New Delhi: Pushing ahead with long-pending reforms of the sugar industry, the cabinet on Thursday approved the dismantling of rules requiring sugar mills to sell the sweetener at below-market prices through the public distribution system (PDS) and abolished curbs on open market sale.

The cabinet committee on economic affairs cleared the recommendations made by a panel headed by C. Rangarajan, chairman of the Prime Minister’s economic advisory council, in a move that was welcomed by the Rs.80,000 crore sugar industry in India. The report was submitted in October last year.

Mills have been losing up to Rs.3,000 crore a year by supplying sugar at a discounted price to PDS. Until now, they have been required to sell 10% of their annual production to the government at cheap rates for distribution through so-called ration or fair price shops. The government till now also curbed the sale of sugar by mills in the open market.

The dismantling of the PDS requirement means the Centre will have to bear a subsidy of Rs.18.50 per kg of sugar sold through the system, which means the sugar subsidy burden will rise to an annual Rs.5,300 crore from Rs.2,600 crore.

The subsidy the Centre will bear will be the difference between the provisional ex-mill price of sugar at Rs.32 per kg and PDS sugar, which is sold at Rs.13.50 per kg.

Food minister K.V. Thomas said at a media briefing that the move to dismantle the rule requiring mills to sell sugar to PDS will be reviewed after two years.

Sugar stocks rose ahead of the expected announcement. Bajaj Hindusthan Ltd was up 7.3%, Shree Renuka Sugars Ltd gained 7%, Balrampur Chini Mills Ltd rose 4% and Dhampur Sugar Mills Ltd advanced 6.3% at the close of trading on BSE, compared with a 1.5% fall in the benchmark Sensex.

“It is difficult to guess which way the prices of sugar will go following this decontrol,” said Himanshu, an assistant professor at Jawaharlal Nehru University and a Mint columnist. “I expect that there will be an increase in the supply of sugar as many mills have been hoarding sugar due to the regulated release mechanism. If there is an increase in supply, sugar prices will come down. In such a situation, government subsidy may also come down.”

Vinay Kore, a former minister in the Maharashtra cabinet and a director of Tatyasaheb Kore Sugar Cooperative Factory Ltd, said sugar prices may drop in the immediate aftermath of the reforms.

“In the short run, there may be a rush to dispose of stocks, which might have an adverse impact on the price of sugar, but the overall decision is a welcome one,” he said. “Those cooperative factories which are run with prudent management and those who have the vision to do long-term planning will prosper.”

Profits of sugar companies in the near term may remain under pressure, given the surplus sugar stocks, said Deven Choksey, managing director of KR Choksey Shares and Securities Pvt. Ltd. “The move will be positive for sugar companies’ bottom line in the long term,” he said.

The abolition of curbs on open market sale will free sugar mills of costs on account of inventory accumulation. Until March 2012, the food ministry determined the quantity of sugar to be sold in the open market on a monthly basis. This was relaxed in April 2012, with the food ministry making it a quarterly stipulation and later a half-yearly practice.

Thursday’s decision does away with restrictions on the time or quantity of sugar released for open market sale, giving companies greater flexibility in managing cash flows.

The Rangarajan committee had favoured complete deregulation of the sugar industry. The panel’s other key recommendations were to streamline the price paid to sugar cane growers based on the combination of fair and remunerative prices and share in the value of sugar.

The panel also called for lifting outright bans and quantitative restrictions on exports in favour of a stable external trade policy regime, with modest tariff levels of 5-10%, phasing out cane reservation areas, removing the stipulation of a minimum distance between two mills, and dispensing with the mandatory requirement of jute packaging.

Powers pertaining to linking the sugar price to the cost of production and sugar realization, phasing out cane reservation areas, and removing the stipulation on the minimum distance between two mills are exercised by state governments, which are expected to discuss the measures with farmers and other stakeholders.

“Government’s decision to give freedom to the sugar industry to sell sugar on commercial consideration and removal of the burden of levy (PDS) sugar are extremely important and crucial,” Abhinash Verma, director general of the Indian Sugar Mills Association, said in a statement.

“These much awaited reforms will reduce the cost of production and improve liquidity with millers, which in turn will ensure better and timely payment of cane price to farmers as also assure better quality sugar, at reasonable prices on a sustained basis, to the consumers,” he added.

The reforms will make the sugar industry more “viable, attractive and bankable”, helping it attract new investments domestically and from overseas, Verma said.