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BJP’s Sugar Challenge ahead of Maharashtra elections

Ignorance of the subject coupled with vote-bank concerns (remember that cane producers form significant vote-banks in several States) of our polity has pushed the Indian sugar industry to the brink — probably to the point of no return.

BJP led NDA Government faces a policy and political challenge on Sugarcane pricing with Maharashtra elections imepending. Sugar Cane pricing in the best of times is a complex exercise. If input cane prices are fixed too high, sugar industry loses its viability. This is more pronounced when global forces are at work. Elementary economics explains when input prices are arbitrarily fixed and output prices are market determined there is bound to be a meltdown, sooner than later.

Naturally unviable sugar mills are unable to pay cane growers. It may not be out of place to mention that estimates on unpaid cane arrears by sugar mills across the country range anywhere from Rs 6,000 crore to Rs 10,000 crore. Farmers are paradoxically the ultimate losers of such irrational cane pricing in India.

Politicians in India unfortunately do not realise this basic economics. Ignorance of the subject coupled with vote-bank concerns (remember that cane producers form significant vote-banks in several States) of our polity has pushed the Indian sugar industry to the brink — probably to the point of no return. With Assembly election in Maharashtra around the corner, the sugar industry issue promises to assume importance.

It may not be out of place to mention that should cane prices be fixed too low, the sugar industry again would be the ultimate loser as cane growers could move to other viable crops.

And remember, if high cane prices are passed on to the ultimate consumer, domestic sugar prices will shoot through the roof. That would necessitate sugar imports leading to a spike in international sugar prices too – a situation that the international sugar lobby is keenly awaiting, probably working and definitely praying for.

Needless to emphasise, the biggest challenge for our policy framers is to fix cane price optimally – one that ensures viability to both the cane growers and sugar mills while addressing the concerns of the other stake-holder – viz., consumers.

A Legal Conundrum
What adds fat to the fire is that determining cane prices falls within the Concurrent List of our Constitution. That means that the Union Government has as much right to mess with the situation as State Governments! And believe me, on this count, neither the Union nor State Governments have underperformed.

It may be noted that the Essential Commodities Act provides powers to Central Government to control production, supply and distribution of “Essential Commodities” which include sugarcane. Thus, the Central Government is empowered to pass an order under this statute if it is of the opinion that it is necessary or expedient to do so to maintain or increase supply or for securing their equitable distribution.

Consequently, in exercise of its powers conferred on it by the Essential Commodities Act 1955 the Central Government brought out The Sugarcane (Control) Order, in 1966.

This Order, over the years, guaranteed a Statutory Minimum Price [SMP] – payable by the sugar producers to the cane growers. Though the computation of SMP was far from scientific it was nevertheless done with some basis by the Committee on Agricultural Cost and Prices [CACP]. To this extent there is some legitimacy associated with SMP.

This is where things turn extremely complex. In this scenario, State Governments naturally feel left behind despite a Constitutional right to fix cane prices! To “remedy” the limitations of SMP, some State Governments have leveraged this Constitutional anomaly to announce arbitrary compensation [called State Advised Price – SAP] to cane growers – some through legislation and some by merely issuing fiats.

What is worrying is that it is precisely because of such arbitrary policy formulations, sugar production has become extremely un-economical in India. Uttar Pradesh under Mayawati [as is the case with Tamil Nadu] regime is a classic example of how such reckless populism of increasing cane prices over and above what the industry can bear has dynamited the economics of sugar industry.

The net result of this imbroglio — as the crushing season is about to begin shortly in the first week of October, nearly two-thirds of mill owners in UP have reportedly given closure notice. Why run the risk of producing sugar when it is apparent that producing sugar is completely unviable?

However, there is an even more serious risk beyond sugar industry collapse, writing off of loans by bankers etc., to social unrest in UP – a very sizeable community of farmers, close to a million, are dependent on sugarcane for their livelihood in UP and prolonged closure of mills/delayed crushing will only hurt the farmers more.

