The inconsistent and ad hoc sugarcane pricing mechanism adopted by principal cane growing States such as Uttar Pradesh, Tamil Nadu and Haryana has left private sugar mills high and dry. Even as the domestic price of sugar declined over 13 per cent last year, the state advised price (SAP) of sugarcane in these States has either been maintained or increased sharply. This has been done to appease cane-growers, who are perceived to constitute a vote bank. This short-sighted approach has ruined the balance sheets of sugar mills; worse, in the long term, it has implications for the well-being of cane-growers and the health of State finances.

Banks have already become apprehensive about the ability of sugar mills to service their loan obligations. Their fears have become compounded following the recent UP High Court order mandating that sale proceeds of sugar inventories, pledged with banks for working capital, be paid first to cane farmers. Historically, State governments, in their fits of populism, have either ignored or failed to adequately recognise that the health of sugar mills is closely twinned with the well-being of cane farmers. Now with banks turning risk-averse, the State governments may be forced to step in and salvage the industry by subsidising cane costs, as Uttar Pradesh did recently. In December, the UP government agreed to subsidise a portion of the SAP, in the event of sugar realisation falling below specified thresholds, following representations by two leading banks. Private sugar mills in Tamil Nadu are also pleading for financial help from the State government to start crushing.

Such one-time financial fixes are in the nature of makeshift arrangements. What is required is that the Centre and State governments work towards a rational and lasting solution to resuscitate the sugar industry. As the first step, State governments should refrain from fixing arbitrary sugarcane prices. The strategy of using the SAP tool to pander to cane growers should be discontinued. Also, States should be disallowed from making unrealistic promises/guarantees to farmers on future cane prices. Secondly, sugarcane prices should be linked to the market price of sugar and other by-products. Fixing a uniform cane price with a linkage to the recovery rate will make the industry viable in the long term and also provide a level playing field for mills across the country — something that both sugar mills and banks have been clamouring for. Implementation of the profit-sharing formula suggested by the committee headed by C Rangarajan — under which cane growers and mills share the profits on sugar and all other by-products in the ratio of 70:30 — will not only provide a uniform recovery-linked realisation to farmers but also ensure fair input prices to sugar mills.

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