More than six months after the Rangarajan panel recommended deregulating the R80,000-crore sugar sector, at least one state has initiated reforms in cane pricing. The Karnataka government has passed a Bill that seeks to link the price of cane with its byproducts, including sugar.
“Although a specific formula is yet to be worked out, we expect the cane pricing policy to be broadly in line with the Rangarajan panel recommendations,” Mukesh Kumar, executive director of Karnataka-based Vishwaraj Sugar, told FE. The panel has suggested that 70% of ex-mill prices of sugar, bagasse, molasses and press mud be paid to farmers for cane supplies. “A reasonable and stable cane pricing regime will ensure timely payment to farmers and a steady margin for mills as they can plan their financial outgo on raw material purchases better,” Kumar added.
Industry executives expect Karnataka to finalise the formula after Assembly elections. Implementing the linkage formula will be a symbolic victory for the sugar industry, which has been pushing for the next stage of reforms in the sector, although Karnataka does not have a state-advised price and cane rates are fixed through negotiations between farmers and mills. This could encourage other states, including largest cane producer Uttar Pradesh, to focus on reforms in cane pricing due to potential fears of mills shifting investments to other states. Reforms in cane pricing are crucial as the raw material accounts for around 65-70% of mills’ costs.
Earlier this month, the Centre decided to partially deregulate the sector by freeing mills from supplying subsidised sugar for state-run welfare programmes and scrapping the release order mechanism through which it controls market sales. Since cane pricing is in the state’s domain, the Centre can’t go ahead with reforms unilaterally, although it has the power to fix the floor rate of cane.
Currently, five states – Uttar Pradesh, Uttarakhand, Punjab, Haryana and Tamil Nadu – announce SAPs above the benchmark price fixed by the Centre. Mills in Uttar Pradesh often complain that high state-set cane prices – aimed at wooing voters in the farming community – coupled with low recovery are bleeding them.
“The linking of cane prices to those of its byproducts, as recommended by the Rangarajan panel and proposed to be implemented in Karnataka, will help stabilise returns to farmers and ensure reasonable margins to mills. It will also curb the cyclicality of cane and sugar production in the country,” said Abinash Verma, director general of the Indian Sugar Mills Association (ISMA). India, the world’s second-largest sugar producer, typically faces a regular cycle of boom and bust even if monsoon showers are normal.
In the past five years, farmers have sometimes received up to 50% of sugar prices as remuneration for their cane supplies and sometimes 100%, Verma said. If farmers get less for their produce, they tend to shift to other crops, driving down cane planting. When mills have to shell out the entire realisation from sugar towards raw material purchases, they suffer huge losses, which ultimately reduces their ability to pay and significantly raises cane arrears, he added.
The SAP fixed by Uttar Pradesh is the highest in the country, roughly 20% more than in central Maharashtra and parts of Karnataka, while its recovery rate (the percentage of sugar production in tonne out of the cane crushed) is among the lowest at around 9%, compared with 11% in Maharashtra and Karnataka. The result: UP accounted for roughly 55% of the country’s cane arrears of Rs 10,694 crore as of February 15, and FIRs have been lodged against top executives of sugar mills for failure in making timely payments.
“Cane pricing in UP is not about economics, it’s about politics. Already, some mills are looking at capacity addition or acquisitions in other states such as Karnataka and Maharashtra, where cane prices are relatively reasonable and recoveries higher. If Karnataka adopts a reasonable formula, it would be a wake-up call for the UP government. UP must realise that for smooth and timely payment to farmers, mills should be in good financial health,” said a senior executive at a UP-based mill, who didn’t want to be identified.
In stark contrast, Maharashtra and Karnataka usually follow a identical models of paying farmers roughly the price fixed by the Centre in the first instalment for cane purchases and the rest subsequently.
In northern Karnataka, farmers are paid for cane supplies on ex-field basis, which means the cost of harvesting and transportation is borne by mills over and above the cane rate, while in other parts, the cane is purchased on ex-mill gate basis. At present, cane prices in northern Karnataka are Rs 2,300-2,500 per quintal, while in other parts, it’s around Rs 2,200-2,300 per quintal.
Rangarajan Committee
*Key recommendations
* Scrap the requirement for mills to supply 10% of production at subsidised rates for PDS
* Grant mills and cooperatives freedom to sell sugar in open
market as they wish
* Stable exim policy needed; up to 10% of duty desirable on exports/imports, instead of ban
* 70% of ex-mill prices of sugar and other byproducts be paid to farmers for cane purchases
* Payment for cane purchases in two phases; the price fixed by the Centre to be the first tranche
* Phase out cane area reservation and facilitate long-term tie-ups between growers and buyers
* Only Karnataka has started the process