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The sweet spot

Importance of sugar mills in politics has been responsible for confused policy.

Written by Sandip Sukhtankar |
November 14, 2014 12:36:44 am
The level of intervention is such that anyone looking at the sugar market may well believe she has been transported to the pre-1991 control raj. The level of intervention is such that anyone looking at the sugar market may well believe she has been transported to the pre-1991 control raj.

There were two recent significant events in the world of sugar. First, the Supreme Court upheld the Allahabad High Court’s order to force sugar mills in Uttar Pradesh to sell sugar stocks to pay arrears to sugarcane farmers. Second, the results of the Maharashtra assembly elections and the new BJP government threaten to shake up state politics, which are firmly linked to the sugar industry. While the two are seemingly unrelated, a deeper analysis shows how both are important in the context of the complicated web that is the sugar industry in India.

It is difficult not to sympathise with the situation of cane farmers and the subsequent high court and Supreme Court decisions. But this is hardly a simple story in which capricious mill owners and greedy banks are exploiting poor farmers. The real culprit lies farther afield, having to do with perverse government policies in setting excessive sugarcane prices along with prohibitive controls on sales of sugar.

To understand this mess, let us start with sugarcane pricing. Pricing cane is far from straightforward, given characteristics peculiar to growing, harvesting and processing sugarcane. First, since cane takes a long time to grow before it can be harvested, production cannot adjust quickly to demand. Second, after it is harvested and cut, it must be crushed to extract juice within a day, or else it dries out and loses value. This means farmers cannot just cut cane and shop around for the best prices. Finally, there are economies of scale in cane crushing, which means large factories need to optimise the harvest, transport and crushing of cane, and can’t just rely on buying it in spot markets.

Because of this, and in order to incentivise investment in sugar mills, governments have historically given mills local monopsony power through a system of command areas under which farmers were only allowed to sell cane to mills in their area. Even though this system has since been abolished in many places, new mills still cannot be located within 15 km of current ones, and farmers remain beholden to the mills in their area. In order to protect them, Central and state governments set MSPs for cane.

Under such conditions, most economists would agree that some state intervention is warranted. Economic theory, however, clashes with the reality of Indian politics. Populist governments face the constant temptation to raise support prices, particularly in election years, and state advisory prices for cane are often much higher than even the Central statutory minimum price. Overall, India has some of the world’s highest sugarcane prices.

At the same time, India is the largest consumer of sugar in the world. So how does the government meet the need for sugar while keeping cane prices high? Controls on the sale of sugar. The level of intervention is such that anyone looking at the sugar market may well believe she has been transported to the pre-1991 control raj: the government regulates monthly quantities of sugar that can be sold by mills; it controls exports and imports; it forces mills to sell a certain proportion of their sugar stocks at a loss to the PDS. It even mandates that sugar only be sold in jute sacks.

At this point, you would be right to believe that something doesn’t add up with high input but low output prices. You would be wrong, however, to feel too sorry for sugar mills. In order to support this untenable situation, the Central and state governments direct an impressive array of sops towards sugar mills through subsidised credit and other inputs, forgiven loans, loan guarantees, bailouts etc. Such policies contribute to boom and bust cycles in the sugar market.

So why do they continue? This is where elections and politics come in. It is an open secret that, in the major sugar-producing states in India, control of sugar mills — set up as cooperatives — allows one to control rural politics. A recent article in this newspaper described how this “gives political leaders control over economic activity and an opportunity to provide patronage to people”.

Hence, it is the importance of sugar mills in politics that has been responsible for confused policy. This is exemplified by the political manoeuvring following the election results in Maharashtra: a BJP MLA openly admitted that the party was considering “its strategy to get power in this [sugar] sector”. This is not necessarily limited to Maharashtra. Reports suggest that UP Chief Minister Akhilesh Yadav wants to open a sugar mill in Azamgarh, an area where previous mills have failed.

Yet there are some signs of change. After decades of propping up failing cooperatives, Maharashtra was slowly retracting subsidies, leading to the gradual acquisition of these mills by private companies. Private sugar mills now produce almost 30 per cent of the sugar in Maharashtra, a scenario inconceivable 10 years ago. Meanwhile, the Supreme Court verdict could make banks more cautious about lending to sugar mills, making it harder for governments to keep financing unviable ones.

Of course, private mills could also be captured by politicians. Credit from state-owned banks could still be directed to sugar mills. Ultimately, as long as the dual interference by governments on both sides — unreasonably high minimum cane prices and unreasonable limits on sugar sales — continues, so will the volatility and unpredictability.

The writer is assistant professor of economics at Dartmouth College, US 

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