NDA’s bailout package for sugar mills has to do with politics. it will help finance assembly elections and woo sugarcane farmers’ votes
By Bhavdeep Kang
One of the first decisions that the Narendra Modi regime took was to anno-unce a huge bailout for the sugar sector. Ironi-cally, one of the last announcements by the previous UPA-II regime was similar: an even higher subsidy package for sugar mills. Clearly, politics, more than economics, was at play in both the cases. The UPA government felt it could gain electoral advantages in sugar-producing states such as Maharashtra and Uttar Pradesh. The strategy flopped.
The fact that Maharashtra, the largest sugar grower and manufacturer, is headed for assembly polls later this year, was seen as the prime motivation for the NDA’s generosity. An additional fact was that Akhilesh Yadav’s state government in Uttar Pradesh is at loggerheads with the sugar producers. There is a move to impose governor’s rule in the state, and force assembly elections almost three years before the scheduled dates. Union minister Nitin Gadkari was apparently the main mover behind the recent handout. Needless to say, he owns a mill.
But how do the two subsidies—Rs. 6,600 crore by UPA-II, and Rs. 4,400 crore by NDA—help the political parties. Well, the two amounts add to `11,000 crore, or the exact amount that sugar mills owed to sugarcane farmers, which is a testimony to our cockamamie sugar economy.
The purpose of the payouts was to protect the farmers—the money was to be used to clear their arrears. UPA’s package was to be used for that purpose. This incentive was in addition to an earlier partial-decontrol in sugar distribution, which resulted in net savings of Rs. 2,700 crore for the sugar producers, and hefty export subsidies. NDA’s package set the same condition: pay the farmers. In both the cases, the attempt was two-fold: woo the mills to finance the elections, and to grab the farmers’ votes.
Can a sugar factory buy raw materials on credit, not ante up and then wait for taxpayers to come to its rescue? “By law, farmers should be paid within 15 days of delivering their cane to the mills. But the latter don’t follow the rule and the state governments don’t bother to make sure they do,” says former Union Agriculture Minister Som Pal. “I can tell you that a sugar mill (owned by a well-known business group Group) in Baghpat (UP) owes farmers Rs. 170 crore for the last two years. Can you imagine the level of distress among the farmers in the region?” he asks.
Given this state of affairs across the state, somewhat belatedly, UP cracked down on recalcitrant mill owners, with arrears having breached Rs. 7,400 crore in the 2013-14 crushing season. The bulk of this—over 90 percent—was due on private mills. The state lodged FIRs against 57 sugar mills for non-payment and issued recovery notices against 19. The sugar mills retaliated by threatening a year-long shutdown. The UP Sugar Mills Association told the state government that farmers’ expectations were unrealistic. Sugar mills suffered a loss of Rs. 3,000 crore in 2012-13, it claimed, because farmers were paid a higher price of Rs. 280 per quintal for the cane, although the center recommended a fair and remunerative price (FRP) of Rs. 170.
State governments can overrule center’s FRP because each cane-growing and sugar-producing region may have different production and transportation costs. Although states are obliged to make up for the differences between the two prices, in case they ask mills to pay a higher price, a technical loophole allows the mills to escape it.
Simultaneously, sugar prices fell. The average ex-mill price in UP slumped from Rs. 3,600 per quintal in 2012 to Rs. 2,950 the next year, or a slide of 18 percent. However, UP mill owners’ arguments looked weak, when seen in the context of Gujarat, where mill owners paid farmers a price of Rs. 275 per quintal in 2012-13, and had no arrears. In Maharashtra the state government announced Rs. 230 as FRP, leading to widespread protests and a subsequent hike to Rs. 265.
“Why shouldn’t sugarcane farmers demand higher prices?” asks food policy analyst Devinder Sharma. After all, their costs have gone up each year. If government employees can get increases in daily allowances and hikes through the pay commissions, farmers need to get higher minimum support prices (MSPs) for their agriculture produce. Unlike wheat and paddy farmers, who grow two crops a year, cane growers are paid once a year because it’s an annual crop.
