For the sugar sector to grow, its players must buy and sell freely

The partial decontrol of sugar is a welcome step in the right direction. Abolishing the 10 per cent levy will benefit sugar mills by about Rs 2,700 crore. This would help them to clear a part of the cane arrears, which touched Rs12,203 crore on February 28, the maximum being in Uttar Pradesh (Rs 6,693 crore). Also, abolishing the monthly release system for non-levy sugar in the market will give them the flexibility to take economically rational decisions, hopefully improving their competitiveness.

Where do we go from here? Unfortunately, not far enough. The reason is as follows: a good policy should be judged by whether it can promote the growth of the sector, while ensuring its economic and environmental sustainability in an open economy framework, and making sure that different stakeholders in that sector get their due. For growth to catapult, the basic requirement in a market economy is that different economic actors should have full freedom to buy and sell their products to whomsoever it makes economic sense.

While the abolition of the levy and the monthly release system does extend that freedom to the sugar industry, do sugarcane farmers have similar freedom to sell their cane to anyone who can offer a higher price? Not really. For this to happen, the policy of reservation of the cane area and the minimum distance between sugar mills needs to go. Mills don't want this, as they say it will create cut-throat competition and hit them below the belt. But is it not the "process of creative destruction" that promotes efficiency and growth? Further, the controls on molasses, related to movement out of the state, as well as quota and prices for the potable liquor industry, need to go to make the sugar sector more profitable. The current policy complex of controls on molasses, in fact, subsidises the potable liquor industry at the cost of sugar mills and cane farmers.

However, the key to economic sustainability and growth of this sector depends upon the pricing of cane. It is well known that the state advised prices (SAP) in some states are not in sync with any economic rationality, doing more harm than good to the economic sustainability of the sector. This has often led to large cane arrears, as is the case this year. And if, next season, SAPs go up further and sugar prices remain subdued or even go down, there could be a disaster in sustaining the sugar industry. And if the sugar industry becomes unviable, for whom will the cane be grown? So the two main stakeholders, farmers and millers, need to realise they have to work together to find a satisfactory principle of pricing cane. Unfortunately, there is a big deficit of trust, and the state governments have not been able to bridge that trust gap. That's why the Rangarajan Committee, as well as the Commission for Agricultural Costs and Prices (CACP), had recommended in their respective reports a switch to the revenue-sharing principle, where cane pricing is 70 per cent of the value of sugar and its first-stage by-products.

Since the recovery ratio and pricing of sugar and by-products vary from state to state, the value of these will be different, and so will the pricing of cane, which can be worked out for each sugarcane zone. The CACP's calculations (cacp.dacnet.nic.in/RPP/Sugarcane-2013-14.pdf) show that farmers will get a better deal, on average, under this formula than has been the case in the last eight years. Unless an agreement is reached on the cane-pricing front, this sector cannot fly much higher, and its flight path will remain jerky and risky.

Last, but not least, is the issue of environmental sustainability. Given the drought in Maharashtra and Karnataka this year — and with climate change, the probability of its intensity and frequency increasing — there is nothing in the policy that can ensure the rational use of water. The CACP's analysis shows that one kilogram of sugar produced in Maharashtra needs 2,000 litres of water, while the same sugar in Uttar Pradesh/ Bihar needs only 1,000 litres of water. The cost of water in UP/ Bihar is typically one-third of that in Maharashtra. Therefore, it is time to think about maximising water productivity, along with land productivity, and switch policy gears accordingly to promote cane in areas where Nature has endowed us with water — and that is eastern UP and Bihar, more than Maharashtra and Karnataka. Only if the northern states learn to price cane in sync with the value of sugar and its by-products, and western states learn to put cane on drip irrigation, can we take this sector to a higher growth trajectory, one that is efficient and sustainable, both economically and environmentally.

The writer is chairman of the Commission for Agricultural Costs and Prices. Views are personal