While there has been considerable liberalisation in agriculture, sugar tastes of the ancien regime. The government, as before, fixes the quantity of sugar that each mill can sell in the open market every month. One of the reasons for this strict control is the fear of what sugar price fluctuations can do to inflation indicators?sugar has a 3.6% weight in the WPI. But this is terribly misguided. The sugar industry, worth around Rs 30,000 crore and supporting more than 7.5% of the rural population, needs to be freer to boost its capacity. Of course, any decontrol of the sugar sector is not easy, given the massive political implications of any reformist decision. But politicians, some of whom are sugar entrepreneurs, are looking at an unsustainable status quo.
Take the pricing of cane. The Union government fixes the minimum price at which millers have to buy cane from farmers, but state governments also have the power to fix their own minimum cane price. This becomes a politically contentious issue, because no party would like to be seen on the wrong side of farmers. The government also fixes the minimum distance at which a sugar mill can be set up to prevent cornering, issues orders to regulate and, until a few years back, even used to determine the amount of sugar that each mill can export. This long list of controls does more harm than good. The hasty decision to ban export last season, when international prices were soaring, is a typical example of official policy holding the sugar industry back. The ban denied millers and farmers profits they should have been entitled to. The government?s decision to create a buffer stock of around 5 million tonnes was also questionable, though it did temporarily push prices down and provide the government with a cushion to absorb future spikes. Unfortunately, it also led to massive carryover stocks, which the government is now asking mills to liquidate in the open market. The government is obviously concerned about large vote banks in states like Uttar Pradesh, Maharashtra, Tamil Nadu and Andhra Pradesh. But markets are best at determining appropriate quantity and price outcomes. It makes little sense for the government to try and do so, especially when farmers will benefit from liberalisation. It?s time to end artificial controls.
