It was in October 2012 that a committee on sugar sector reforms recommended eliminating state controls on it. At that time, sugar shares had risen in anticipation, but have lost significant ground since. Investors would have been more circumspect if they had known nothing would happen for another five months. They have not lost hope yet, it seems. On Wednesday, sugar stocks gained in early trading after news that the Prime Minister’s Office has sought action on sugar decontrol.

The easiest proposal to implement is perhaps the one pertaining to levy sugar, an event that everyone has assumed will happen. The question they don’t have an answer to is when. The real question that investors should be asking is: Will the government risk taking the blame for higher sugar prices when elections lie ahead?

Removing the levy is an administrative step, but there is still the matter of supplying subsidized sugar to the masses. The government now pays about Rs.19 a kg for levy sugar produced in the 2011-12 season, which does not cover a mill’s cost of production. This sugar is sold through the states’ public distribution system at Rs.13.50 a kg. Removing the levy system will mean that states will buy sugar at market-determined rates, but the difference will need to be subsidized by the central government. Sugar trades in the wholesale market at about Rs.32 a kg.

So, who will pay the difference? The government can bear this burden itself, but that will add to its fiscal deficit. The Rangarajan committee had recommended using part of the sugar cess, an additional excise duty, or a levy on exports and imports to recover the subsidy. Higher duties will result in higher sugar prices and the opposition will promptly lay the blame on the government’s decontrol policy.

But if the government has to bite the bullet, it should do so when this will result in minimum volatility. The timing seems right now, as prices are stable both in domestic and overseas markets. In 2011-12, sugar output was at a high of about 26 million tonnes. Though sugar prices are up by about 12% from their year-ago levels, they are down by 13% from early-August levels. Compared with how costs have risen, prices have not risen as much.

In the current season, sugar output is estimated at 24.3 million tonnes by the Indian Sugar Mills Association. The next few months will reveal if actual output will be in line with estimates, as dry weather has affected production in several states. A lower-than-estimated output could upset prices. Internationally, higher-than-expected global output has kept prices in check. That makes exports less attractive, and ensures there is enough sugar for domestic consumption.

The worst-case scenario will be a shortfall in domestic cane output, accompanied by a global surge in sugar prices. Both events would have led to higher sugar prices—decontrol or not—but now the government will bear the political blame for the event.

This risk will always be there, but it acquires more credibility when elections lie ahead and may perhaps explain the government’s inertia on decontrol. If the government is so cautious about a baby step of removing the levy, its ability to take on bigger issues such as ending the practice of a state-advised price and allowing free trade in sugar comes under a cloud.