As the June 1 deadline to herald the partial sugar decontrol regime draws near, Tamil Nadu has asked the Centre to review its decision or bear the entire subsidy burden on sugar sales through the public distribution system (PDS).
In a letter to Prime Minister Manmohan Singh, Tamil Nadu chief minister J Jayalalithaa said, I request you to reconsider the decision of withdrawing the levy sugar obligation on sugar mills and continue with the existing levy system of sugar in the interest of the public, or to guarantee that the entire difference between the open market price of sugar and issue price in the PDS would be borne as subsidy by the government of India and continue the subsidy beyond 2014-2015 as well.
In April, the Centre had decided to loosen its decades-old control over the sector by granting freedom to mills from supplying subsidised sugar for state-run welfare programmes known as levy sugar as suggested by a panel set up under the chairmanship of the Prime Ministers Economic Advisory Council chairman C Rangarajan last year.
Prior to the decision, mills were mandated to supply 10% of their sugar output for the PDS at just over R19 a kg, while ex-factory prices were ruling around R30 a kg. The Centre further subsidises the sweetener and sells it through PDS at R13.50 a kg.
Under the new system, the Centre had asked states to source sugar from the open market through a transparent mechanism and agreed to provide them a subsidy of R18.50 per kg for the PDS supplies until the fiscal year through March 2015, effectively capping the purchase price of sugar by states at R32 a kg.
Moreover, subsidy will be limited to the quantity based on the current allocation. Currently, states need as much as 2.7 million tonnes of sugar a year for welfare programmes, and Tamil Nadu requires around 1,30,000 tonnes. The state is the fourth-largest sugar producer in the country.
A food ministry official said states are free to purchase sugar from the market at a higher price if they want, but, in such a case, they have to bear the subsidy beyond R32 per kg. This purchase price would be reviewed by the Centre after 2014-15, he added.
Putting a cap on sugar purchase price at a reasonable level was necessary as otherwise, any state would quote any price and manipulations in such a system couldnt be ruled out, said a government official who didnt want to be named.
Stating that there is no clarity whether this arrangement will continue beyond 2014-2015, Jayalalithaa said, The sudden withdrawal of levy obligation on sugar mills will expose the supply of PDS sugar to the vagaries of the market and the resultant volatility. Further, any price fluctuation over R32 per kg in the open market will have to be borne by the state, which is already saddled with a huge subsidy burden.
Surprisingly, among major producers, ex-mill prices of sugar were the lowest in Tamil Nadu on Thursday in the range of R29-29.50 a kg followed by R29.40-30.20 in Maharashtra and R31-32 in Uttar Pradesh, according to industry executives.
Apart from scrapping the levy sugar system, the Centre has also decided to abolish the release order mechanism through which it controls sugar sales in the market.