In the run up to assembly elections in Uttar Pradesh [UP] in early 2017, BJP had promised immediate payment of all sugarcane arrears [money that sugar mills owe to them for their cane supplies]. For the future also, it had promised to release of all dues by the 14th day counting from the day the sugarcane is delivered to the sugar mill.
The UP government has been in office for over two years now and has since ensured payments of a whopping Rs 50,000 crore which includes Rs 10,500 crore for the sugarcane marketing year October 1, 2016 – September 30, 2017 and Rs 34,000 crore for the year October 1, 2017 – September 30, 2018 and Rs 5500 crore for the marketing year commencing from October 1, 2018.
The unfolding scenario points towards several areas of concern and questions which need to be answered.
What is the root cause behind the arrears surfacing year-after-year? Why do the state authorities need to get involved in ensuring payment to the farmers? What is the implication for the consumers? What if the mills don’t pay even after being heckled by the state? How will it impact the budget if the state foots the bill?
At the outset, arrears are contingent upon transaction between sugar mills on one side and farmers on the other. The former purchase sugarcane from latter at so called state advised price [SAP] which is fair remunerative price [FRP] notified by the centre plus an incentive amount fixed by the state.
Left to themselves, they would have paid a price linked to their realization from sale of sugar and its byproducts. Since, under conditions of excess supply [during 2018-19 marketing year, availability is estimated to be about 40 million tons (including production 30 million tons and opening inventory 10 million tons) against consumption of 26 million tons], the realization is low, the cane price too ought to have been low. But, the mills are forced to pay a much higher price under orders from the state.
So much so, that at the market-based realization of Rs 26 per kg ex-factory, they could not even fully pay for SAP-based sugarcane cost, forget meeting expenses on other inputs and fixed cost including capital related charges [CRC]. In this scenario, unpaid dues were inevitable which have escalated over time with the state increasing SAP – driven primarily by vote bank politics.
The central government has sought to address the problem by increasing import duty, creating a buffer, regulating supplies and other measures which aim at increasing the ex-factory realization. When, these measures did not work, it made a more brazen intervention fixing a minimum ex-factory price at Rs 29 per kg.
This may have helped sugar manufacturers generate more revenue and clear the arrears to a great extent [reinforced by punitive action by the state including filing of FIRs], but this is an abhorrent policy decision. How can a producer be told not to sell below a certain level? Wherever, price controls exist [e.g. fertilizers], the government fixes the maximum retail price [MRP]. The manufacturer cannot charge more even as he is free to sell at any price less than this. But, to require that he must not sell below a certain level is not just an anathema to market forces but is patently anti-consumer.
Through their flawed decisions, the centre/state have created an anomalous situation whereby it is forcing sugar mills to charge from consumers a price which is significantly higher than justified by underlying supply-demand conditions only to help them pay artificially high sugarcane price to the farmers. Indeed, this benchmark price will only increase as fresh arrears build-up. Already, the mills have petitioned the centre for a hike of Rs 5-6 per kg!
Imagine, if the consumers refuse to pay the higher price for sugar and the FRP/SAP for sugarcane remain where it is [or even hiked, courtesy vote bank politics], the only option left with the state government would be to make up for the shortfall from the budget. This could lead to fiscal destabilization; hence unacceptable.
Finding a lasting solution to the problem cannot be divorced from the fundamental factors which have contributed to it, the most critical factor being the practice of fixing FRP/SAP of sugarcane at an artificially high level. This practice must be shunned. The sugar mills should have the freedom to determine the payments to farmers based on their revenue under a market-based framework.
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. This seeks to address the flaw under the subsisting arrangements but is a half-hearted move.
Anything short of complete deregulation of sugar industry won’t work. The way forward is to let market dynamics drive various stakeholders including farmers. Even if farmers get lower price for cane, that will be better than receiving short payments which forces them to borrow at high interest and get in to debt trap. That apart, the government can always give direct income support to the needy.
This will also prompt farmers to diversify to crops which are in greater demand and fetch higher price. This will be good for conserving water as sugarcane is a water guzzling crop and any shift away from it will help conservation. It will also save on electricity consumption as farmers work less on pump sets.
The new government should crack the whip on this reform which will not only help farmers but also save energy and water thereby giving a boost to the economy, preserving environment and maintaining ecological balance.