Even as the government has decided to loosen its grip on the sugar sector, mills are clamouring for more.

Ajit S Shriram, deputy managing director, DCM Shriram Consolidated, and vice-president, ISMA, says partial decontrol, despite being a great job by the Centre, would fall short of producing the desired results if the states, particularly UP, don't rationalise cane prices to ensure a level-playing field for mills across the country, in an interview with FE's Banikinkar Pattanayak. Excerpts:

What will be the impact of the recent government decision to partially decontrol the sugar sector and what steps do the mills need to take to maximise the benefits of the move?

I think what they have done so far is to address concerns on the sugar side. They have decided to abolish levy sugar and the release order mechanism. This will improve the cash flow of companies and enable them to pay better prices to farmers (for cane purchases) on time. But I think sugar prices will be under pressure for some time, until all mills get to know how to use the futures markets better and how to effectively use exchanges like NCDEX for business. It's because earlier some people may have used the futures market for hedging. But when you have a monthly release order mechanism and at the end of the month if you get a week's extension or additional quota, then the position you have taken in the futures market changes.

What other reform measures do you seek now?

The government has done a great job, and now it needs to complete the reform process by establishing a linkage between cane and sugar prices. If you see the reports of the Mahajan committee, the Thorat committee and the Tuteja committee, everyone has recommended some kind of linkage between cane and sugar prices. Ultimately, sugar is not made in the factory, it's made in the field, because whatever sucrose content a cane has, factories are only converting it into sugar. So if the sucrose content is less, you will get less sugar. And today, we have a system where we pay on the basis of the weight of the cane, and not exactly on recovery. So there has to be some kind of linkage where farmers would be encouraged to grow high-yielding cane that will have better recovery. Or, we won't be able to break the cyclicality of sugar production.

Farmer groups often demand the de-reservation of cane areas when the issue of sugar sector decontrol is raised. Are you comfortable with this idea?

There is no problem in the de-reservation of cane areas. What happens is there are certain areas that are closer to the factory, and it is in the interest of those farmers who are cultivating there to supply to that particular factory. Otherwise, transportation costs will be higher for them. Only those farmers who cultivate the crop in the areas that share equal distance from two factories may have a choice to supply to either of the plants, but not all.

Is there any level-playing field for mills in Uttar Pradesh compared with some other states, considering that the state-advised price in the state is higher and recovery rate lower?

This is exactly why we want the linkage between cane and sugar prices. It's because if sugar factories in Maharashtra or Karnataka get cane with higher recovery and lower prices, their cost of production will be less. So they are able to supply sugar to the North East, Bihar and even eastern Uttar Pradesh. Even mills from Andhra Pradesh are going to the North East which were traditionally the market for UP mills. But now that mills across the country have ramped up efforts to become competitive because UP has outpriced others in cane and recovery has gone down, mills in the state are not able to compete effectively. Some mills also import raw sugar and convert it into refined sugar to sell in the domestic market, which puts pressure on local prices.

What is the ideal linkage formula according to you?

Rangarajan has recommended that 70% of ex-mill prices of sugar and each of its three major by-products be paid to farmers for cane supplies. And if you don't factor in any of that and just take sugar, make it 75%. It sounds logical.

Cane pricing is also in the states' domain and considering that a consensus among producing states is difficult to achieve soon, what measure would you suggest to tackle the issue?

Around 4-5 year ago, the Centre wanted to bring in a clause in the sugarcane control order. What it says is if the state wants to pay more for cane beyond the price fixed by the Centre, the state has to bear the difference. It's the ideal solution. Bring in that clause as an interim solution.

What are other measures that you suggest the government to take to complete the reform process in the sector?

The country needs to have a stable trade policy and rational duty structure, factoring in the supply situation. So considering the current situation, when we expect the carry-forward stocks for the next season to be more than 30% of the production, the government should perhaps raise the import duty on sugar a bit so that domestic farmers don't suffer.