Column : A reform half done

Written by Abinash Verma | Updated: Apr 9 2013, 07:06am hrs
The next important step will be to rationalise cane pricing in line with globally-accepted formula

Thursday, April 4, 2013, will be remembered in history as the freedom day for the Indian sugar sector, when the Cabinet decided to abolish the regulated release mechanism and remove the levy burden from the sugar industry. These historical decisions will not only benefit the sugar industry but also cane farmers and sugar consumers by way of better realisation, reduced costs and sustained sugar availability at reasonable prices.

The need to borrow working capital has crossed R51,000 crore for around 175 lakh tonnes of sugar stocks, only because the regulated release mechanism did not permit mills to sell as per their cash flow requirements, financial conditions and the need to clear cane price arrears of farmers. The interest burden at 14-16% to finance such huge sugar inventories was only adding to the costs. A journalist friend jokingly told me the other day that with the abolition of the regulation on sugar sales, the industry will no longer be forced to hoard sugar. I could not agree more. The R11,000 crore cane price arrears of farmers could have been lower had the mills had the freedom to encash their sugar stocks on time.

The industrys loss of R2,800 crore annually due to the burden to supply levy sugar at a hugely discounted price will be taken over by the central government. The Rangarajan committee has also pointed out that the open market consumers were cross-subsidising the levy sugar burden. This annual savings to the industry translates into R1.25 per kilo of open market sugar sales of 225 lakh tonnes, part of which can now be shared with the consumers. Considering that the industry pays around 70% of its sugar price realisation to the farmers, the savings of R2,800 crore would give almost R2,000 crore more to the farmers. Therefore, the central government has rightfully decided to take over the financial burden of this social welfare programme. The decision to not change the retail issue price and sugar entitlement of BPL families shows the governments continued commitment to the poor families and yet push for reforms.

Reduced costs will give small savings to the mills that can be passed on to the farmers as better cane price or to consumers as reduced prices. With freedom to plan sugar sales and cash flows, mills should recover their costs in the long run and pay to farmers on time and avoid cane price arrears. Farmers would not shift out of cane, reducing chances of any significant fall in sugar production, making cyclicality in production a thing of the past in India. With comfortable sugar stocks, surplus sugar production for three years in a row and a two-year low global sugar prices, any untoward increase in prices would be checked. In fact, the mills would be tempted to reduce carrying costs and interest burden and sell more sugar, at least initially, to generate cash flows to clear off the farmers arrears of R11,000 crore today. Sugar prices would come down in the short run and benefit consumers. A highly fragmented Indian sugar industry with 600 mills across the country and no sugar company so large as to have even 2-3% market share means the mills cannot hold back too much of sugar.

The question now being raised from several quarters is whether the government has done enough for the ailing Indian sugar sector. This question will continue till a decision is taken on the reforms on the sugarcane-side controls.

The Rangarajan committee itself had recommended for immediate decontrol of sugar sales but had suggested discussions over the next couple of years, on rationalisation of cane pricing, area reservation and minimum distance between the mills. Hence, these reforms were not on the agenda of the government now.

It is nevertheless to be remembered that the politics of sugarcane pricing adopted by just about five states in the country who fix state advised price (SAP) over and above the fair and remunerative price (FRP) fixed by the central government, on considerations other than economics, has continually distorted the sugarcane economy and has made the Indian sugar industry uncompetitive in the global market. We may take pride that we pay the highest cane price in the world, but suffer when it adversely impacts our balance sheets. After studying the cane pricing system across the important sugar producing countries and accepting that the revenue-sharing model between mills and farmers has given wonderful results, the Rangarajan committee recommended for a cane price linkage to sugar price realisation.

The recommendation for a 70-75% pay out of sugar price realisation to the farmers would not only give a reasonable return to the investors for the capital invested and the risks taken in the business, but will also assure the farmers of a stable return on time (CACP report for 2013-14 mentions that during the last 10 years, the farmers share of the sugar price realisation varied in the range of 48.5% to 96.4%). Unreasonable sugarcane price not only hurts the sugar industry when the market conditions do not allow them to even recover their costs but also delays payments to farmers, when in the last two years alone, cane price arrears crossed R10,000 crore.

Cane price arrears is the main reason for farmers shifting out of cane, causing cyclicality in sugar production and exposing the consumers to sugar imports at high prices. Several observers argue that when the sugar industry has been freed from the shackles of government controls, why should the farmers not be freed from the controls on sugarcane. Farmers from Maharashtra have already written to the Prime Minister for accepting the linkage formula. Karnataka government has already set up a board consisting of farmers, industry and government to establish the linkage in Karnataka. Obviously, they see that the formula will, in the long run, benefit the industry as well as cane farmers and sugar consumers. If we are to survive in this very competitive global market, especially when the government has allowed free flow of sugar exports and imports, it is extremely important to control unreasonable cane prices. Even though we have a surplus of 15-20 lakh tonnes of sugar this year, our cost of production is so high that we are unable to export the surplus.

Therefore, the next important step for the government, both the central and states, would be to address sugarcane controls and rationalise the cane pricing in line with the globally accepted and successful cane price-sugar price linkage formula, very strongly recommended by the Rangarajan committee also. The earlier this is done, the better it will be for all the stakeholders.

The author is director general of the Indian Sugar Mills Association