Bitter sweetener

A steady rise in domestic sugar prices and a rally in the stocks of sugar producers may give the impression that India’s sugar sector — the world’s second largest — has managed to put its troubles behind it. But as long as the structural issues plaguing the sector remain unaddressed, any rally in sugar stocks is likely to be temporary. Sugar prices in the home market have risen from about ₹20 a kg in July to ₹26 now. This was supported by a recovery in international sugar prices and the expectation of a drop in domestic sugar production in 2015-16, following a deficient monsoon. After the supply glut witnessed over the last five years, global sugar production is estimated to fall short of consumption by about 2-3 million tonnes in 2015-16. Rising international prices and an improved export subsidy spell some relief for the sector, which has been bogged down by high debt, rising losses and acute shortage of working capital. In fact, expectations of a favourable subsidy regime, combined with the reduced output, have been the principal factors driving the rise in sugar stocks. But the core issue affecting the industry — the complete lack of correlation between input and end product prices — remains unaddressed.

The unrealistically high price of sugarcane remains the biggest problem facing sugar producers. In the last six years, the minimum purchase price for sugarcane mandated by the Centre — the so-called fair and remunerative price (FRP) — for sugarcane has been increased by 70 per cent while the market price has fallen by 19 per cent. This is not all. The governments of principal sugarcane growing States, such as Uttar Pradesh, have announced ad-hoc State advised prices (SAPs) for cane, which have been way higher than the FRP. The result? Ballooning cane arrears, inability of sugar mills to even secure working capital assistance from banks, and widening losses for sugar producers. The Centre’s ₹6,000 crore ‘rescue package’ for the sector, announced in July, solved the problems of neither mill nor farmer since it came attached with stringent conditions that most producers were unable to meet.

The disconnect between sugarcane and sugar prices can be best addressed by linking sugarcane procurement price to the realisation on sugar and its other by-products, as suggested by the C Rangarajan Committee. Further, State governments must refrain from playing politics with cane prices. This will provide a level playing field for mills across the country. Setting up a price stabilisation fund will help the industry ensure timely payment of FRP to cane farmers. The difference between cane price based on the formula suggested by the Rangarajan Committee and the FRP can be adjusted against the fund corpus. Such a fund has been the industry’s longstanding demand and was also recommended by the Commission for Agricultural Costs and Prices earlier this year. It is time the Centre considered this seriously.

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