Sugar’s very bitter challenge

A government led by ‘an accidental prime minister’ announced bold reforms for the sugar sector in April 2013. The levy obligation on sugar mills was abolished and state governments were allowed to purchase sugar from open market for distribution under PDS. 

The regulated release mechanism of open market sale of sugar was also abolished. It meant that the food ministry would not decide how much sugar a mill could sell in the open market every month. 

At one stroke, the much coveted sugar division of the Ministry of Food in Krishi Bhawan lost its clout with sugar mills. 

In June 2018, the government used the powers under the Essential Commodities Act and brought back the monthly release mechanism. In order to check falling prices of sugar, the government decided that a mill could not sell refined sugar at less than Rs 2,900 per quintal. 

The idea was to check the decline in open market price of sugar. Krishi Bhawan regained its seat on the table.

It is true that the circumstances, both global and domestic, contributed to reversal of policy of deregulation. And it is possible that any other government may also have resorted to similar action.

The present crisis of delayed payments to sugarcane farmers is caused by excessive production of sugarcane. 

Since sugarcane remains the only crop, in addition to wheat and paddy, whose farmers receive a fair price, farmers prefer it to other crops. 

Even through a crisis of cane payment, the area under sugarcane has increased from 47.32 lakh hectare during 2017-18 to 51.58 lakh hectare during 2018-19. In 2017-18, India produced 32.2 million tonnes of sugar. 

This year, despite the drought in parts of Maharashtra, the estimated production is 31.5 million tonnes. With domestic consumption of about 26 million tonnes, India is staring at another year of excess production, low sugar prices and delayed payment for cane.

The FAO sugar price index fell about 22 per cent in 2018 due to higher global production of sugar. Lower energy prices have also contributed to this, as use of sugarcane to produce ethanol goes down when crude prices are lower.

In an election year, mounting dues of sugarcane farmers would be a source of serious worry to government. In UP, the sugar mills still owe Rs 1,210 crore for cane supplied by farmers in sugar season, 2017-18. In addition, farmers are owed Rs 5,400 crore for cane supplied so far in 2018-19. 

Even in Maharashtra, sugar mills owe Rs 5,320 crore for cane supplied this year. Farmers are staring at the possibility of getting cane price in installment. 

The mills argue that at current fair and remunerative price (FRP) fixed by the government, the production cost of sugar comes to Rs 3,400 per quintal and they are in no position to pay full FRP at one go. 

They want the government to raise minimum sale price of sugar from Rs 2,900 per quintal to Rs 3,400 per quintal. But in the run up to elections, it is unlikely that the government will risk inflation in sugar.

No other sector of agro-processing is as pampered as sugar. Ironically, no other sector is as tightly regulated as sugar. 

For example, soybean farmers do not receive similar support from government when prices fall. Moreover, income from growing sugarcane is more than income from most other crops and farmers prefer to grow sugarcane even if cane payments are delayed. 

In every cycle of low sugar prices, sugar barons, both in cooperative and private sector, have been able to obtain handsome incentives from government. 

In 2017-18, the government announced a package of incentives, including assistance of Rs 5.50 quintal of cane crushed for sugar season to offset the cost of cane amounting to about Rs 1,540 crore. 

Reimbursement of carrying cost of Rs 1,175 crore for buffer stock of 30 LMT in sugar season 2017-18 was also announced. 

In addition, the UP government provided Rs 4,000 crore as soft loans to private sugar mills. Farmers of other crops used in agro-processing can only dream of such benevolence!

The most promising decision of the government was to provide soft loans of Rs 6,139 crore through banks to sugar mills for setting up new distilleries and installation of incineration boilers to increase ethanol production capacity.

Interest subvention of Rs 1,332 crore was also provided. By 2019-20, India is likely to achieve 10 per cent target of ethanol blending of petrol. 

The National Policy on Biofuels – 2018 envisages a target of 20 per cent ethanol blending by 2030. Cost effective manufacture of ethanol from agricultural waste is still not conclusively proven so government should provide additional incentives for manufacture of ethanol by sugar mills. Additional ethanol capacity of 200 crore litre is expected by 2021. This will enhance blending of petrol to 15 per cent.  

In the long run, the structural problems of sugar sector are, however, not likely to be addressed by ad-hoc year to year decisions. The Rangarajan committee had shown a way of liking sugarcane price to price of sugar. 

If cane price is fixed at 70 per cent of revenue from sugar and by-products, the farmers can get FRP when sugar prices are high. 

If they fall short of FRP, the balance can be met from a fund, which has to be created by a cess on consumers and government funding. In years of high prices, a part of sugar price has to go to the fund.

An opportunity to reform sugar sector on the lines suggested by Rangarajan Committee was presented in 2016-17, when sugar prices rose above Rs 4,000 per quintal. But the government did not take the initiative to build consensus on reform and instead brought back stock limits. 

Author is Visiting Senior Fellow, ICRIER. He retired as Union Agriculture Secretary