Are sugar mills privately-managed PSUs?

In April 2013, the Centre decontrolled the sugar industry. But it still allowed the States to fix the advisory price (SAP) on sugarcane, which mills pay to farmers, while keeping the Fair Remunerative Price (FRP) fixed by it as an indicative one. Political “fixing” of SAP has turned out to be a monster for the industry because it defies market realities. The solution lies in taming SAP instead of uncalled for frequent and vague interventions by the Centre.

The current mess is the due to the Uttar Pradesh Government fixing a SAP of ₹280/quintal– ignoring the rationale FRP of ₹210, which is logically arrived at. Leave aside SAP, UP mills have not paid full FRP to farmers either.

For the last 25 years or so, the trio of farmers, sugar mills and Government have played game of blaming one another, devised ad-hoc solutions.

As a result, the nation continues to pay a price for this imbroglio.

On June 23, 2014, Food Minister Ram Vilas Paswan, after a high-level meeting, announced a hike in import duty on white sugar from 15 to 40 per cent.

He also announced interest subvention on additional loan of ₹4,400 crore, over and above already sanctioned amount of ₹6,600 crore with softer terms of repayment of 5 years (from the earlier 3 years), and readiness to recommend ethanol blending of 10 per cent from the present 5 per cent to oil marketing companies. Raw sugar export subsidy of ₹3,300/tonne will also continue till September (instead of September 2015), he said.

Government as Santa Clause All that the industry wished was agreed to by policymakers who acted as a Santa Clause, subject to mills furnishing a written “assurance” that they shall clear pending cane payment of farmers around ₹11,000 crore. Of this, UP alone accounts for over ₹5,000 crore dues till May.

Sugar inventory of major UP mills as on end-March 2014 is about ₹11,000 crore.

Defaulting on cane arrears by the mills – even non- payment of full FRP – to farmers for the cane already crushed and converted to saleable sugar cannot be defended.

Building pressure on political establishment, continuing irrational and inappropriate WTO non-compatible subsidy disguised as incentive out of Sugar Development Fund, blocking imports though higher duty, hoarding sugar and making the Government accomplice for pushing up market prices cannot be justified either.

Ascending inflation When an entity prima facie is in a default mode by not honouring FRP, how can another dose of relief be considered?

The hike in import duty pushed up domestic prices from ₹32/kg to ₹34 within three days. With 15 per cent duty, the landed price of Brazilian 150 Icumsa sugar ($510 cif) will be ₹36-37/kg – saleable at ₹38-39/kg. At 40 per cent duty, Brazilian’s landed cost would be ₹43-44.

By October 2014, there is likely to be a carryover stock of 7.5 million tonnes. Sending panic signal by hiking the import duty is unwarranted.

Do the industry and Ggovernment want to push up domestic price beyond the benchmarked ₹36-37/kg? The moot point is: why should the Government be supportive of needless inflationary pressures?

Domestic inefficiencies beyond 15 per cent are unthinkable. The argument that higher sugar price will enable mills to pay arrears to farmers cuts no ice because the market can pare gains to ₹31 or less. Thus deficits to growers may still remain unpaid while duty stands at 40 per cent. Restoration of duty to 15 per cent will be the right approach for keeping inflation in check.

There is no controversy over FRP of sugarcane of ₹210/quintal while SAP’s fixation is often ad-hoc, albeit debateable. Before any engagement with millers, at least FRP to farmers should be ensured by the Government. It will be naïve to consider any “written assurance of payment of outstanding cane arrears” as sufficient and workable solution.

Will Banks agree to be co-signatory for this assurance? If there is lack of compliance on assurance, what is the remedy or recourse?

Sugar corporates have assumed themselves to be PSUs for financial support, exploiting in the name of farmers. The Government has willy-nilly accorded that status. This is an untenable state of affairs of private profits and public losses.

A remedy for perpetual relief could be the Government promulgating an Ordinance that FRP will be the base price or National Sugarcane Price and divest States of SAP.

The Modi Government with absolute majority can do it. It will be the right governance, more governance and less of Government.

The writer is a trade analyst.