Home Essay/Articles ARTICLE : Sugar Decontrol -- Taking Care of Interests of Sugarcane Grower, Consumer and Sugar Sector
ARTICLE : Sugar Decontrol -- Taking Care of Interests of Sugarcane Grower, Consumer and Sugar Sector
Monday, 10 June 2013 03:20

Sugar Decontrol -- Taking Care of Interests of Sugarcane Grower, Consumer and Sugar Sector

In a landmark decision the union Government has abolished the levy sugar mechanism and regulated release mechanism to de-control Indian sugar industry while at the same time ensured that poor segments of the society continue to get sugar at existing subsidised prices by taking upon itself the entire financial burden of distributing sugar through ration shops. A notification in this regard has been issued on May 7, 2013.

By this landmark decision the Government has ensured that the interests of all segments of the sugar economy be it industries, farmers, consumers and poor section of society are safeguarded.

For industries, the measure will give them freedom to sell their produce without any restriction and improve their liquidity position, a improved liquidity will ensure that millions of sugarcane farmers in India will now not have to wait for their due price from sugar millers, while for consumers it means sugar availability will increase in the market by as much as 10 per cent per year.

The Government has decided to reimburse the state governments for purchasing and selling sugar through PDS below the market rate for which it will bear upon itself an additional burden of around Rs 3,100 crore.

The issue of de-controlling of sugar industry was engaging the attention of the Government for a very long time.  There were representations from sugarcane farmers’ associations as well as sugar mills, the major stakeholders of the sugar industry, that a price sharing formula for sugarcane was long overdue.

The Government, too, thought about bringing a level playing field where the interests of the consumers on the one hand and the development of sugar industry on the other hand can be ensured.

The demand for decontrol of sugar has stemmed from cyclic nature of sugar production in the country, which puts the sugar industry at a disadvantage in that they are not able to find it a viable business option finally affecting sugarcane farmers.  Starting from a normal year when there are no major cane price arrears, the farmers tend to plant larger area under sugarcane.  This leads to increase in sugarcane production with the consequent increase in sugar production which in turn leads to excess stocks resulting in depressed sugar prices and building up of cane price arrears. As a result of lower returns, the farmers tend to take lesser care of the cane and area under sugarcane gets reduced in the subsequent years.  The years of reduced production of sugarcane also witness higher diversion of cane for gur making, a significant part of which also finds its way into the liquor industry in the unorganised sector as a substitute for molasses which itself would be in short supply. The lower production of sugarcane and higher diversion combine to produce still lower availability of cane for crushing in sugar mills which results in disproportionately low sugar production.

As a result, the sugar prices rise, the mills get higher returns, the arrears position is taken care of and the farmers get a good price and are encouraged to plant more and the area under sugarcane starts rising again.  In two to three years time, this leads to another year of peak production and the cycle starts all over again.

The Central Government was confident of taking the burden arising out decontrol of sugar as the country could achieve sugar production of 263.50 lac metric tonnes during the 2011-12 (October-September) sugar season which was 20 lac tonnes more than the sugar production of 243.50 lac tonnes during the 2010-11 sugar season.  While the seasonal variation in sugar production had also started to smoothen in the last 3-4 years, the market price of sugar had remained within reasonable levels all throughout 2012-13 sugar season.

The Rangarajan Committee appointed by the Government to look into the whole gamut of sugar decontrol had observed that levy amounts to a cross subsidy between open market and PDS sugar and, it is not in the interest of general consumer or development of sugar sector and recommended that levy sugar be dispensed with.

So, two crucial issues emanating from the Rangarajan Committee’s report came up before the Government for a decision.  These were, one, whether sugar is to be continued as an item under the PDS; and, two, if sugar is to be continued as an item under the PDS, does the current levy obligation on sugar mills need to be continued with or the PDS supplies are to be met through open market procurement.

The options that were available before the Government were quite complex in that it had not only to take the State Governments along, but to look into other critical issues such as increase in procurement cost, problems relating to market distortions including delayed payments for cane price, the subsidy burden, etc.

It was felt that removal of sugar in the PDS could not be acceptable. The major decision to take was that if sugar was to be continued as an item under the PDS, who would bear the extra burden for keeping the delivery at Rs. 13.50 per kg?  The extra burden in terms of increase in subsidy owing to decontrol of sugar will be around Rs. 3100 crore excluding distribution cost involved.

At present open market price of sugar hovers around Rs. 32 per per kg., while in respect of retail price through PDS, it is Rs. 13.5 per kg, which has not been revised since 2002.  The Government is able to provide sugar at Rs.13.5 per kg by absorbing the subsidy involved in each kg at Rs.6 per kg after buying it from sugar mills at levy price fixed by the Government at Rs. 19.05 per kg.

At present, the total expenditure being incurred by the Government in terms of subsidy for supply of 27 lakh tonnes of sugar under PDS comes to Rs. 2556 crore.  With decontrol of sugar, the additional burden would mean absorbing the increase in subsidy component to the tune of Rs. 13 per kg, currently being borne by the individual sugar mills, i.e. the difference between the ex-mill price of Rs. 32 and the levy price fixed on them for the current year, which is Rs. 19.5.  The total additional subsidy burden works out to Rs. 3100 crores excluding distribution cost.

The Central Government had decided to take the responsibility of the additional burden in terms of subsidy increase upon itself.

The decision of the Government to partially decontrol sugar has not affected the sugar price in open market also, as there is enough sugar in the country with this year’s production expected to be around 24.5 million tonnes as against a requirement of 22.2 million tonnes.

Now the States will also be free to purchase sugar through a transparent system at the current ex-factory price of Rs. 32 per kg which has been capped for two years.

The Government had ensured that this important decision on partial decontrol of sugar takes care of the interests of sugarcane farmers while also ensuring that the interests of the common man and development of sugar sector.