Sugar: strong bastion of the Nehruvian edifice
by Virendra Parekh on 17 Jan 2009 0 Comment

Economic liberalization has demolished large parts of the economic edifice assiduously built by Jawaharlal Nehru and his daughter Indira Gandhi. But some bastions have managed to survive. They keep reminding us what the dynasty has done to the country’s economy. India’s sugar industry must be regarded amongst the last and strongest bastions of Nehruvian policies. It symbolizes everything that has gone wrong with the country’s economic policy.

Predictably, the results have been bizarre. Here is a commodity whose supply, consisting of production plus carryover stock, almost always exceeds the demand for local consumption and exports. Besides, it is officially designated as ‘essential.’ Yet it is frequently in short supply, leading to high prices. The high prices of sugar, however, do not benefit cane growers, many of whom are turning to other crops in disgust and despair. If you think the villain must be the sugar producers, think again. Sugar mills have long been complaining that their operations are becoming unviable or at least far less profitable than they ought to be.

What explains this extraordinary state of affairs? The short answer is: government interference and control. Everything from the price of cane to the quantity a sugar mill can sell in the so-called open market is decided by some law or fiat of government.

First, the Central Government announces the statutory minimum price (SMP) for sugarcane, as for many other crops. Then, some State Governments decree the state-advised price (SAP), which is higher than the SMP. These prices are often fixed arbitrarily, without taking into account the prevailing sugar prices and the industry’s capacity to pay. The political clout enjoyed by cane growers, many of whom are in active politics, is partly responsible for this.

Sugar mills are duty-bound to pay the SAP to farmers for the cane they buy. There is a location policy for sugar mills which places restrictions on the number of sugar mills coming up in an area. This binds mills and farmers in every area in a forced marriage.

Also, sugar mills have to surrender 10 percent of their production to the government at a fixed price. This ‘levy’ sugar is used by government to supply consumers through fair price shops at a subsidized price. The sale of by-products like molasses (used to make alcohol) is also under government control.

As the price paid to mills for levy sugar is lower than the open market price, mills end up bearing a part of the subsidy given to consumers. They are supposed to make it up by selling the remaining output at a higher price in the open market. But the open market is open only in name. The government decides how much sugar the industry will sell in the market every month (the monthly quota) and issues release orders to individual mills telling them how much each can sell in the market that month.

When the market price goes too high and consumers shout in protest, the government responds by releasing additional quota or some tinkering with import/export norms. 

This stranglehold of government on the market is justified as necessary to even out the imbalance in sugar supplies between peak (October-March) and lean months for production of sugar. However, many other sectors relying on agricultural inputs face similar seasonal swings; but none needs this degree of state control. Managing predictable seasonal cycles should be the responsibility of producers, not government. We have a fairly active futures market for producers to hedge themselves against intra-season price risk.

As cane price is fixed arbitrarily, what determines the viability of sugar production, as also of cane cultivation, is the ex-mill sugar price. When that price is high enough for mills to recover their cost, the system runs relatively smoothly.

Frequently, alas, that is not the case. Year after year, mills claim they are not in a position to pay farmers their dues because cane prices (fixed by government) are too high or open market prices of sugar too low, or both. Citing un-remunerative sugar prices, mills withhold payment to farmers. Payment delays force farmers to look for other means to raise cash, such as offloading cane at gur and khandsari units at far lower prices, or reducing the area under sugarcane to grow some other crop, or even to borrow money from the moneylenders at exorbitant interest rates.

Ironically, sugar factories owned by the state governments and farmers’ cooperative societies are bigger culprits in withholding cane payments than private sector mills that are often reviled as exploitative. Companies such as Bajaj Hindustan, Balrampur Chini and Triveni have over the years, expanded cane-crushing capacity to enjoy economies of scale. They have also invested heavily in power units which burn bagasse to produce electricity, molasses-based distilleries, and ethanol plants. Profits from these allied businesses enable these companies to pay farmers quicker than others. Probably, they would not have been able to diversify in this manner if the licence-permit-quota raj had not largely been dismantled.

Again, it is the small farmers who are the worst sufferers because they bring their cane to the factory gate after the big farmers have sent theirs. Cane bills are settled on the basis of ‘first come first served’. In difficult times, when mills run out of cash, small farmers are kept waiting for months together.

The build-up of arrears has led to an unhealthy cycle of ups and downs in production of cane and sugar, and consequential wide fluctuations in sugar prices.

Indeed, the ebbing phase of the sugar cycle seems to have set in again. Millions of traditional cane growers in almost all states have switched over to other crops such as maize, cotton, wheat and rice. Between 2006-07 cane was grown on a record 5.15 million hectares yielding an all-time high crop of over 355 million tonnes; yet this season there has been a fall of about 30 percent in land under cane.

In the current sugar season (October 2008-September 2009), sugar production is set to decline by over a fifth to about 20-21 million tonnes, following a 20 percent drop in crop area and a 45 million tonne decline in cane output to 295 million tonnes from the last season. Sugar consumption for the year is estimated at 22-23 million tonnes. Together with a carryover stock variously estimated at 7 to 10 million tonnes, the supply exceeds demand. Yet, the expected shortfall in output has already pushed wholesale prices up by over 10 per cent in the last couple of months.

The sugar industry has for long been victim of over-regulation and muddled policy regimes. Needless governmental interference has disturbed market dynamics and discouraged investment and modernization. Instead of tinkering with quotas, releases and import/export norms, the industry deserves total decontrol, deregulation and rational cane pricing. This would encourage fresh investment, consolidation of fragmented capacities and modernization of factories.

The current regime, dominated by sugar barons and coming to the end of its miserable tenure, is unlikely to take any such initiative. Do not blame it. Successive governments at the Centre have routinely promised decontrol. The Vajpayee government did so in 2002-03 and Manmohan Singh government in July this year. The promise has never been followed by action. The only government that actually decontrolled sugar was the Janata Party government under Morarji Desai in 1977-78, when sugar prices dropped to Rs. 2 per kg. The decontrol was quickly undone.

The hard reality is that the politics of sugar cuts across party lines. Too many powerful people prefer the status quo.

That brings us to the mortal bind in which Nehruvian policies have put the country in the economic as well as the political sphere: those who have the power and responsibility to do the right thing have a strong vested interest in not doing so. That explains the paralysis of will, the deliberate dithering. Sugar is but a small example.

The author is Executive Editor, Corporate India, and lives in Mumbai


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