Sugar decontrol is on the cards. The least that is likely to happen is the abolition of ‘levy system’ (compulsory procurement of sugar at below-market prices) and withdrawal of the free-sale quotas.
In other words, sugar mills will not be required to surrender a part of the production to the Government and will be free to sell their entire production according to their own business plan.
To meet the requirement for the public distribution system, the Government will buy sugar from the open market; and the difference between such open market purchase price and PDS supply price will be absorbed as subsidy.
To meet the subsidy burden, additional revenue is proposed to be raised through a hike in excise duty on manufacture of sugar.
Decontrol does not just mean removal of some restrictions. In spirit, it means much more. There are a few more issues relating to the sugar sector that deserve close attention.
There is demand in some quarters that the statutory minimum price for cane should be abolished and free market pricing must be introduced. This damaging suggestion deserves to be rejected right away.
The statutory price is a critical support system for cane growers who should not be subject to the unintended oppression of a free-market system.
A more important aspect is cash flow for growers.
Because cane is a 12-14 month crop, cane growers have to wait for over a year to realise some income. Even here, more often than not, mills keep huge arrears of payment. This must stop. There is also a suggestion that growers should be free to sell to any mill irrespective of zoning restriction.
Keeping all these in mind, an equitable solution would be for the mills and growers to agree in advance on the quantity of cane to be traded; and the mill should provide an advance to the grower say half way through the crop production cycle or six months.
This will result in a formal arrangement, whereby, the grower has received an advance and the mill is sure of receiving the contracted quantity when harvested.
At the time of harvest, the grower may be free to sell to anyone the quantity, if any, not contracted for by any mill.
The next tricky issue is the cyclical nature of cane crop. This cyclicality has to be effectively broken; and sustained flow of raw material should be ensured season after season.
Climate change and risk of water shortage are likely to pose a serious challenge in future to cane cultivation. This calls for redoubling of research efforts to get sugarcane climate-ready.
Also needed are policy initiatives to infuse stability in the market. We need a stable and open foreign trade policy.
The government should keep export and import open and not tinker with the trade policy. Tariff measures (customs duty on export or import) should be used to either encourage or discourage exim trade depending on market conditions and prices.
With nearly 600 sugar mills dotting the country’s landscape – many of them with modest or sub-optimal capacity for cane crushing – the industry as a whole is losing scale-economies. Fragmentation must give way to consolidation and modernisation.
Removing the levy system and free-sale quotas is critical; but they alone cannot lend competitiveness to this industry.
A holistic approach with a long-term perspective to sugar decontrol is necessary.