The government is set to implement a major overhaul of its sugar pricing policy, a policy that until now had led to distorted and less-than-efficient outcomes in the troubled sugar sector. Earlier, the central government set a statutory minimum price (SMP) for the procurement of sugar. States had the option of increasing this under what was called the state advised price (SAP). Some states consistently opted to use the higher SAP as procurement price, while others used the lower SMP. This obviously led to the development of an uneven playing field for millers across states. Under the new policy, the Central government will have just one procurement price called the fair & remunerative price (FRP), which will take into account cost of inputs and fair returns to farmers. And if states wish (their local millers) to pay more, they will have to bear the additional costs themselves. The government argues that FRP will guarantee a better price to growers. It will discourage states from playing politics with cane pricing. It will also help to wipe off long-standing cane dues accruing to farmers, which mills had to pay, but did not, because of the unreasonable SAP fixed by state governments. Sugar mills are, therefore, quite pleased with the changeshares of major sugar companies jumped by almost 21-30% over the last one monthoutperforming the BSEin expectation of the change in policy.
There may be problems in implementation, though, with resistance from states like Uttar Pradesh and Punjab which have already announced a state advised price (SAP) of more than the proposed FRP of Rs 130 per quintal. These states are unlikely to agree to reimburse the millers for the difference between SAP and FRP. In this battle, the real losers may turn out to be farmers and consumers. The farmers may lose because the revised policy will discourage mills from paying more than FRPthey used to pay more than the SMP to ensure timely and quality supply quite regularly. And the consumers will lose if mills pass on their additional burden to them. At a time when the government should be looking at lower sugar prices, the FRP may actually raise them further. All the FRP will end up doing is adding another distortion to the sugar economy, where the government still decides how much millers can sell in the open market each month. In the current scenario (when production is expected to remain almost 70,00,000 tonnes less than consumption in 2009-10), a deregulated sugar sector would have enabled higher returns to farmers, ensured more sugar for the open market and also encouraged mills to import or optimise their crushing. Instead of meddling with non-market mechanisms, the government should simply let the market set the price of sugar.