The abolition of levy sugar and monthly release mechanism will reduce the infamous cyclicality in the sugar industry, and benefit all stakeholders alike.

The Government’s decision on partial decontrol of the sugar industry is welcome. It comes at the right time, with India seeing excess sugar production vis-a-vis consumption for the last three consecutive years. This step will help reduce the cyclicality of sugar production and better enable the industry to pay for the sugarcane supplied by farmers. Consumers, too, will benefit with more stable sugar prices.

One needs to also thank the committee under C. Rangarajan, Chairman of the Prime Minister's Economic Advisory Council, for its constructive and positive recommendations given in October 2012.

LEVY SUGAR SYSTEM

One of the most positive steps in the decontrol process for both farmers and the industry is the removal of 10 per cent ‘levy sugar’, which deals with supply of sugar by the sugar industry to the Public Distribution System (PDS). Levy sugar for the PDS will now be procured by State governments from the open market at prevailing market prices.

The quantity of levy sugar procured for PDS and its retail price for the BPL families at the ration shops will remain unchanged at today’s rate of Rs 13.50 per kg. The Central Government will provide a subsidy to the State governments for the difference between the PDS retail price of Rs 13.50 per kg and the sugar procured from the open market by the State governments, subject to a maximum purchase price of Rs 32 per kg for the next two years.

So far, the industry has been supplying levy sugar to the Government for PDS at 50-60 per cent of its cost of production.

This decision will help the industry save about Rs 3,000 crore annually, which would also help in making cane payments on time and reducing cane arrears.

Another welcome move is that Cabinet Committee on Economic Affairs (CCEA), headed by Prime Minister Manmohan Singh, has not approved any increase in excise duty to fund the government’s additional subsidy burden (due to its taking over the levy sugar burden from the industry).

This will benefit consumers, as it would not lead to inflationary pressures.

MONTHLY RELEASE MECHANISM

The next important decision towards deregulation has been the removal of regulated release mechanism for non-levy sugar (or free sale sugar), which has been abolished with immediate effect. The regulated release mechanism would dictate to sugar factories on how much sugar they could sell in the open market on a monthly basis. Sugar factories could not sell over or below the amount stipulated by the Government.

Now, each factory can sell how much it likes in the open market, depending upon the open market prices and their cash flow needs. This will also help in establishing transparency in market pricing, by increasing transactions on the commodity exchanges and establishing a robust forwards and futures market on which sugar can be traded and/or hedged.

CANE PRICING

A key issue of having a formula linking the sugarcane price to the sugar price and its primary by-products (bagasse, molasses and press mud), as recommended by Rangarajan Committee, has not been addressed in the first phase of decontrol. Linking of sugarcane prices to sugar prices is an established practice in most large sugar-exporting countries.

Today, there is a disconnect between the sugar prices and sugarcane prices in India. It is not possible to have a low sugar price, a high cane price and a healthy industry at the same time. This is simply not sustainable.

The Government and the Commission of Agricultural Costs and Prices (CACP) comes out with an all-India sugarcane price called ‘Fair and Remunerative Price’ (FRP) every year before the start of the sugar season. This FRP is a formula-linked cane price to encourage higher productivity. However, some States want to pay their farmers more and thus fix a cane price over and above the Central Government-advised FRP. This is known as the State Advised Price (SAP).

A few years ago, the Union Ministry of Food had proposed that if any State Government wished to give a cane price higher than the calculated Central Government cane price, it could certainly do so. The only caveat proposed was that there would be an amendment in the Sugarcane Control Order (1966) by bringing in a Clause 3B.

Clause 3B says that if the State Government announces any price for sugarcane (that is, SAP) over the Centre Government’s price (that is, FRP), the State will have to pay the differential price.

Unfortunately, this amendment has not been made.

The Government of India could consider a re-look at introducing Clause 3B in the Sugarcane Control Order (1966). This could mitigate against States announcing unviable ‘populist cane prices’.

FURTHER REFORMS

This could be an interim solution to the cane pricing issue. However, ideally, as recommended by Rangarajan, a formula-based cane price linked to sugar price and all its primary by-products should be promoted.

This would ensure an equal playing field across India. Having a rational sugar price and sugarcane price will be beneficial to all stakeholders i.e. farmers, consumers, government and industry, and would ensure that there are no cane price arrears to the farmers. This will reduce cyclicality of the industry and benefit farmers who can reap the benefits of a healthier sector. The decontrol of sugar sector is incomplete without addressing this fundamental issue, which is essential to its long-term viability.

The next steps could address bringing ethanol under ‘declared goods’ for ease in inter-State movement. Blending of ethanol with petrol has been encouraged by the Central Government. This would help save precious foreign exchange as well promote a greener fuel.

Reforms in the sugar sector will result in a win-win situation for the farmer, consumer, government and industry. In the long run, all stakeholders will benefit with a less volatile and a more stable industry.

(The author is Deputy Managing Director, DCM Shriram Consolidated Ltd, and Co-Chairman, National Task Force on Sugar, CII.)

(This article was published on April 7, 2013)
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