Though at the time of liberalisation in early '90s a whole lot of industries went out of purview of license raj, sugar industry along with a clutch of a few defence-related industries continued to be licensed.

The government's decision on Thursday to delicense the sugar industry practically allows entrepreneurs to set up a sugar mill, provided they are 15 km away from an existing mill, without going through the rigmarole of obtaining a letter of intent from the centre. It also signals the beginning of reforms in an industry which is, perhaps, the most inefficient producer of sugar in the world owing to various controls.

Till recently, to set up a sugar mill one had to apply to the secretariat of industry approvals. The secretariat would then seek state government clearance with respect to the cane availability, spatial and the promoter's capability.

Once state approval is obtained, the industry ministry's licensing committee studies the case and gives a letter of intent. After this, the state government has to be approached again for demarcation of the cane area before the mill can be set up. These procedures took anywhere between one to three years.

But such a circuitous procedure did not deter people from setting up mills, thereby, negating the objective of licensing itself. With sugar being classified as an essential commodity, there was a need to foster orderly growth of the industry and it is for this reason the industry came under the license raj.

What happened was, however, very different. Instead of a measured increase and distribution in capacity, what was witnessed was haphazard capacity creation. The country has about 430 sugar mills and there are about 300 letter of intents pending or in the process of implementation for a domestic consumption of about 145 lakh tonnes. The license raj was exploited by many to seek the letter with the objective of selling it at a later date or to ensure that no other mill is put up near their existing command area.

Compare this with Australia, which has to produce 60 lakh tonnes with 27 mills. These units have an average capacity of over 10,000 TCD as against 2500 TCD or less in India. The lack of economies of scale is a major factor that has made domestic sugar production uneconomical.

Contrary to all belief, the country does not need many more units. A consolidation of existing units with a vertical integration is the need of the hour to make the industry globally competitive. The cause for the horizontal fragmentation was the incentive scheme which allowed mills to sell 100 per cent of their production in the open market for five to eight years, rather than supplying 40 per cent to the government at less than the production cost for public distribution supply. This resulted in clamour for new units when the existing were doing badly.

Suspension of the scheme will put an end to the setting up of new units as under the current economics, any mill, sans incentives, is unviable and no institution will finance the project.

Though delicensing may pave way for reforms, a decontrol is a prerequisite for making it globally competitive. In a era of free market and declining tarrif barriers, the domestic sugar industry is in no position to compete effectively.