This is one sweet pill that no one is going to complain about at least for now. The government's decision to partially decontrol the sugar sector would boost the profits of sugar companies and enable farmers to get quick payments for the cane supplied. But there is a catch. Sugar prices will be completely market determined which is broadly in line with the freeing of petrol from price controls. So, prices could shoot up during years when there is a deficit production. Consumers would, however, continue to pay low prices for sugar purchased at ration shops.

The government move would result in the sugar companies making at least Re 1 more in profits for every kilogram produced. The industry would net Rs 2,500 crore-3,000 crore more in a year and this would boost profit margins of sugar producers by over 10%. Some analysts reckon that profits of sugar companies would increase by as much as 50%. Sugar production is estimated to be around 245 lakh tonnes in the current season (October-September) while consumption is pegged at about 230 lakh tonnes. With an opening stock of 60 lakh tonnes, there is no threat of sugar prices going up this year, top industry officials say.

"A lot of new investments will come into the sector," says Ravindra S Singhvi, MD, EID Parry, which is among the largest sugar producers in the country. "We can enter into long-term contracts and tie-up with institutional customers," he says. There is some cheer for sugarcane farmers as well. They would be able to get payments for cane supplies quickly. With the government tightly controlling supplies from the sector, cane arrears got piled up leading to friction between farmers and sugar mills over delay in payments. "Since we would get a higher value (for sugar), we would be able to give payments (to farmers) earlier," says M Manickam, MD, Sakthi Sugars. Improved cash flows will enhance liquidity of sugar firms enabling them to settle dues to farmers on time, analysts tracking the sector say. Cane arrears will reduce substantially from the usual peak of 6-7 months following decontrol, according to estimates made by ratings agency Crisil.
 

However, the centre has left the sugar price mechanism and minimum distance between mills' crop areas within the control of the state government. The centre advises the cane purchase price— known as the fair and remunerative price (FRP)—for companies. However, key sugarcane producing states such as Uttar Pradesh and Tamil Nadu also announce state advised price (SAP) for sugarcane. Interestingly, the Rangarajan committee that advised sugar decontrol favoured abolition of SAP.

State governments would have to float tenders and buy sugar through competitive bidding from mills for supplies to ration shops. This would enable sugar companies, which had to supply 10% of their production to the government at rates lower than prevailing market prices, to get the best possible deal. Sugar mills supply the 10% quota also known as levy sugar at a subsidised rate of around Rs. 19 per kg for distribution to ration shops compared to the current market price of around Rs 31.