Sugar decontrol buzz gains momentum!

Rohit Joshi/Zee Research Group

The Union Cabinet is likely to consider the long-standing sugar decontrol proposal this week. But, can the government bite the bullet on an issue which is politically contentious and dear to sugarcane farmers in the heartland?

Experts are unanimous that the time is ripe to decontrol sugar which is a win-win situation for all stakeholders. Currently, the sector is highly regulated. Not surprisingly, the industry has been pushing for deregulation: abolishing the release mechanism, levy quota, and cane area reservation.

Not so long ago in 2012, the Rangarajan Committee on sugar decontrol had recommended reforms in two phases: first, immediate removal of regulated release mechanism and levy sugar obligation. Through the release mechanism, sugar mills are directed to sell a certain fixed quantity of sugar every quarter in the open market. Under the levy system, the central government asks mills to supply 10 per cent of their production as levy sugar for the Public Distribution System (PDS) at a discounted price.

The Rangarajan Committee had also recommended for further deliberations on the sugar cane control side over the next 2-3 years. The latest Economic Survey too bats for sugar decontrol as recommended by the Committee. Abinash Verma, Director General of the Indian Sugar Mills Association (ISMA), favours sugar decontrol, “This is the most opportune time for decontrolling the sugar sale side. Firstly, sugar prices are under control and secondly, demand-supply situation in the country is matching each other. Infact, there is a small surplus and therefore the prices will remain under control.”

Agreeing with Verma, RK Gupta, chief general manger, Dwarikesh Sugar Industries, says, “If sugar decontrol happens then it would be a historic decision. The sugar industry can’t be left to die. It is a highly regulated sector because of which international players are not coming and it should be set free like petroleum industry. Sugar sector should be given a level playing field in order to show its capability to survive.”

While there is unanimity among industry experts, they reckon that it is ultimately a political decision. Much would depend whether the government can show the will during an election year.

“If it happens, it would make economic sense as it will align the sector dynamics to market forces. Considering the oncoming general elections in 2014 it would be doubtful to say that government would go for it at this stage.,” Stressed Jai Sharda, Managing Partner, Equitorials.

Welcoming the proposal to abolish levy sugar quota, Verma at ISMA, says, “The sugar industry is losing Rs 3000 crore per year because of levy sugar burden. If that burden is taken off from the industry, it stands to benefit Rs 3000crore. This in turn would benefit farmers as large part of this amount would be utilised to pay the sugar cane farmers. It is to be noted that nearly 70 per cent of the payments accounts for the sugar cane.”

Furthering the support for the cause, Gupta at Dwarikesh Sugar, said, “The government is giving sugar to BPL (below poverty line) people at a subsidised rate of around Rs 13 per kg. While the market price of sugar is around Rs 32 per kg, we are supplying to them at Rs 21 per kg. Hence, the difference of nearly Rs 10 per kg has to be borne by us. Why should we pay for the government social welfare programme? The whole contribution should come from the government kitty.”

The removal of release mechanism too is widely expected. Verma at ISMA, says, “Companies are forced to carry sugar inventory over a long period of time and that affects our cash flows. It limits company’s capacity to pay the farmer during crushing season. Secondly, I have to borrow working capital from banks to pay my farmers at a high interest rate of 14 – 16 per cent. It increases the interest burden of the companies.”

For consumers, “If the industry gets deregulated it would attract large scale investments in the sector. Those investments will improve the efficiency of the mills and quality of sugar. Therefore, in the long run open market consumers would get access to quality sugar at a reasonable price,”Verma at ISMA explained