After a long time, the ministry of food and consumer affairs have greater leeway to strive for some much-needed reforms, such as raising the price of sugar supplied through the public distribution system (PDS) and the amendments to the Forward Contract (Regulation) Act, as the government has renewed focus on fiscal prudence and attracting investments.
The food ministry had, on several occasions, moved proposals to raise the PDS sugar price, but they were rejected without much debate on fears of political backlash. However, the ministry?s latest proposal to raise the price is expected to be taken up much more seriously by the Cabinet Committee on Economic Affairs (CCEA) in its meeting on Monday, official sources said.
The optimism gained pace after the government staked its political equations last week to go ahead with certain reforms measures, including raising diesel price by around 14% and allowing FDI in multi-brand retail, which resulted in the Trinamool Congress severing the alliance. Still, the government stayed the course.
Prime Minister Manmohan Singh on Friday stressed the need to trim subsidies to address fiscal deficit, and followed it up on Saturday with emphasis on creating ?a climate that attracts investment? and ?fair and effective regulatory institutions?. The government’s subsidy on PDS sugar is more than R3,000 crore a year.
A senior executive with a Uttar Pradesh-based sugar mill said if the CCEA decides to raise the PDS sugar price, which has remained unchanged at R13.50 per kg since 2002, it would also send a positive signal about the government?s willingness to go ahead with more serious reforms in the sector.
A panel, set up by Singh to explore possibilities of shedding decades-old state control over the sugar sector, is widely expected to soon recommend the scrapping of mandatory supplies of the sweetener by mills and co-operatives for state-run welfare programmes, also known as levy obligation.
The sources said if the government decides to scrap the levy mechanism, it would first have to consider raising the PDS sugar sale price, or else subsidy burden would skyrocket. Currently, mills and co-operatives are mandated to supply 10% of their output for the PDS at around R19.50 per kg, which covers roughly 70% of their cost of production, and the centre further subsidises it for sale through ration shops.
The government needs around 2.7 million to 2.8 million tonne of sugar a year to meet the PDS demand. According to the food ministry, the government will be free of any subsidy burden if PDS sugar price is priced at R25.37 per kg, although the CCEA will take a decision on the sale price. The Centre has to bear a subsidy of R270 crore to R280 crore annually for selling sugar at every rupee below this threshold.
Moreover, with the exit of the TMC, commodity market participants are now optimistic that the much-awaited amendments to the Forward Contracts Regulation (Amendment) Bill 2010 would be cleared soon.
Last month, the Cabinet had deferred a decision on the Bill after TMC MP and then railway minister Mukul Roy wrote to the Prime Minister to hold it until a broader consensus?among political parties as well as states?was evolved.
The Bill, which provides for tougher oversight and freer entry of financial institutions, as well as launches of new products such as options and derivatives, has hung fire for a long time now, while periodic bans on trading in some agricultural futures in the pretext of stemming inflation have fed regulatory cynicism. The delay in approval is also hindering investments in the commodity futures market.
