Relations between sugar mills in most Indian states on the one hand, and cane farmers along with state governments on the other hand, have traditionally been strained. Most state governments, to curry favour with farmers, hike cane prices to abnormally high levels—as a result, mills can’t clear their dues on time and, to ensure against this, the governments then threaten to jail millers. To fix this, under the UPA government, a panel under former RBI governor C Rangarajan had recommended a more even sharing of fortunes between farmers and sugar mills. He proposed mills pay farmers a certain amount as soon as cane was delivered to them and then, based on their realisations from it over a period of time, a total of 75% of the realisations would be given to farmers. While big cane-growing states like Maharashtra moved to this formula, Uttar Pradesh did not. Based on the Rangarajan formula, over five years, FE had calculated, Uttar Pradesh’s cane mills had paid farmers around Rs 19,000 crore extra. Hardly surprising, then, that UP has the most acrimonious relations between farmers and sugar mills. When Yogi Adityanath became chief minister of UP, the mills owed cane farmers Rs 4,200 crore.
Thanks to a fortuitous chain of events, including planting of higher-yielding sugarcane in the state, the price difference between the central government’s Fair and Remunerative Price (FRP)—generally seen as a fair price—and the State Advised Price (SAP) fell to just around Rs 20 per quintal earlier this year. That is when the central government wrote to Adityanath, advising him to adopt the Rangarajan formula since the FRP-SAP difference was quite low and farmers would find it easy to adapt to it. The UP government, however, did nothing of the sort and today, according to a news story in FE, the sugar industry could once again be headed for a crisis. In just the last five weeks, thanks to a bumper harvest, prices have fallen about a tenth, to around Rs 3,400 per quintal. It is not clear if prices will fall further since the country’s demand-supply balance appears to be okay—though Maharashtra and Karnataka’s production is about 30% below and UP’s is about a third higher than that two years ago. But if prices do fall, UP’s mills will once again start defaulting on payments and the old cycle of defaults and threats will start once again. It is still not too late for UP to move to the Rangarajan formula but, as the election cycle starts—central elections are due in 2019—it will get that much more difficult.