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All you wanted to know about sugar decontrol

Oct 15 2012, 13:53   |   By Moneycontrol.com

Moneycontrol Bureau

The Rangarajan Committee today recommended deregulation of the sugar sector by giving freedom to mills to sell sugar in the open market.

The crux of the recommendation is to use the Fair and Remunerative Price (FRP) fixed by the central government as the base price for sugarcane, while Rangarajan has also suggested that sugar mill should share a part of their market gains with farmers. Rangarajan has said that 70 percent of market prices realised from sugar and sugar products can be given to cane growers.

Here's what the panel is recommending and its implication:  

1. Current rule: Every designated sugar mill is obligated to purchase from cane farmers within the cane reservation area, and conversely, farmers are bound to sell to the mill.

Flaws in the rule: This arrangement may reduce the bargaining power of the farmer, who is forced to sell to a mill even if there are cane arrears and also reduces the farmer's remuneration if the design mill has a lower recovery rate. Mills also lose flexibility in augmenting cane supplies, especially when there is a shortfall in sugarcane production in the cane reservation area.

Solution: The states should encourage market-based long term contractual agreements between mills and farmers, and phase out cane reservation area.

2. Current rule: The central government has prescribed a minimum distance of 15 kilometers between any two sugar mills.

Flaw in the rule: The virtual monopoly over a large area can give the mills power over farmers, especially where landholdings are smaller. This restriction inhibits entry and further investment, and adversely impacts competition for purchase of sugarcane.

Solution: Do away with the minimum distance.

3. Current rule: The central government fixes Fair and Remunerative Price (FRP) as the minimum price. Many states have intervened in sugarcane pricing with State Advised Price (SAP), usually higher than FRP, to strengthen the farmer interests.

Flaw in the rule: Mills are often at a disadvantage because state governments favour farmers for political considerations.

Solution: An analysis of the costs incurred by sugarcane farmers and those incurred by sugar mills, taking a recovery (of sugar from cane) rate of 10.31 per cent, works out to 70:30. Therefore, it is suggested that 70% of the value of sugar and each of its three major by-products, namely bagasse, molasses and press mud (all ex-mill), be fixed as the cane dues payable to the farmer for the sugarcane supplied.

However, farmers will in all circumstances be paid FRP as the minimum, and up-front. States may publish half-yearly ex-mill prices of sugar and the by-products for this purpose.

4. Current rule: Every sugar mill mandatorily surrenders 10% of its production (levy sugar obligation) to the central government at a pre-determined price, which is, at present, Rs 1904.82 per quintal. This enables central government to get access to low cost sugar stocks for distribution through public distribution system.

Flaw in the rule: Levy amounts to a cross-subsidy between open market and PDS sugar and is not in the interest of the general consumer or the development of the sugar sector.

Solution: Abolish levy system. The states which want to provide sugar under PDS may henceforth procure it from the market directly through a competitive bidding process according to their requirement and may also fix the issue price.

5. Current rule: The release of non-levy sugar into the market is regulated by the Central Government through a controlled release mechanism.

Flaw in the rule: This mechanism of regulated release of non-levy sugar imposes costs directly on mills (and hence indirectly on farmers) on account of inventory accumulation, inability to plan cash flows.

Solution: Abolish it.

6. Both exports and imports are controlled by the central government, depending on factors like mill-wise monthly production and stocks, local production levels and world market conditions

Flaw in the system: Even though India contributes 17% to the global sugar production, its share in the exports is only 4%. The policy has not really helped stabilize retail price of sugar. Whatever little stability, has been at the cost of considerable instability for the sugar cane and sugar production.

Solution: Have a moderate duty on imports and exports, not exceeding 5-10 per cent, instead of outright ban or quantitative restrictions, to meet domestic requirements of sugar in an economically efficient manner. Keep an option of imposing a higher level of duty could be retained for dealing with exceptional circumstances.

7. Current rule: There are several regulatory hurdles in respect of the by-products of sugar industry.

Flaw in the rules: Current regulatory arrangements relating to by-products impede development of a national market and consequently reduce economic efficiency.

Solution: No quantitative or movement restrictions on by-products like molasses and ethanol. Prices of by-products should be market-determined with no earmarked end-use allocations. There should be no regulatory hurdles preventing sugar mills from selling their surplus power to any consumer.


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