Surinder Sud: The sugar sector's last resort

Last Updated: Mon, Jan 28, 2013 20:12 hrs

Who does the government want to protect by holding the sugar sector in shackles? It is surely not sugarcane farmers, who get pre-determined prices whether fixed by the Centre (the so-called “fair and remunerative price” or FRP) or by state governments (the state-advised prices or SAP), both of which are far divorced from the market price of sugar. Nor is it the sugar industry that is feeling stifled — unable to take its own commercial decisions. In fact, excessive controls and regulations, besides ill-advised import-export policies, often disallow sugar mills to recover even production costs, as is the case today.

The targeted beneficiaries, evidently, are consumers; essentially, the bulk consumers, such as the beverage industry and sweet-meat makers (halwais), who account for over 70 per cent of the sugar consumption. In the case of the household consumers, the average expenditure on sweeteners is rather meagre — just 2.4 per cent of the monthly household spending in urban areas and 1.5 per cent in rural areas (National Sample Survey data, 2009-10). This is far lower than expenses on edible oils (6.2 per cent in urban areas), pulses (3.7 per cent) or vegetables (6.2 per cent) — all of which are largely free of official stranglehold.

There is, therefore, little logic in persisting with the present intimidating controls and regulations on sugar, or pursuing the policies that artificially depress the prices of sugar while, at the same time, escalate its production costs.

Worse, sugar imports are being allowed on liberal terms, despite ample domestic production, to add to the woes of local sugar producers. Not only is the import duty on sugar kept rather low – just 10 per cent against up to 60 per cent allowed by the World Trade Organisation – imported sugar has been exempted from domestic controls, such as mandatory 10 per cent levy and stockholding restrictions, as well. These are tantamount to favouring imports over indigenous production. The industry’s suggestion for increasing the import duty on sugar to at least around 30 per cent to restrain imports and provide a level-playing field, therefore, merits consideration.

The present misguided sugar policies are, predictably, pushing the domestic industry towards sickness. Most sugar mills in Uttar Pradesh, the country’s second-largest sugar-producing state, are already facing liquidity crunch as the new, steeply raised, sugarcane SAP of Rs 280 a quintal has escalated the sugar production cost to far above the ex-factory price realisation.

The case of the sugar industry elsewhere is not much different. Factories are unable to make prompt payments for the cane procured from growers, resulting in accumulation of unpaid price arrears. Going by the industry’s reckoning, sugar mills already owe farmers around Rs 4,000 crore. This amount may soar to over Rs 15,000 crore by the end of the current crushing season. Even banks are unwilling to lend to the sugar factories because of their tottering financial health.

An obvious consequence of the mounting unpaid cane price arrears would be shrinkage of crop area in the next season which, in turn, would jeopardise sugar output prospects and perpetuate the unwelcome cyclicality of sugar production. What the government seems to disregard is the fact that the fate of cane growers and sugar producers is interlinked — none can survive without the other. The fear that the sugar industry will exploit the cane growers if the government washes its hands off this sector is a myth. The sugar mills will, in fact, do everything possible to keep the cane growers in good humour to ensure steady supply of raw material to run their plants.

The best course for the government under the circumstances is total decontrol and deregulation of the sugar sector. A beginning towards this end can be made by accepting the recommendations of the expert committee on sugar headed by Prime Minister’s Economic Advisory Council Chairman C Rangarajan. This panel has sought to strike a fine balance between the interests of various stakeholders in the sugar sector – cane growers, the sugar industry and consumers – and has been widely hailed for doing so. There is no point in delaying the implementation of this report.

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