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Healing the sugar sector and curbing inflation need brave reform.

Mills cannot function sustainably unless sugarcane prices, which are state controlled, are aligned with the price of sugar. (Source: PTI) Mills cannot function sustainably unless sugarcane prices, which are state controlled, are aligned with the price of sugar. (Source: PTI)

The first month of great expectations is over. But no magic is possible in such a short period of time. The treasury is scraping the bottom of the barrel, and reviving growth calls for herculean efforts to put the economy back on the rails. Meanwhile, fears of an impending failure of the monsoon have spiked inflation, which is at a five-month high. In such a situation, the government should undertake path-breaking reform of the economy. But tinkering is what it seems to have begun with.

In the face of the mounting cane payment arrears of sugar mills (to the tune of Rs 11,000 crore), import duties have been raised nearly three-fold, from 15 to 40 per cent. To add to this, the existing sugar export subsidy of Rs 3,300 per tonne has been extended, and additional subsidised loans of Rs 4,400 crore are being offered to the mills. This is an expensive arrangement designed to enable mills to pay the arrears. But this arrangement does nothing to address the core issue — mills cannot function sustainably unless sugarcane prices, which are state controlled, are aligned with the price of sugar. Further, the increase in the import duty could also encourage inflation. Already the prices of sugar have gone up.

When there are already heavy import duties on all manner of agricultural, horticultural and dairy products, further protection seems like a bad idea. To protect consumer interests, the government must now do all that it can to keep retail prices in check. But with several state governments not allied to the NDA, a coordinated plan to check hoarding and price rise will not be easy.

What, then, should be done? As far as wheat and rice are concerned, the FCI buys up about 600 lakh tonnes (a third of our annual output) each year, and off-loads (via the PDS) about 500 lakh tonnes. Not only does the FCI buy up a large amount of the marketable surplus, in the process, it squeezes out the open market. By adding such large quantities to its already overstocked inventory, the FCI itself has become an anti-consumer hoarder. Releasing at least 20 lakh tonnes from the FCI’s surplus stocks is called for urgently. Such a measure will not only reduce food prices, it will also create capital (a whopping Rs 2,000 crore) for a job-creating infrastructure push.

The key to success in an evolving 21st-century economy is effective retail marketing that supplements food production. In the last two decades, food grain output has increased 50 per cent and horticultural output 100 per cent. But marketing hasn’t kept pace. In spite of their imperfections, the FCI and PDS have managed to ensure that wheat and rice are available to all. But as far as fruit and vegetables are concerned, the experience has been bizarre. Both market availability and prices have zig-zag graphs, largely because marketing is regulated by outdated APMC acts. Even when, for example, onion prices shoot up, it does not benefit the producer. Only the middleman benefits.

We need a marketing model similar to the Gujarat milk model for the horticultural sector. That is, we need to eliminate middlemen by getting producers and consumers face-to-face in as many places as possible. There should be outlets in all one million-plus population towns, not merely in the metros.

For the sugar sector, the only cogent long-term solution is to either totally decontrol it (so that prices of all commodities — inputs, outputs and byproducts — are determined by the market) or to takeover the sector entirely (this would involve cane procurement prices being set by the government and manufactured sugar being bought by the FCI and distributed through the PDS). But the latter solution would untenably increase the food subsidy.

A combination of such diverse steps —  offloading some of the FCI’s stocks to increase supply in the market, better marketing of fruit and vegetables via more outlets, totally liberalising both cane and sugar to allow the market to determine prices — would go a long way in addressing the food inflation crisis.

The writer is former chairman and managing director of FCI
express@expressindia.com

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