Such bitterness over sugar pricing

For the first time since 1976, there is no single unified pan-India policy for the sugar sector. All state governments are deciding sugarcane prices or policies at will, creating intra-state distortions in production, marketable values and exports. The nation stands divided by sugar.

The absurdity has reached a level where the price of output, or sugar, equals input cost of sugarcane with a traditional rate of recovery. Threats by farmers and counter-threats by mills, especially in Uttar Pradesh and Maharashtra, are an indication of the impending uncertainty in this sector. About 70 per cent of the sweetener is produced by these two states.

The sugar environment at the start of the 2013-14 season stands altered. First, the Centre decontrolled the release and levy mechanism in April 2013, which created instant surpluses in the market. Second, because of election year, political pressures are mounting to balance interests of cane-growers, millers and consumers.

In less than eight months, the sector has vaulted from control to decontrol and then back to active and ad-hoc interventionism by the Centre. This represents a threat to the liberalisation effort.

The Rangarajan Committee report on sugar decontrol says: “Rationalisation of sugarcane pricing and liberalisation of sugar trade need to be introduced over a two to three year period , in a calibrated and phased manner. However , levy sugar obligation and administrative control on non-levy sugar need to be dispensed with immediately ”. (Page 10 para 13 of the report).

A committee headed by Chairman of the Prime Minister’s Economic Advisory Council would not have suggested a two-stage or split recommendation, unless compelled politically. The Rangarajan committee and the UPA Government erred in pushing sugarcane pricing into a vague zone. That explains the mess this year.

Uttar Pradesh

The trigger point is last year’s State Advisory Price (SAP) for sugarcane of Rs 280/quintal (or $44/tonne) in Uttar Pradesh (UP). The result — mills are already saddled with a massive liability of sugarcane arrears due to non-remunerative market prices, while farmers are pushing for an SAP of upwards of Rs 300/quintal (or $48/tonne).

A higher Indian sugar output (about 25 million tonnes) is foreseen in 2013-14, apart from nine million tonnes of stocks. This is against demand of 23 million tones; hence, the open market value may further decline below last year’s level of Rs 28-30/kg.

Mills can lose heavily under such conditions.

UP’s millers feel that Rs 225/quintal (or $36/tonne) in UP is the limit for viable operations. That is almost at par with other states (Maharashtra/Karnataka/Tamil Nadu), after factoring in cane recovery rates.

The UP Government finds itself in a bind. How can the Samajwadi Party (SP) government of Akhilesh Yadav afford to reduce the SAP, when annual inflation is running into double-digits?

Nevertheless, the Akhilesh administration has refrained from hiking it above Rs 280/quintal (or $44/mt). This has given rise to a stalemate between farmers, millers and the government.

Skewed market

In a sugar cycle of 5-6 years, farmers claim that millers have made profits in some years, each time due to high market prices. The counterpoint is that Government intervenes to check the abnormal rise in local prices, resulting in a significant loss to millers’ potential profitability. However, any additional investments made by them from accrued profits are an asset to the nation.

The fact is that the sugar business is skewed. Markets can work right if inputs and outputs operate on the principle of free trade, rather than one side being administered by irrational political considerations of SAP.

Political mileage

Now, the Agriculture, Food and Finance ministries of the Centre are trying to work out a solution to the impasse, even as it has divested responsibility to states. Ajit Singh, Aviation Minister and of Rashtriya Lok Dal (RLD, another ally of UPA) has also chipped in. Likewise, Maharashtra’s Congress Chief Minister is also approaching the PMO for relief.

Hence, the Nationalist Congress Party, RLD, Congress and SP are vying for the sugar vote bank. Any relaxation or subsidy means additional fiscal deficit.

That translates into erosion in the value of the rupee, higher inflation and diminishing buying power of savings. But in an election year politics supersedes economics, anyway. The BJP is silently watching the confusion to derive some mileage.

Buffer stock

Buffer stocks of 2-5 million tonnes have been mooted. Apart from the concern over fiscal deficit, the issue of storage is paramount. If this buffer is to be stored at the premises of the mills, it could give rise to controversy.

The NSEL scam is a case in point, where warehouses reflected paper stocks but actual stocks went missing.

The CAG has already commented on the paddy stored by FCI in millers’ premises as highly objectionable and questionable.

Exports are not viable, due to surpluses available internationally, except for niche opportunities. Any export subsidy will violate WTO commitments. Moreover, Brazil’s raw sugar value will further plunge to match Indian competition.

Court Remedy

A solution lies in approaching the Supreme Court for authorising “Fair Remunerative Price” (FRP) announced by the CACP (Commission for Agriculture Costs and Prices) as the basis for sugarcane pricing for 2013-14.

This would be Rs 210/quintal or $33/tonne at 9.5 per cent recovery rate, with pro-rata hike linked to higher recovery on a pan-India basis. This will end diverse policies in different states.

The governmental route may be messy and time-consuming, unless worked through an Ordinance, calling for immediate implementation of the second phase of Rangarajan report.

Whether that would involve the Election Commission’s consent remains to be seen.

(The author is a grains trade analyst.)