G Chandrashekhar

Sugar decontrol is long overdue

G Chandrashekar | Updated on March 12, 2018

Ihe industry faces a double whammy with both input and output prices are regulated.

Abolition of levy and free-sale quotas would help remove distortion in pricing of sugar.

Pressure is mounting on the government to seriously consider decontrol of the sugar sector. For long, the sector has been mired in a complex web of controls and regulations, many of which have become antiquated .

Unfortunately, political will to effect reforms has been lacking. The call for decontrol was first raised sometime in 2002; but for reasons often specious the move towards decontrol was stalled. Political personalities with strong business interests and powerful business houses with political support have time to time thwarted attempts to decontrol. Has the situation changed?

At this point in time, nothing has actually changed from the recent past to generate confidence that decontrol is really round the corner. Yet, decontrol is necessary and it is the best thing that can happen to the challenged domestic sugar industry. It is time the policymakers seriously applied themselves to removing at least some of the fetters that stymie the natural growth of the industry. This necessity arises because the sector provides livelihood for millions; it is an integral part of the food processing sector and there is tremendous scope for making the industry truly competitive.

But the tragedy is that in recent years New Delhi has failed to muster courage even to do what it is empowered to do. Towards decontrol, there are two important steps of reform the Centre can take at this point of time. One, withdraw the levy system and the other, do away with the so-called free-sale quota for mills.

Misplaced fears

The levy system mandates mills to surrender to the government a part of the sugar they produce (currently 10 per cent) intended for supply through the public distribution system. It is a mystery why sugar mills must suffer this forced sale to the government even 20 years after the process of economic liberalisation was started. This legal pressure to part with production, that too at unjustifiable prices, must go forthwith. To meet the needs of Public Distribution System, the Centre can buy from the mills in auctions in a transparent manner. Any apprehension of cartelisation is misplaced. In years of sugar glut, mills will vie with each other to supply. In years of shortage, the government can import, if needed. The option to import on government account should be kept open all times.

Then there is the restriction on marketing the balance 90 per cent production through a system of quotas. There is no reason why mills should be deprived of free marketing of what they produce. The government should simply get out of interfering with sugar marketing.

The implication of the twin measures — abolition of levy and free-sale quotas — is that sugar mills will have more freedom to market the output, while the prices will be truly market-determined, rather than distorted as at present because of the twin restrictions.

SMP issue

In the context of sugar decontrol, some sections of sugar business believe statutory minimum price for sugarcane should also be removed. This expectation is unjustified. In some way, fixing SMP is a sovereign function of the government to protect the interest of growers. The Centre is right when it says States have to be consulted in the matter of doing away with SMP. Also, there is no reason why cane should be excluded and cane growers treated differently when there is minimum support price for many crops. It would be a tragedy if deregulation of the industry is derailed by raking up the SMP issue. Instead of debating the merits or otherwise of SMP/SAP, it would be advisable to discuss ways and means of breaking the cyclical nature of cane production. This would be in the long-term interest of the industry.

Currently, the industry faces a double whammy.

The government decides the input price (cane price through SMP/SAP) while the output price is impacted by government-imposed marketing restrictions. It is important that at least one side of the twin restriction is freed. Politically, it is expedient to free the output side.

Once the output side is freed with removal of marketing restrictions, output (sugar) prices will become truly market-driven. The government can monitor open market sugar prices. As and when needed, the tariff mechanism can be effectively deployed to encourage or discourage foreign trade (import-export) with a view to regulating or moderating prices.

Other issues

Other issues to be considered independent of the industry deregulation include poor scale economies arising out of fragmented capacities and strategies for consolidation; quality-related cane pricing to growers on the basis of on-field testing; interim financial support to growers because of the long duration of cane crop (12-14 months) and stock verification at the mills.

Published on August 15, 2011

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