In a bid to tackle the problem of mounting dues to sugarcane farmers – estimated to be Rs 21,000 crores as on date – the Cabinet Committee on Economic Affairs (CCEA) recently approved a loan of Rs 6000 crores to sugar manufacturers the interest cost on which for one year amounting to Rs 600 crores will be met by government [the money will come from Sugar Development Fund (SDF)].
Coming on top of a loan of Rs 6600 crores earlier sanctioned by erstwhile UPA dispensation for 5 years [also to facilitate payment of dues to sugarcane farmers], the sop granted by Modi – government should have come as a further relief to the industry. Alas, the decision has irked it! Indian Sugar Mills Association (ISMA) has even dismissed the loan as un-productive. ISMA does not like the conditions appended to the loan. These are:-
First, the loan amount will be funnelled directly to the bank account of farmers under the Prime Minister’s Jan Dhan Yojna (PMJDY) and balance left if any, will be given to the manufacturer [all of them have been asked to submit details of bank accounts of farmers whom they need to pay arrears]. Second, a manufacturer will be eligible to avail of it only if he/she has cleared 50% of outstanding dues to farmers by June 30, 2015.
The manufacturers wanted that the entire loan amount be released to them up front [no direct payment to farmers] leaving the manner of utilization to be decided by them. And, they did not want to chip in any of their own funds. Their argument is if they were really in a position to contribute at this stage, why would they come to the government for help?
The industry’s bloated expectation level can be gauged from a stance expressed by some members of ISMA that support to farmers be treated as a ‘welfare expense’. In other words, government should clear arrears purely as a welfare measure entailing no liability on manufacturers whatsoever. Since, the former did not deliver, latter’s disappointment was inevitable.
But, industry’s biggest grouse is that government has not addressed the cause behind their continuing losses year after year. While, production cost has increased primarily due to increase in minimum support price (MSP) of sugarcane, realization from sale has declined due to excess of supply over demand [e.g., during Oct–Sept, 2014-15 marketing season, production is likely to be 28 million tons against demand 24 million tons]
There can be no disagreement on industry’s diagnosis of the problem. The two key factors that have contributed to the aforementioned situation are: (i) politicization of pricing of sugarcane with states especially Uttar Pradesh [it alone accounts for around 45% of arrears] hiking MSP much beyond the level fixed by central government and (ii) indiscriminate expansion of sugar capacity unmindful of the demand scenario.
None of these factors are within control of Government of India (GOI). Being a federal set up, it is entirely within jurisdiction of the concerned state to make laws. So, if Uttar Pradesh government decides to jack up prices, there is little that centre can do all the more when state is ruled by a party other the one ruling in the centre. Likewise, whether or not some one will set up a new sugar factory or expand capacity is entirely his prerogative.
The only way the situation can be handled is via allowing un-fettered operation of market forces. That would require that some of the high cost and inefficient units are closed to bring about balance between demand and supply. This will also help in improving the market price and in turn, realization from sales for remaining units.
The manufacturers also need to make efforts at the state level to make the authorities realize the futility of disproportionate hike in MSP of sugarcane. The latter need to understand that there is no point in a mere announcement of higher price when industry cannot afford to pay and arrears keep piling up. A farmer will be too happy to get paid even at a lower rate so long as he gets timely payment in full.
Yet, the industry seems to be barking up the wrong tree. There is no way that central government can even influence let alone alter the market dynamics. Any thought that it should buy 3-4 million tons from manufacturers and keep it in a buffer to restore balance in market is seriously flawed. It will tantamount to using tax payer’s money to subsidize the industry.
If, the manufacturers are bailed out in this manner, similar demands will keep popping up in future too. Not just that, citing this as a precedent, other industries faced with similar problems too will come asking for support. It could be a never ending stream of demands that run the risk of destabilizing already precarious budget position.
In this backdrop, even as the government was under no compulsion to offer manufacturers the facility of even an interest free loan; yet it has come forward with some support. This intervention has to be viewed from a very limited objective of ensuring that farmers are not victimized and suffer in the cross-fire between the industry and the state governments.
The GOI is perfectly justified in funnelling the money directly to farmers – under PMJDY – to ensure that it actually reaches them in full. And, since the amount is released to clear sums that manufacturers owe to farmers, it will necessarily get reflected as liability to GOI in their books. It is preposterous for them to argue that they won’t take it.
Likewise, government’s insistence on prior clearance of 50% of arrears for a manufacturer to qualify for interest free loan is perfectly logical. This will be considered as a proof of their seriousness and commitment to solve the problems faced by farmers. If today farmers are suffering, it is because manufacturers did not manage their affairs well. Therefore, in any scheme of mitigating former’s misery, latter must take a haircut first.
The industry should treat ‘interest free’ loan only as a temporary reprieve to tide over their current cash flow problems. Concurrently, it should look for permanent solutions to its problems instead of expecting government for complete bail out each time manufacturers come up with losses and increasing arrears to farmers.