UP is finishing off industry with high cane prices

While the face-off between the Uttar Pradesh government and the sugar industry in the state continues over accepting cane from farmers for crushing, the government needs to pause and think about the consequences of its policies. In an attempt to be popular with the state’s 4 million cane farmers, Uttar Pradesh has traditionally announced a much higher ‘state advised price’ (SAP) than the central government-recommended Fair and Remunerative Price (FRP)—in FY12, the SAP was R240 per quintal versus R145 forthe FRP and in FY13, UP announced an SAP of R280 versus the FRP of R170. Not surprisingly, the sugar mills in Uttar Pradesh make the biggest losses in the country and, at R2,300 crore, their current arrears to farmers are higher than that in any other state—the total for the country at the end of September was R3,400 crore. India’s biggest sugar producer Bajaj Hindusthan has just declared September losses of R509 crore as compared to R122 crore in the same period last year; Balrampur Chini, another UP-based miller, declared R122 crore losses in September versus a profit of R49 crore in September last year.

Though the higher sugar recovery rate in states like Maharashtra is also a reason for those mills doing better, a major factor is the much lower SAPs—as compared to UP’s R280 per quintal in FY13, Mahrashtra’s SAP was a much lower R230. What is alarming is that instead of realising the problem its policies are causing—the arrears of Uttar Pradesh sugar mills rose from R2,592 crore in February FY11 to R5,836 crore in February FY12—the government continues to play the heavy and has been arm-twisting mills into starting their crushing. The mills, on their part, are insisting that they cannot begin accepting cane till an SAP is announced, and an SAP that makes economic sense. What is amazing about the Uttar Pradesh government’s stance is that its bad economics is not making good politics either. With their arrears mounting, farmers are certain to see through the game plan. While the mills have been threatening to shut shop, and the farmers agitating for higher prices, it is clear that unless the state moves towards the Rangarajan formula of paying farmers the FRP immediately and then dividing up the eventual proceeds when the mills realise the funds after selling the sugar and various by-products—so as to ensure 70% of the total goes to the farmers—both the industry and the state’s farmers are going to lurch from one crisis to another.