Sugar Crisis: Beyond the ‘sweet’ package, opportunity for reform

Published: June 8, 2018 4:38 AM

The Centre could start by scrapping the sugarcane and sugar control orders (both of 1966 vintage), and free the industry with effect from a prospective date in 2020/21.

The government has taken note, albeit late, and announced a package worth Rs 8000 crore; with tested and tried ad hoc solutions, and nothing for the long term.

In an earlier article published by Financial Express on April 18, 2018, I had pointed out the crisis looming large over the sugarcane fields. The government has taken note, albeit late, and announced a package worth Rs 8000 crore; with tested and tried ad hoc solutions, and nothing for the long term. A classic case where the immediate takes precedence over the important. A band-aid is good optics!

Buffer stocks, restricted release mechanism, and export incentives are time-tested instruments of interventions, typical of bureaucratic knee-jerk reactions. Discretion and misuse are embedded in these. These steps would bring back the control regime and vest a lot of power in the hands of the lower bureaucracy. The wheel seems to have turned full circle. Sugar mills will now ‘run’ to the food ministry every month for their release quotas.

But, who ensures that the quotas are strictly adhered to? There is no mechanism either to ensure monthly releases, or detect violations. In any case, ‘release’ only means taking sugar out of the factory warehouse and not necessarily a sale to consumers: that is the catch! To be fair to the government, medical emergency procedures involve saving lives, be it with oxygen or cortisone!

The sugar industry is in the emergency ward and it is the sugarcane farmer who is at risk, and hence, emergency procedures are under political compulsions. But, why did we not see this coming? Let the band-aid solutions continue. The bigger question is: does this crisis provide an opportunity for bold reforms?

The Rangarajan committee (of which this author was a member), suggested a revenue sharing formula based on the price of sugar, molasses and bagasse. It suggested that the farmers be paid a fair and remunerative price (FRP) as fixed by the government and an additional amount as a share of the revenue generated by the sugar mill. There could be a year where the FRP itself could be higher than the amount calculated under this formula. This would call for price deficiency payments either out of a cess, a special fund, or the budget.

The Rangarajan committee recommendations have to be viewed in the context of the conditions prevailing then, in the sugar sector. They were primarily:

(a) the operation of the Central sugarcane control order and the State sugarcane Control Acts which pre-date the central order,

(b) the area demarcation provisions of the various control orders restricting the sale of sugarcane to non-specified mills,

(c) the need for orderly harvesting and the supply of sugarcane to mills for better recovery of sugar,

(d) the need to encourage sugar mills to provide technical and extension support to farmers in their “command” area,

(e) the serious trust deficit between farmers and sugar mills and the need for an intermediary mechanism to ensure fair prices and timely payment.

Times have changed. Conditions in the agriculture sector have also changed. Water has become the most crucial input for agriculture. An ICRIER study by Gayatri Mohan and Ashok Gulati has pointed out the serious water crisis in sugarcane (and some rice) areas, necessitating a strategic rethink of water use and conservation policies.

Overall agricultural growth, as pointed out in the paper, will depend upon intelligent and careful use of water. Therefore, policies relating to agriculture, be it sugarcane or rice, will have to take into account the evolving scenario of sustainable water availability.

Is it therefore time for us to take a clean break from the past? This crisis provides an opportunity. The sugar industry could be made to shift from the current control and protection mode to a contract farming mode under the new Model Contract Farming (Promotion and Facilitation) law. The model law takes care of all major concerns referred to in an earlier paragraph: it provides for

(a) an enforceable contract between sugar mills and the farmers,

(b) an effective intermediary mechanism to enforce the terms of a contract, including payments,

(c) an agreed price for the produce, in advance, so that farmers are able to take planting decisions well in time, and

(d) an orderly harvesting arrangement as part of the contract.

Trust, the basis of long-term sustainable relationships, is what the mills have to strive to build. Such a bold initiative would unburden the government from intervening in the sugar sector during every crisis. After all, there is no credible answer to the question as to why the tax payers in the country should pay for the unscientific and ad hoc fixation of state advised prices (SAP) in favour of sugarcane farmers, who are better off than other farmers, that to in two or three states.

The Centre could start by scrapping the sugarcane and sugar control orders (both of 1966 vintage), and free the industry with effect from a prospective date in 2020/21. This would give sufficient time to the industry to shift to a contract farming format. State governments would have hopefully, by then, passed laws enabling contract farming. Sugarcane Control Acts in existence in the states (since 1953 in U.P), can be repealed. The limits imposed by land ceiling laws can be removed to enable mills to own land and bring economies of scale. Water pricing can be introduced.

The government can sweeten the deal by seriously encouraging use of ethanol by not only mandating, but by changing the distribution structure. It can also support the design and manufacture of ethanol-driven pump sets for farms and ethanol-driven tractors.

Government can also state clearly that sugar exports will not be banned as part of agri-export policy, thereby giving a stable export regime. If an orderly shift to contract farming in this Rs 80,000 crore industry transpires, it could become the template for the take-off of many more agri-processing based contract farming options.

The agriculture ministry should see this as an opportunity and convert this crisis into a trail blazing success story. The change could lead to a sustained increase in farmers’ incomes, not only in sugarcane, but in many other crops!

By T Nandakumar 

The author is Former secretary, agriculture and food ministries and currently visiting fellow at ICRIER.

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