Opinion

It’s up to States to sweeten the outcome

Tejinder Narang | Updated on March 12, 2018

Total decontrol of sugarcane pricing would have been a better move.

The flexibility of States to determine cane and levy sugar prices can lead to subsidy complications.



The Cabinet, on April 4, abolished 10 per cent levy obligation on sugar mills and the monthly release mechanism, initially for two tears. Now, industry can manufacture and trade sugar on a marked-to-market basis. “Implicit taxation”— on the mills, farmers and consumers is over. Mills will no longer be required to carry levy stocks and subsidise them on behalf of the Government.

The marketable inventory with mills is 17.5 million tonnes (Rs 51,000 crore) including 10 per cent “surplus” tonnage of 2012-13 that has not gone into levy so far. World market prices are very low, much lower than local cost. Therefore, no exports demand is foreseen this year, leading to excess supply in the country. In agro commodities, small surpluses or slight shortages can trigger high price volatility.

THE CONSEQUENCES

Domestic prices can fall steeply in the medium term, which is good for the Government and negative for the industry, even after accounting for immediate savings owing to dismantling the levy obligation. Since 75 per cent of the sugar is guzzled by soft drink/ice-cream makers, the biscuit industry, and halwais (sweetmeats) — lower sugar values would enhance their margins, involving greater competition and therefore lower prices for end consumers.

As a long-term policy prescription, this partial decontrol will improve cash flow and ensure enhanced profitability. Arrears of farmers will be settled without undue delay.

Where sharing of sugar profits with farmers is the norm — especially in the co-operative sector — farmers will be rewarded. Industry will be in better position to square off bank loans.

The ‘Fair Remunerative Price’ (FRP) of sugar cane, fixed annually by the Agriculture Ministry, is redundant now because the Supreme Court has validated right of the States to determine State Advisory Price (SAP). The Rangarajan committee had also recommended that cane area reservation with 15 km stipulation should go, subject to the States’ consent. The Cabinet has also left it to the States.

The burden of inspector raj stands reduced. The Government needs to be complemented for dismantling the archaic socio-economic model. A 20 per cent rise in the value of shares of all sugar companies is an endorsement of this positive sentiment. Big corporates will strategise marketing for better returns. Those with weak financial muscle — like co-operative mills — may lose out.

Co-operatives may not be able to hold on to their stocks for disposal at best prices. Loss- making mills will see fresh acquisitions from large Indian corporates. However, any FDI in the Rs 80,000-crore sugar sector is a remote possibility, as sugarcane and sugar-related issues can be mixed up with muddy State politics.

OPTIONS BEFORE STATES

States can procure sugar from the open market, for which Centre will reimburse only Rs 18.50/kg — the difference between Rs 32/kg (estimated market price now) and Rs 13.50 (sale price to PDS consumers). If States purchase sugar above Rs 32/kg from the market, the increase will be a debit entry in States kitty. Should States dispose of sugar below Rs 13.50/kg — difference will devolve upon the States.

It is now up to the States; to what extent will they make political capital by fixing SAP and initiating tender-centric procurement for 2.2 million tonnes of sugar (estimated value of Rs 7,000 crore at Rs 32/kg) for the aam aadmi. Farmers and consumers are vote banks, while mills generate political funds. State Chief Ministers, especially of Uttar Pradesh, Maharashtra, Tamil Nadu and Karnataka, will be pleased with this enhanced clout.

State Civil Supplies departments will be saddled with the additional responsibility of issuing/finalising tenders for sugar procurement and storage meant for PDS that may be subjected to strict procedural and financial scrutiny. Traders may also be “suppliers” of PDS sugar to civil supplies departments, along with mills.

Some of the populist ideas that could emerge from each State could be:

Competition in fixing SAP: Two of the largest sugarcane-producing States — Uttar Pradesh (8 million tonnes) and Maharashtra (7 million tonnes) — can fix a much higher SAP for farmers and allow mills to have a market-determined sale price. Sugar inflation can significantly increase if demand exceeds supply. The greatest threat to the industry is -- if supply exceeds demand (that could occur, as farmers are highly incentivised with higher SAP that lacks economic logic) and market prices dive below cost of production, that could spell their and other stakeholders’ financial disaster with no rescue boat.

Selling PDS/levy sugar “below” Rs 13.50/kg: What stops States from subsidising sugar to say Rs. 5/kg per household per month? Tamil Nadu, Chhattisgarh, Andhra Pradesh, Himachal Pradesh, Punjab are already bearing the burden of “extra” subsidy of grain and pulses. Why bother about the extra subsidy, when Central Government is the lender of last resort?

If the open market sugar is Rs 32/kg or more and subsidised sugar Rs 5/kg, there will be a greater temptation to recycle this sugar back in the open market or to State procurement centres through private trading channels.

FURTHER STEPS

Total decontrol of sugarcane pricing and reservation area policies, and free sale of sugar and their by-products without any levy or PDS subsidy would have been the preferred option. Wise States will desist from adding to their subsidy bill. But will that happen?

If policy options are to be exercised at the realm of the States, total decontrol may be a pipe dream.

(The author is a grains trade analyst.)

Published on April 11, 2013

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