the way on the journey to decontrol. Hopefully, once these proposals are implemented, the government will take up the next phase of reforms in the sugar sector.

The most imperative of these, currently, is the issue of cane procurement prices. Though cane prices hold the key to whether India’s sugar sector can eventually transition to global competitiveness, the policy on cane price fixation is currently being decided more in the Courts than by policymakers. The bitterly contested and recurring legal battles on the issue of cane SAPs in Uttar Pradesh are a case in point.

Issues such as the linkages between sugar prices and those for cane, the profit share for farmers from the by-products of cane and a standardised pricing formula for cane across the country, need to be addressed expediently.

The government certainly does not have to look far on the solutions to the cane price issue — it only has to dust out the ten-year-old Mahajan Committee report that discusses this issue in considerable detail.