The “Report of the Committee on the Regulation of Sugar Sector in India: The Way Forward” (referred to as ‘the Report’ hereafter) has been published. The group headed by the Chairman of the Economic Advisory Council to the Prime Minister should be congratulated for its workmanlike performance in producing the document in a short period with good recommendations.
Prior to this Committee there had been three others that considered the same issues, viz., the Mahajan Committee (1998), the Tuteja Committee (2004) and the Thorat Committee (2009). The latest Committee has not made any reference to their reports, with the exception of a solitary one to the third. In fact, most of the recommendations on deregulation reiterate those of the earlier committees.
The Report has highlighted the known fact of the cyclical nature of the production of sugarcane and sugar. It is a classic example of what economists would call the Cobweb Cycle. But the reason given for its operating over a period of three to four years is not satisfactory. The Report has barked up the wrong tree by attributing it to cane price arrears owed by mills to farmers.
In India there is a practice of rationing which refers to the crop that grows from the stubble of the previously harvested plant-cane. The main benefit of the ratoon crop is that it matures earlier in the season and also the farmer saves the cost in preparing the field and planting. He is, therefore, tempted to continue with the ratoon crop, even if he does not get his dues from the mills. I do not minimise the influence of the price factor in the farmer’s decision on crop patterns, implied in the Cobweb Cycle. But in the case of sugarcane, the ratoon factor means that the price effect operates with a lag.
TREND ELSEWHERE
The Report has observed that global sugar production does not exhibit the fluctuations that characterise Indian sugar production. Of the total global production about 25 per cent is derived from sugar beet in the temperate zones and the rest from cane in the tropical and sub-tropical regions. There is no ratooning in beet cultivation.
Secondly, sugarcane is increasingly becoming the feedstock for bio-fuel in many countries, and Brazil, the world’s largest producer of sugar, is a leader in the field. There is a mandatory blend of 25 per cent of anhydrous ethanol and 75 per cent gasoline (E25 blend). Of the 378 ethanol plants operating in Brazil in July 2008 one-third were dedicated to ethanol production and the remaining to both sugar and ethanol. In view of the steady rising trend in gasoline consumption there are no marked fluctuations in cane production, unless it is due to the weather factor. Maybe, India should follow the example of Brazil that will act like a broad-spectrum remedy for many problems.
CANE ARREARS
I am not happy with the analysis of cane arrears in the Report, having dealt with the matter during my days with the Reserve Bank of India (RBI). Referring to the issue, the Thorat group made the statement that the mills had several problems such as being unable to arrange for bank credit, though it did not provide any supporting evidence. Cane arrears persisted even in years when banks complained of a lack of credit demand and made excess investments in SLR securities.
In an econometric study of the demand for commercial bank credit from sugar factories in private and State sectors (1973-80) I found that although the cane payments had a first charge on the cash credit limits sanctioned to factories by banks, there was no mechanism to ensure the stipulation (Reserve Bank of India Occasional Papers, June 1983). I excluded cooperative factories from the study because in their case the dues are owed by members to themselves. The law levied interest at 15 per cent for delays in payments beyond 14 days. It was not followed by any mill. It may be the situation even now.
Certainly, it is to the advantage of mills to run into interest-free arrears on suppliers’ credit rather than draw on bank loans to make timely payments. It was evident from the non-utilisation of credit limits and drawing power to the full extent.
It contributes to their profits at the expense of the farmers who have to pay interest on crop loans from institutional agencies or moneylenders.
COUNTERCYCLICAL DEMAND
The Indian Sugar Mills Association issued a long press release, and even a longer article in its journal questioning the RBI study that showed its lack of understanding of econometrics. It did not answer the basic questions as to whether it was true that mills accumulated cane overdues even when bank credit was available to settle them and they did not pay interest on them. The cane crushing season starts from October and lasts for about 6-7 months. The RBI study found a contra-seasonal trend over the years in the demand for bank credit. Thus the transition from busy to slack season showed an increase in bank credit. A priori , this is enigmatic since one should expect credit needs to decrease rather than increase with a decline in production, when there are lower or no arrivals of the crop at the factory gate. The explanation is simple. The mills settle their dues before the cash credits are sanctioned for the next season by banks.
(The author is a Mumbai-based economic consultant.)