While it remains to be seen whether MSP scheme works, the ethanol plan leaves original high-sugar-price issue unresolved
In an attempt to quell agrarian distress—agriculture GDP rose just 2.4% per annum in the NDA’s first four years versus 5.2% in the UPA’s last four—the government finally announced its MSP-based deficiency-payments scheme to boost farmer income; the actual MSPs for various crops were announced in July. How the scheme will work, and how effective it will be, is not clear since, against FE’s estimate of the scheme costing as much as Rs 175,000 crore in a year—if market prices fell to 20% below the announced MSP—the government has allocated a much smaller amount. This means that the government either expects a full rollout will take a few years or that it estimates farmers will sell only their marketable surpluses—logically, however, with MSPs much higher than market prices at the time of harvest, farmers should want to sell their entire crop and buy back what is needed at the lower market prices later.
Since procurement takes place in just 4-5 states today, how much money will actually be required for the scheme will depend on whether the other states are able to put together a mechanism for giving farmers a payment should market prices fall below the MSP. The impact on exports also remains to be seen—based on the MSPs announced in July, Indian rice and cotton will become more expensive than those in overseas markets, potentially hitting exports in a big way.
On the face of things, the dramatic hike announced in prices of ethanol that is to be bought by PSU oil companies—to blend with petrol—looks like a game-changer since it will create another demand stream for sugarcane production, and will help cash-strapped sugar mills clear their dues to cane farmers. A price of Rs 52.43 has been fixed for each litre of ethanol produced from B-heavy-molasses—it will remain at Rs 43.46 for the ‘C’ grade—and, based on existing and planned distillation capacity, this can absorb ethanol that is equivalent to around 8-10 lakh tonnes of sugar. India’s production next year is estimated at around 350 lakh tonnes and the annual excess production at around 70-80 lakh tonnes. The larger problem, however, is that the policy looks unsustainable. For one, at Rs 52.43—and Rs 59.13 in case ethanol is produced directly from sugarcane juice—the price is quite high; once crude oil prices fall from today’s levels, ethanol supplies will cost more than petrol. Also, India’s government-mandated cane prices are already 70-80% higher than those of Brazil, the world’s largest supplier—while this means India cannot export sugar, nothing has been done to signal to farmers that they need to move away from sugarcane production. So, while the new policy will ensure sugar mills will earn Rs 3,000-4,000 crore more each year, the build-up of cane arrears will continue as in the past.
With elections approaching, and the government desperate to ensure the agrarian vote, there may not have been much else it could have done, but after the elections, it needs to push for larger agriculture-market reforms. Policies that push prices above market levels—as in the case of rice, cotton and sugarcane already—will only aggravate matters. What is required is genuine reform, not just palliatives; indeed, if local prices overshoot global ones, several billion dollars of existing export markets in rice and cotton-based products will also be compromised.