Rangarajan solution looks quite comprehensive

When every aspect of an industry, right down to deciding which farmer will sell his produce to which mill and when each mill will sell its sugar—and how much at any point in time—is controlled by the government, decontrolling it is not an easy job. Sure, there’s a subsidy element—the 10% levy sugar the government takes from industry at a below-cost price to feed the ration system—of around R3,000 crore a year, but the problem is more deep-seated than that. Freeing up farmers to sell to whom they like, and allowing mills to buy from farmers when they want, and at what price, is a great idea but if done to soon, can cause a collapse in the system, endangering the livelihood of lakhs of farmers, apart from the health of the sugar mills themselves. Which is why the plan of the Rangarajan Committee on sugar decontrol is a well-thought out one.

To get the subsidy question out of the way, Rangarajan has suggested the government use part of the funds from the Sugar Development Fund—an annual revenue stream of R600 crore gets generated—and then levy an additional excise duty or a small import/export duty on sugar to fund the subsidy. While the eventual goal is to move away from the current system where mills have to buy cane only from farmers within a 15 km radius of their factory—since they have to mandatorily buy all the cane even when they don’t need it, farmer dues are around R5,500 crore right now—and move to a system of long-term contracts between mills and farmers, Rangarajan has suggested a 3-5 year time-frame in which to do this. And since there is no certainty the mills won’t take advantage of farmers in a free-market scenario—each day of delay in buying cane lowers its sugar content and therefore value—what is recommended is that mills pay farmers the price announced by the Central government each year as soon as he brings the cane to their factory gate. Later, based on the value of what is sold by the mills, they give the farmer additional payments in such a manner that 70% of their total revenues are given to the farmer. The idea behind this is to ensure state governments don’t keep announcing a high state advised price (SAP) for buying sugarcane each year, a figure that’s so high that while mills have no option but to buy at that price, they don’t have the money to pay the farmers. So while the farmers don’t really benefit since they don’t get the money, all the SAP does is to bankrupt the industry. The 70% figure has been arrived at by the committee after looking at the costs incurred by the farmers and the millers. This revenue share, presumably, can also be done away with in later years when both the farmers and the mills have understood how the market works—the idea of the formula, immediately, is to ensure farmers aren’t taken for a ride. Whether the vested interests, and that includes powerful sugar cooperatives in Maharashtra, will allow the report to be acted upon, however, is an altogether different matter—given how the industry’s growth more than doubled after just partial decontrol in 1998, that would be a pity.