Manish Sharma

The spiraling sugar prices have caused a lot of bitterness this season. Almost everyone, including farmers, industrialists/ millers, retailers, consumers and the government, have been bearing the burden of a crisis that has created a lot of ruckus over the past few months. Prices of the sweet commodity shot up to an unprecedented level of Rs 4,300/quintal last week in the wholesale markets and, going by the current trend, is clear that it would touch an all-time high of Rs 50/kg in the retail markets soon. Of all the commodities, sugar has been the most politicized crop in India. But the chain of events of the last year that saw violent protests, political maneuvering and pressure tactics by all and sundry has all the makings of a gripping potboiler.

Demand-Supply mismatch

At the heart of the issue lies the age-old problem of demand-supply mismatch. While production of sugarcane has declined, demand remained at previous year’s level. Last year India witnessed a shortfall of around 5 million tones (MT) of inventories, while domestic consumption is about 20 MT, production dropped to 15 MT, a whopping drop of more than 40 per cent in a single year. For the 2009-10 sugar season (spanning October 2009 to September 2010), India is expected to see a huge gap of 7-8 MT between demand and supply.

In the farming circle, it is fairly well known that the sugar crop has a typical three-year cycle. In 2006-07, sugar production was 28 MT but domestic consumption requirement remained moderate at around 20-22 MT. In 2007-08, again, production overshot demand by 5 MT with a bumper crop of 26 MT. So for two consecutive years, farmers either resorted to distress sale or burning the crop. Moreover, unlike wheat, sugarcane cannot be stored for long as the cane dries up fast leading to loss in output. Thus, having burnt their fingers with overproduction, farmers switched to other crops in 2008-09.

Pricey Issue

The early prediction of drought in the sugarcane belt, particularly in the western region, led to speculation in the domestic market. Prices had already flared up in the international markets by June 2009 on the news of crop shortage in Brazil. So by the time the government decided to act by reducing the import duty to zero on raw sugar, prices had already touched Rs 40/kg in the retail market. Moreover, the government banned futures trading in sugar from May onwards. This move left everyone, particularly the industrialists, clueless about the future price behaviour.

To top it all, the government’s inept handling of the pricing issue left much to be desired. The sugar economy in India is highly regulated, starting from the basic crop to end-product. There is too much control from procurement to pricing. Even the by-products are subject to government control. However, it is ironical that when the government decided to simplify remuneration-related matters by tweaking the policy, it trespassed into the territory of the powerful farmers’ lobby and aggravated the crisis further.

In the current season, to ease the subsidy burden the government came out with a new remuneration plan. It amended the Essential Commodities Act, 1955 through an Ordinance whereby the price of sugarcane will be fixed on a FRP (fair and remunerative price) basis instead the minimum support price plus the advisory price.

Till now, the Centre used to compensate farmers by announcing a SMP (statutory minimum price) for sugarcane. Moreover, pricing has not been uniform across states. Apart from the SMP, various state governments have announced a SAP (State Advisory Price) that mills are required to pay to the farmers. The prices announced by the governments of Punjab, Bihar, Haryana, Uttar Pradesh, Madhya Pradesh and Rajasthan were not linked with the recovery per cent in cane, while those announced by Karnataka, Tamil Nadu and Andhra Pradesh were based on recovery rates. In Maharashtra and Gujarat, where cooperative mills dominate the sector, initial payments tend to be slightly higher than the SMP. This created a lot of problems for farmers and mill owners.

Thus, to end this pricing conundrum the Centre announced a ‘fair price’ of Rs130/quintal for sugarcane, 62.5 per cent more than the Rs 80/quintal SMP of the previous year. The Ordinance also made it clear that states can compensate farmers more than the FRP but they have to bear the cost in such cases. So far, state-level politicians used to seek higher remuneration for farmers but have been reluctant to foot the bill themselves passing on the bucks either to the Centre or mills.

Bitter-sweet Politics

This Ordinance, however, was opposed by many regional politicians especially those from Uttar Pradesh (UP) – the most politically sensitive state in Northern India. Local leaders like Ajit Singh, son of former Prime Minister Ch. Charan Singh, teamed up with an old farm lord Mahendra Singh Tikait and mobilized farmers across states to protest the government order.

In the last season, the UP government had fixed the SAP of sugarcane at Rs 145 per quintal for the common variety and Rs 150 per quintal for the early variety. Even before the crushing season began, the gur and khandsari units (the unorganized market) had offered to pay Rs 170 per quintal to sugarcane growers. Thus, when government announced the FRP of Rs 130/quintal, farmers got disappointed and sensing a loss of revenue, took to the streets of the Capital. The government buckled under pressure and backtracked on the Ordinance.

But, the crucial issue remained mired in political bickering.

In order to bridge the shortfall in the domestic market, the Centre allowed duty-free imports of raw and white sugar. However, it has not yielded desirable results. Following the agitation, the UP government banned imports of raw sugar into the state where almost all the important mills in the country are situated. In most states, farmers have refused to sell their produce to mills in anticipation for higher rates. The landed price of imported sugar has become more expensive than the domestic price because of the government’s mismanagement. So, most millers have abandoned their plans to import in the last one and a half months.

With prices showing no signs of coming down, the central government finally relaxed sugar imports by abolishing import duty on refined white sugar up to December 31 this year. It also lifted any ceiling on the quantity to be imported. It also allowed UP sugar mills to get processed raw sugar imported by them anywhere in the country.

According to some news reports, the Centre now wants to hike the quota allocated for PDS to 40 per cent of produce. Millers have reduced the quota to 10 per cent in the past few years. Most mill owners are now offering prices of around Rs 250 per quintal but farmers are still in the dark about the market price. Meanwhile, Agriculture Minister Sharad Pawar and UP Chief Minister Mayawati are trading charges to politicize the issue. While no one has emerged as winner, it is the consumer who unnecessarily has to bear the cost of lop-sided policies and a lack of foresight.

Indiabiznews, January 14, 2010