Column : Freeing sales can sweeten reforms

Written by Abinash Verma | Updated: Feb 12 2013, 05:39am hrs
The Rangarajan committee, set up by the Prime Minister for studying and recommending reforms in the Indian sugar sector, submitted its report in October 2012 on the roadmap for its growth. Clearly dividing the government controls into two partssugar sales-side and sugarcane-side controlsthe committee suggested a two-phased reform. Establishing that the controls on sugarlevy sugar obligation on mills, regulated release mechanism, export-import controls and compulsory packing of sugar in jute bagsare harming the sector, the committee has recommended their immediate decontrol/reforms in the first phase. The cane-side controls, exercised by the states, and which directly affect farmers and include pricing of sugarcane, cane area reservation and minimum distance between mills, have been suggested for further discussions and reforms in the next 2-3 years.

The government in May 2012 had moved from quantitative and time restrictions/bans on sugar exports, to a flexible tariff rate policy to manage sugar availability in the country. The sugar packaging requirements have also been relaxed, from a 100% use of only jute bags till last season, to 40% from the current season. The other two sugar-side controls to be taken up in phase 1 itselflevy sugar obligation on mills and regulated release mechanismare on the governments agenda next, for which a decision is expected in February 2013. These controls are not only unfair to the industry, but also to the 50 million farmers and their families. They harm the consumers too in the long run. The Rangarajan committee has, therefore, recommended their immediate abolition.

No other industry in India, or any sugar industry abroad, is required to give up a part of its produce to the government for the PDS, as levy, at 60% of its cost of production or at two-thirds the open market price. Mills have to also carry the unlifted obligation physically by two years, and supply it thereafter at previous years price, foregoing the extra carrying cost and interest burden borne in the process. The industry suffers a direct annual loss of over R3,000 crore, which is either borne by the mills by way of lower returns on their produce, the farmers by way of lower cane price, the consumers by way of increased sugar price, or partly by all the three. Reduced paying capacity of mills translates into reduced cane price to farmers. The Rangarajan committee agrees that the open market consumers cross-subsidise the levy sugar consumers (by almost R1,000 per tonne). Why should the industry, farmers or housewives bear the financial burden of a social welfare programme of the government To make things worse, there are reports of levy sugar diversion into the open market, logistic problems of making rake-loads, delays in levy price fixation, disputes with procurement agencies, etc, making it an inefficient system. Is it not because of these problems that some states like Bihar and Jharkhand are not able to procure and deliver sugar to their BPL families

Why do we, then, not have a similar system of procurement and funding for sugar too, like we have for wheat, rice, pulses, etc A R3,000 crore subsidy for sugar (additional burden if the government buys its levy requirements from open market) is minuscule when compared to the current R80,000 crore food subsidy bill, expected to go up to R1,25,000 crore after the Food Security Act is implemented. The change will ensure a financially stronger sugar industry, and will also give another over R2,000 crore to our farmers annually. The cross-subsidisation from middle class housewives will also end.

The regulated release mechanism too, under which the government decides how much sugar each mill has to and can sell in a month/quarter, purportedly to control sugar prices, outlived its utility long ago. No other industry in India is subjected to such an archaic control. The Rangarajan committee has also recommended the immediate abolition of this control and allow market forces to determine the demand, supply and the price of sugar, instead of leaving it to a few officials to do. Ministry records will establish that in the past 3 out of 4 times the released quantities had to be revised or carried forward, clearly confirming that this job can best be performed by market forces. The food ministry, in a Cabinet note in 2008, also accepted that the mechanism is unable to control prices and had recommended for its removal.

Sugarcane is crushed 6 months of the year, when cash flow needs are the highest to pay farmers on time and avoid cane price arrears. But because of the regulated release mechanism, mills are unable to plan their cash flows or sell sugar as per their needs or when the market offers the best opportunity. Therefore, sugar stocks start building up from December to April, blocking R50,000 crore in the inventory, and with interest on working capital at 14-16%, costs escalate unnecessarily. Already burdened with high costs of cane, the additional burden of high inventory only adds to the sugar prices or losses of mills and delays payments to the farmers.

The above disadvantages not only make the Indian industry uncompetitive worldwide, but they also mean lower and delayed payments to farmers and costlier sugar for domestic consumers. Cane price arrears cause cyclicality in sugar production, frequently exposing Indian consumers to highly priced sugar imports. Such volatility is not good for the domestic industry, farmers or consumers. With these phase 1 reforms, mills will get their fair returns, farmers will get a remunerative cane price on time and consumers their sugar at a reasonable price: a win-win situation for all. Investments in the sector would ensure better quality sugar and falling costs, but, for that to happen, there has to be freedom in sugar sales. Only then can we better plan the second phase of decontrols on sugarcane. As suggested by the Rangarajan committee, the sector would then be on course to grow to a R1,60,000 crore industry in 4-5 years from the R80,000 crore today, at a healthy growth rate of 20% per annum.

The author is the director general of the Indian Sugar Mills Association