Not so sweet

In the sugar sector, one bad decision paves the way for another, and the consumer must bear the brunt.

By: Express News Service | Published: June 25, 2014 12:05 am

The Union government announced a series of measures to prop up the tottering sugar industry, which has been squeezed for years by the arbitrary fixing of input prices by state governments. On Monday, a few months shy of the Maharashtra assembly elections, Food Minister Ram Vilas Paswan announced that the import duty on sugar would be raised from 15 to 40 per cent and that the interest subvention scheme for loans to sugar mills will be extended from three years to five. This implies that the mills, which were already getting subsidised loans of Rs 6,600 crore, as decided last December, will now get an additional Rs 4,400 crore. In return for this benefaction, the mills must undertake to use these loans exclusively to clear the arrears owed to sugarcane producers, which added up to Rs 11,000 crore on May 31. The price of sugar has already increased in wholesale markets by Rs 60 per quintal in response to the hike in the import duty, and is expected to rise further. But there is no such thing as a free lunch. Buyers would be bearing the brunt of this palliative for the sugar mills, which are haemorrhaging due to the irrationally high state-advised prices (SAPs) for sugarcane. At a time when inflation is uppermost on policymakers’ and consumers’ minds, the government’s measures are especially ill advised.

Certainly, something needs to be done, given the huge losses of sugar companies, running into thousands of crores. The status quo — the Centre announces a fair and remunerative price (FRP), currently Rs 210 per quintal, but the state government announces a higher SAP at which mills have to buy sugarcane — is untenable. UP’s SAP, for instance, is Rs 280 per quintal, the highest in the world, even though its recovery rate is among the lowest. Companies find it unviable to operate at these prices, and the measures announced don’t address the core problem. The Rangarajan committee showed a feasible way out. It suggested that mills pay cane producers the FRP upfront and 70 per cent of all realisations at the end of the season, thereby doing away with SAPs. By not making a state’s implementation of the Rangarajan formula a precondition for accessing the subsidised loan scheme, the government lost a valuable opportunity for reform.

The other measures, including raising the mandatory ethanol blending cap to 10 per cent in the long run, may also not help. Currently, in contrast to the mandated 5 per cent, PSUs blend only 2 to 3 per cent of ethanol in petrol. The government will have to exert itself to realise the 10 per cent cap. Clearly, in the sugar sector, the government needs to summon the political will to break with the bad economic policies of the past.

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