What is galling is that UP offers one of the most fertile lands to produce sugarcane and yet runs the risk of such closure. Trust our politicians and bureaucracy to convert victory into defeat.

A Possible Solution
Constitutional niceties apart, the fact remains that this dual pricing mechanism by State and Central Government — both being unscientific or arbitrary is irresponsible economics. The UPA Government realised this and introduced the concept of a Fair and Remunerative Price [FRP] payable by sugar mills to cane-growers. This was introduced in October 2009 by an Amendment to the Sugarcane Control Order, 1966.

This idea of FRP was a generational leap over the traditional SMP as it was a comprehensive formula taking care of the overall cane pricing mechanism including profits. Having fixed a scientific and just pricing mechanism for cane, the UPA Government also simultaneously mandated that SAP announced by any State Government over the FRP declared by the Central Government was to be paid by the former directly to the cane-growers. The intention was obviously to curb policy excesses of State Governments.

Despite the apparent economic logic embedded in this policy, this idea of making States pay was withdrawn within weeks in January 2010. That in turn allowed State Governments to once again announce SAP and increase cane prices recklessly when already FRP – the new liberal pricing formula and not the old archaic SMP was in force.

This policy “U” turn of the UPA is at the root of the present conundrum in sugar industry.

Meanwhile, to balance conflicting interest of the cane growers and to simultaneously ensure viability of sugar mills the UPA Government formed the Rangarajan Committee to “comprehensively look into all the issues related to the regulation of the sugar sector.”

This committee after studying various alternatives suggested the Central Government to move to a Revenue-sharing formula. Accordingly, 70 per cent of the realisations of sugar along with by-products, is to be paid by sugar mills as a price for sugarcane. In the alternative 75 per cent of the realisations of sugar alone is to be paid.

It may not be out of place to mention that the some State Governments — Karnataka and Maharashtra — have adopted this formula recommended by the Rangarajan Committee [and tweaked the same to suit local conditions] with reasonable degree of success.

In the alternative, some States [UP and Tamil Nadu] that have kept announcing SAP in excess of FRP, have paradoxically seen decreasing production of sugarcane while some [Maharashtra and Karnataka] that actually announced moving to a sharing formula are seeing increasing acreage coming under sugarcane and bumper crops.

Can there be greater proof of what a win-win sharing can do vis-a-vis mere tweaking of cane prices to benefit the farmer?

In fact, the ideal position would be for the Central Government to first announce FRP based on various factors as mentioned above. This should be an indicative price payable to the farmers – the worst case scenario. However, should 75 per cent of the sugar price realised by the sugar mills be higher than the originally calculated FRP, the sugar producer should be compelled to pay difference.

Such an arrangement would ensure that the farmer is protected from through a guaranteed minimum FRP while allowing him to partake in the upside in sugar industry. Should the State Governments feel that even this is inadequate they could announce a SAP but directly pay to the farmers. Given the precarious state of their finances, it is obvious none of the state governments would commit any such financial harakiri.

But adopting such simple formula could minimize the role of the Central Government and totally eliminate the role of State Governments. And therein lies the rub.

As the crushing season approaches, the Central Government has to quickly address the issue on hand as the farmers with cane are bound to reach the mill gate shortly. Importantly, in the next season cane growers could possibly diversify into other crops would once again lead to sugar shortages and resultant price spikes. India cannot afford supply side shortages any further.

India, let us not forget, is the world’s largest consumer of sugar while in terms of production (14 per cent of world’s sugar), it ranks second after Brazil. All the top three sugar exporting countries (Brazil, Thailand and Australia) have linked prices of Cane to sugar.

The NDA Government can put India on the Sugar world map by pro-actively implementing a National Sugar Policy. The first element of this would be linking of sugarcane prices to sugar. This makes sound economics and also political sense. Will Mr Paswan bite the bullet?


Last modified on Friday, 31 October 2014 17:40