Will protect mills/farmers, but need reforms in UP, etc
The prime minister’s office (PMO) asking the food ministry to explore the possibility of imposing a cess on sugar is a good idea since it will help ameliorate the distress of both farmers and sugar mills in times of a collapse in prices. The food ministry will have to find out whether, post-GST, a cess can even be considered, but if it is, it will jell with the Rangarajan reforms implemented in most large cane-growing states, except Uttar Pradesh (UP). Take the case where, based on the recommendations of the Commission for Agricultural Costs and Prices (CACP), the government notifies a fair and remunerative price (FRP) of Rs 255 per quintal, which sugarcane mills have to pay the farmers. Under the Rangarajan formula, 70% of the proceeds from all sugarcane and various byproducts, like molasses, have to be given to the farmers—so, if mills earn `400 per quintal at the end of the season, the farmers’ share will be Rs 280 and the mills will have to pay them another `25. But, if sugar prices crash and the farmers’ share works out to Rs 240, the cess/fund can give the mills `15, and they will continue to make payments to the farmers on time. Ideally, the cess should be kept as low as possible, else it will raise consumer prices unduly—if it so happens, the cess is not possible, the government will have to think in terms of making a contribution from the budget.
What is more important, however, is to ensure the government pushes sugarcane reforms. UP, for instance, forces mills to buy cane at a state advised price (SAP) of Rs 320 per quintal. Taking the FRP into account, and the average cane-to-sugar yield in the state, the SAP should have been Rs 290 at most—that is, mills are paying farmers Rs 30 per quintal extra, or Rs 3,200 crore in the season. Till this is fixed, the industry will always find it difficult to pay farmers their full dues and they, in turn, will keep agitating—indeed, till states are allowed to set their own SAPs, instead of adopting the Rangarajan revenue-sharing formula, they will always be tempted to fix higher prices, driving the industry further in the red. Also, at some point, the government needs to do away with the current ‘cane area’ concept, where all farmers have to sell to a particular mill and each mill has to buy all the cane from all farmers in its ‘cane area’. Once this happens, farmers will migrate to the most efficient mill since that will be able to pay them the most for the cane. The flip side is that, with mills no longer obligated to buy from farmers—and at a price fixed by the government—there will no longer be any price security for farmers; at a time when the government is planning an MSP-based deficiency payments system, it is unlikely it will be in a hurry to carry out this reform.