The arrears of sugarcane farmers [money that sugar mills owe to them for their cane supplies] running into thousands of crore has been a perpetual headache for the ruling establishment both at the centre and states. Last year, in the run up to assembly elections in Uttar Pradesh [mills owe the maximum amount to farmers in this state], Modi had promised immediate payment of all arrears and for the future, ensure release of payment by 14th day counting from the day the cane is delivered to the factory.
On assumption of office, the BJP government led by Yogi redeemed the commitment by clearing all arrears. Yet, last month, BJP lost the Kairana by-election to Lok Sabha. A major reason for the defeat was farmers’ anger over non-payment of sugarcane arrears. The problem this time was with fresh dues which piled up during the last one year. At the all India level, sugar mills owe to farmers Rs 22,000 crore of which in UP alone, these are over Rs 12,000 crore.
To address it, the government has come out with measures such as increase in import duty on sugar, elimination of duty on its export, allowing export under a quota regime, fixation of a minimum ex-mill price, setting up of a buffer [carrying cost of this to be reimbursed by the centre], interest subvention on loans taken by mills for augmenting capacity vide up-gradation or setting up new units, tweaking stock holding limits, incentive to farmers @ Rs 5.5 per quintal to be paid directly into their account etc.
These are ad hoc and piecemeal measures which provide only band aid solutions and are far from alleviating the systemic problems facing the sector. At a fundamental level, the problem is two-fold.
First, the central government has allowed an ever escalating minimum support price [MSP] for sugarcane – unrelated to either the cost of production or to the price realized by manufacturing units from sale of sugar. On top of this, the state governments notify the so called state advised price [SAP] which is MSP plus an additional incentive making the price even more unrealistic.
Second, the ruling dispensations have allowed indiscriminate expansion of sugar manufacturing capacity in complete disregard of the expected demand leading to excess supply. During the 2017-18 marketing year ending September 30, 2018, production is estimated to be 31.5 million tons against consumption of 25 million tons. Next year, production is projected to go up further to 32 million tons.
Juxtapose these two basics, we have an inherently unsustainable situation. The excess supply inevitably leads to lower ex-factory price realization by sugar mills. Currently, the price of sugar is Rs 26 per kg which does not even cover the cost of basic raw material [sugarcane] having to be mandatorily paid to the farmers forget the cost of other inputs and fixed cost including capital related charges.
This shortfall in cash generation by sugar mills vis-à-vis the requirement inevitably leads to ever increasing unpaid arrears. The one-time payment of arrears by the state government [as in UP] merely relieves the burden for a while but does nothing to tackle the source of the problem. Likewise, measures aimed at restricting imports, increasing exports, impounding supplies [vide creating buffer], tweaking stock limits etc are band aids which merely provide a temporary healing effect.
A recent decision of the government to regulate on a monthly basis the release of sugar by every manufacturing units and ask for submission of detailed data in this regard sounds like resurrection of the license raj. Far from solving the problem as the fundamental causes remain unaddressed, this would leave more discretion with bureaucrats and associated nepotism and corruption.
The fixation of a minimum ex-factory/mill price [even as the centre has proposed Rs 29 per kg, the Indian Sugar Mills Association (ISMA) has demanded Rs 34 per kg] is an anathema to the very principle of market driven economy. This is an abhorrent idea. By doing so, are our policy makers suggesting that the consumers must not pay a price anything less than an amount that will ensure the ex-mill price fixed by the government? This will tantamount to penalizing consumers for enabling mills to clear unpaid arrears to farmers.
Alternatively, guaranteeing a minimum ex-factory/mill price irrespective of what the consumer pays [based on market mechanism] would only be possible if the union government pays subsidy equal to the difference between this price and realization from sale. A similar system is already existing in fertilizers wherein the maximum retail price [MRP] is controlled at a low level and the excess of ex-factory/retention price – as determined by the centre – over the net-back from sale at MRP is reimbursed as subsidy to the manufacturer.
This will have much wider implications for union budget which is already stressed due to the heavy spend on a plethora of welfare schemes and subsidies [fertilizer subsidy and food subsidy alone entail a burden of over Rs 200,000 crore annually]. Can the government afford several thousand crore more that guaranteeing a minimum ex-factory price to sugar mills will entail?
What then is the way forward? The problem has to be addressed right at the source. The government – both centre and states – should shun the practice of fixing MSP/SAP of sugarcane. With this, the stipulation for mandatory procurement of cane by mills from farmers becomes redundant. Then, the decisions in regard to cane purchase by mills and price paid to farmers will be governed by the revenue that the former generate from sale of sugar and its by-products.
Unlike the present dispensation wherein unpaid arrears are inevitable [as cane price payable to farmers is completely out of sync with market realities], in the above market driven model, this is ruled out as the cane price will be in sync with what the mills realize from sale. True, farmers might get less money especially when demand is depressed but that would be a much better scenario than the one under which the high MSP/SAP merely remains on paper. If, any state wants to augment income of its farmers, it may give cash support directly.
In 2013, the Rangarajan Committee on sugar deregulation had recommended shift to a revenue sharing mechanism between farmers and millers and linked the fair and remunerative price for sugarcane to yearly realizations from sugar and its byproducts, through a fixed formula. But, only few states have accepted this. All state governments could make a beginning by implementing this recommendation, if not complete deregulation.
Will Modi crack the whip?