Sharma cites a study by Karnataka’s University of Agricultural Sciences, which concluded that the market value of sugarcane products, if properly utilized, is Rs. 40,000 per ton. Therefore, the problem is not that the farmers are overpaid, but that the mills are run inefficiently. However, the mill owners of UP want cane prices to be linked to that of sugar. The state set up a panel to look into the issue; the panel, which was to submit its report by April, 2014, missed the deadline.
In 2012, the Rangarajan Committee on the rationalization of the sugar sector suggested a 70:30 revenue-sharing arrangement between the farmers and sugar mills. It said that while the FRP pricing system should be retained as a floor price to be paid to farmers upfront at the beginning of the sugar season, the final annual earnings of the mills should be shared six months later.
The trouble with this approach is that FRP, like MSP in food grains, tends to be too low and does not take account of the high risks in agriculture. Farmers can suffer losses due to crop failures. Moreover, sugar prices can be extremely volatile; if the mills’ annual earnings are slim because of internal and external factors, cane growers would be in serious trouble. Besides, sugarcane is highly perishable, and the farmers have no holding capacity. Add to this the fact that mill owners are organized and prone to cartelization. Thus, there is a need to protect the farmers.
At the end of the day, farmers are best served by viable mills, whether private, cooperative or state-owned. Sugar cooperatives were formed in Maharashtra to avoid the exploitation of farmers; in 1950, farmers of 44 villages in Ahmednagar set up the first cooperative sugar factory. But today, these cooperatives are highly politicized, mismanaged and as sick as the private mills.
With the viability of the mills in mind, the NDA took another big decision: it increased the import duty on sugar from 15 percent to 40 percent. The logic was that the move will dissuade importers—Indians seem to have a preference for foreign sugar—and, therefore, lead to higher demand for domestic sugar. Retail prices moved up; share prices of listed sugar manufacturers rose in tandem as investors felt their financials will improve.
While the price bump will make the sugar industry happy, the government has to worry about two implications. One, it will make the consumers unhappy; they are already burdened with huge food inflation. Two, as stated earlier, UPA-II discontinued the levy system, which forced mills to supply sugar at a subsidized rate for distribution through Public Distribution System (PDS), or ration shops. So, while the government would buy sugar at market rate, it would supply it at a lower price to poor consumers, inflating the center’s food subsidy bill.
The NDA regime also decided that 10 percent ethanol, a byproduct of molasses, produced in sugar mills, should be blended with petrol. This will enable the mills to earn extra revenues. But the oil companies have to agree.
“Opening up the sector fully could be the answer. Let the market decide the prices of cane and sugar”, advises Alok Sinha, former chairman of Food Corporation of India. Obviously, he adds that there is a simultaneous need for an independent sugar sector regulator, which can protect farmers from cartelization. The government has to ensure farmers’ remuneration, viability of the mills, and availability of sugar at a reasonable price in the retail market.
Is there a way to keep all the stakeholders happy? If liquor baron Ponty Chadhha was still alive, he could have come up with an answer. Despite the controversies that engulfed him, he owned highly-profitable sugar mills in UP and Punjab, which also produced 30 MW of power each from cogeneration plants that used bagasse, a byproduct of the mills, as fuel. He produced alcohol from molasses, although his distillery was sealed in 2012 for violating pollution norms.
If it is serious about the health of the sugar industry, the government has to formulate a policy that forces the sugar mills to become viable. One of the ways is diversification of their products, like Chadhha did. But since banks are reluctant to lend money to this sector, the solution may lie in the Sugar Development Fund. The government has to keep a sharp eye on the private mill owners, so that the latter don’t indulge in gold-plating of their projects to siphon off money, and renege on payments. Efficiency rather than subsidy is the only way forward.