No artificial sweeteners

In another stopgap measure to address the escalating sugar crisis, the Centre has announced a ₹6,000-crore loan package to help mills clear their dues to cane farmers. The loan, which is interest-free for the first year, comes with strings attached. Only mills which have already paid half their cane arrears are eligible and the sums will be directly credited into farmer accounts. The industry has, predictably, dismissed this package as ineffectual and is demanding other palliatives, such as creation of a sugar buffer stock, which will require the Centre to mop up 20-30 lakh tonnes of the sweetener from the market. But this is an ill-advised move. A buffer stock may reduce excess sugar stocks and temporarily lift prices. But with both domestic and global sugar markets expected to remain over-supplied in the foreseeable future, the Centre may get saddled with unnecessary sugar inventories. Over the last two years, levy quotas for sugar have been dismantled, export subsidies for raw sugar hiked (despite WTO objections), and prices for ethanol sold to oil companies increased. That these sops have done little to resolve the crisis suggests the industry’s problems are structural in nature and cannot be sorted out through quick-fix methods.

The record cane dues of ₹21,000 crore are the result of four consecutive years of excess domestic production, in which sugar output has consistently outpaced demand. With 2014-15 expected to be yet another bumper year (output of 280 lakh tonnes against demand of 240 lakh tonnes), sugar prices have plummeted to levels far below production costs for mills. Earlier, three-four years of excess sugar production were inevitably followed by a sharp cutback, as depressed realisations would encourage farmers to switch to alternative crops. But this normal market response to low prices has been distorted by artificially high procurement prices for cane in recent years. The Centre has consistently hiked FRPs (fair and remunerative prices) and States such as Uttar Pradesh and Tamil Nadu have gone further by setting even higher State ‘advised’ prices (SAPs).

The solution to the sugar crisis lies in allowing market forces in the sugar sector to operate once again. The Centre needs to moderate its FRP and persuade State governments to desist from unrealistic SAPs. Draconian laws which force sugar mills to compulsorily crush all the cane offered to them need to be dismantled. One viable long-term outlet for the excess cane produced lies in the ethanol-blending programme which requires oil companies to procure alcohol from the sugar mills. This programme has been a nonstarter due to the stand-off between sugar mills and oil marketing companies on procurement and pricing. Still, given that sugar consumption is stagnating worldwide, policymakers and the sugar industry need to restart these negotiations. This will mean sweeter prospects for both the industry and cane farmers in the long term.

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