Opinion Sweet and sour

Till the beginning of the 21st century,most sugar mills in UP were state-owned. Pandering to the cane grower’s lobby,successive state governments kept increasing the price to be paid by these mills to the growers. Rising cane prices led to mounting losses for the sugar mills,which the state government dutifully absorbed. The few private sugar mills fell in line,though some of them also had to close down. These losses led to cane price payments arrears,which were paid off after a delay. This delay caused financial distress among growers,which in turn fuelled the demand for higher cane purchase prices.

This bizarre situation got even more complex once the UP state government started privatising sugar mills. The dilemma now centred on who would bear the losses as cane purchase prices rose,recovery rates fell and there were,at times,excess sugar stocks. Over the last four seasons,cane payment arrears in Karnataka have moved from Rs 600 crore to Rs 1,200 crore,in Maharashtra from Rs 500 crore to Rs 900 crore,and in Tamil Nadu from Rs 550 crore to 950 crore. In UP,it has gone up by six times,from Rs 1,385 crore to

Rs 7,779 crore.

Mills are compelled to buy cane at the state advised price (SAP),which has no legal basis. In UP,the SAP has more than doubled,from Rs 125 to Rs 280,in the last six years. Yet sugar prices have increased at a lower pace. Consequently,the share of cane purchases in the sugar output cost price has jumped from 61 per cent to an unbelievable 97 per cent.

Today,the state is torn between the need to not let down cane growers (which means continuous escalation of cane purchase prices),the need to not let down consumers (which means knee-jerk import-export restrictions to ensure that there is no deficit in the market) and the need to stand by the sugar millers. It must be noted that export restrictions queers the pitch both for the sugar industry and cane growers,denying them the joys of free-market pricing.

Since the middle of 2012,the import duty has hovered between 10 and 15 per cent. The sugar industry would like it to be hiked to 50 per cent,given its excess stocks,but government will not do it as cheaper imports will ensure that prices remain low. This might ultimately harm the cane-grower too,but on the eve of elections,with onion and tomato prices shooting up,the government will do everything to keep things stable for the consumer. But cane growers are also getting restless; cane has to be harvested to clear the fields for wheat. So the UP government had to devise a solution to satisfy both the mills and the growers. It has agreed to the cane growers’ demand that the purchase price not be lowered below Rs 280 per quintal,against the sugar mill’s offer of Rs 225. But it softened the blow on the sugar mills by exempting them from taxes of Rs 11 on each payment of Rs 280.

While this has bought peace for the time being,the effective rate of Rs 269 is more than the Maharashtra rate of Rs 265. This is when Maharashtra’s recovery rate of 14 per cent is better than UP’s 9 per cent. With lower SAPs and higher recovery rates,sugar mills in Karnataka,Maharashtra and Tamil Nadu will out-price UP sugar mills. This regional imbalance will blow up one day since sugar prices are supposed to be uniform all over the country.

In the long run,if there cannot be complete control,the only solution is complete decontrol. For instance,in wheat and paddy procurement,the state-owned Food Corporation of India (FCI) copes with rising procurement prices only because of the annual food subsidy. Imagine what would happen if the FCI were to be privatised,with no clarity on who would bear the cost of artificially hiked-up procurement prices.

The writer is former chairman and managing director of FCI

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