Reviewing regulations in the sugar sector
There
have been some recent developments in the sugar sector, which pertain to the
pricing of sugarcane and deregulation of the sector. On January 31, the Cabinet
approved the fair and remunerative price
(FRP) of sugarcane for the 2013-14 season at Rs 210 per quintal, a 23.5%
increase from last year’s FRP of Rs 170 per quintal. The FRP of sugarcane is
the minimum price set by the centre and is payable by mills to sugarcane
farmers throughout the country. However, states can also set a State Advised
Price (SAP) that mills would have to pay farmers instead of the FRP.
In
addition, a recent news report mentioned that the food ministry has
decided to seek Cabinet approval to lift controls on sugar, particularly
relating to levy sugar and the regulated release of non-levy sugar.
The
Rangarajan Committee report, published in October 2012, highlighted challenges
in the pricing policy for sugarcane. The Committee recommended deregulating the
sugar sector with respect to pricing and levy sugar.
In
this blog, we discuss the current regulations related to the sugar sector and
key recommendations for deregulation suggested by the Rangarajan Committee.
Current regulations in the sugar sector
A
major step to liberate the sugar sector from controls was taken in 1998 when
the licensing requirement for new sugar mills was abolished. Delicensing caused
the sugar sector to grow at almost 7% annually during 1998-99 and 2011-12
compared to 3.3% annually during 1990-91 and 1997-98.
Although
delicensing removed some regulations in the sector, others still persist. For
instance, every designated mill is obligated to purchase sugarcane from farmers
within a specified cane reservation area, and conversely, farmers are bound to
sell to the mill. Also, the central government has prescribed a minimum radial
distance of 15 km between any two sugar mills.
However,
the Committee found that existing regulations were stunting the growth of the
industry and recommended that the sector be deregulated. It was of the opinion
that deregulation would enable the industry to leverage the expanding
opportunities created by the rising demand of sugar and sugarcane as a source
of renewable energy.
Rangarajan Committee’s recommendations on
deregulation of the sugar sector
Price of sugarcane: The central government fixes a
minimum price, the FRP that is paid by mills to farmers. States can also
intervene in sugarcane pricing with an SAP to strengthen farmer’s interests.
States such as Uttar Pradesh and Tamil Nadu have set SAPs for the past few
years, which have been higher than FRPs.
The
Committee recommended that states should not declare an SAP because it imposes
an additional cost on mills. Farmers should be paid a uniform FRP. It suggested
determining cane prices according to scientifically sound and economically fair
principles. The Committee also felt that high SAPs, combined with other
controls in the sector, would deter private investment in the sugar industry.
Levy sugar: Every sugar mill mandatorily surrenders 10% of its
production to the central government at a price lower than the market price –
this is known as levy sugar. This enables the central government to get access
to low cost sugar stocks for distribution through the Public Distribution
System (PDS). At present prices, the centre saves about Rs 3,000 crore on
account of this policy, the burden of which is borne by the sugar sector.
The
Committee recommended doing away with levy sugar. States wanting to provide sugar
under PDS would have to procure it directly from the market.
Regulated release of non-levy sugar: The central government allows the
release of non-levy sugar into the market on a periodic basis. Currently,
release orders are given on a quarterly basis. Thus, sugar produced over the
four-to-six month sugar season is sold throughout the year by distributing the
release of stock evenly across the year. The regulated release of sugar imposes
costs directly on mills (and hence indirectly on farmers). Mills can neither
take advantage of high prices to sell the maximum possible stock, nor dispose
of their stock to raise cash for meeting various obligations. This adversely
impacts the ability of mills to pay sugarcane farmers in time.
The
Committee recommended removing the regulations on release of non-levy sugar to
address these problems.
Trade policy: The government has set controls on both export and
import of sugar that fluctuate depending on the domestic availability, demand
and price of sugarcane. As a result, India’s trade in the world trade of sugar
is small. Even though India contributes 17% to global sugar production (second
largest producer in the world), its share in exports is only 4%. This has been
at the cost of considerable instability for the sugar cane industry and its
production.
The
committee recommended removing existing restrictions on trade in sugar and
converting them into tariffs.
