Ashok Gulati, chairman, Commission for Agricultural Costs and Prices (CACP), wants the Centre to stay away from the Uttar Pradesh sugar crisis until the state adopts the Rangarajan committee formula for sugarcane pricing. In a conversation with Sandip Das, he explains how the poor pricing policy of the UP government is making most of the stakeholders in the sugarindustry bitter.

Given the ongoing turmoil in the UP sugar industry, what would be your suggestion for reviving the industry and at the same time protecting the interests of consumers and farmers?

The current turmoil in UP sugar industry is purely a result of high State Advised Price (SAP) of cane (R280 per quintal) announced by the state government. The Centre had announced a Fair and Remunerative Price (FRP) of R210 per quintal for this year. If the state had heeded the advice of the Centre, there would not have been any problem whatsoever. In its report, the CACP recommended that the states should adopt the Revenue Sharing Formula (given by the Rangarajan Committee) for pricing of cane. Given the ex-factory price of sugar in UP is hovering around R30 per kg, sticking to the Rangarajan formula will price cane at R225 per quintal in the state. But the price being set at R280 per quintal will surely make most of UP’s sugar mills financially sick which will harm farmers, millers, and the state. Currently, the logjam over pricing is forcing farmers to sell cane to khandsari and gur making units at prices ranging from R150-200 per quintal.

In order to find an amicable solution, there are several options ranging from totally freeing up the molasses market in UP (currently, 20% of the molasses is reserved for potable liquor industry, sold at a highly subsidised rate) to implementing the ethanol blending order seriously which would raise the ethanol price to around R40 per litre to the creation of some buffer stock of sugar, etc. But all these reforms in the sugar sector will still not allow the sugar industry to pay more than R250 per quintal for cane. The difference of R30 per quintal (from the SAP) will have to be borne by the state exchequer. Given that UP crushes around 80 million tonnes of cane, this would amount to roughly R2,400 crore. Since this crisis is purely a creation of the state policy, I feel the Centre should stay away from it unless the state government is ready to adopt the Rangarajan Committee formula.

Has the sugar sector decontrol been implemented in its true spirit by the government? What should be the government’s role in the sector?

The removal of the levy system as a part of the decontrol has benefited the industry by about R3,000 crore or so, and freeing up of the monthly release quota system also was a step in the right direction. But this decontrol has to be taken to its logical end. I feel that unless we move towards the revenue sharing formula for cane procurement, the reforms in the sugar industry will remain incomplete.

You have been advocating promotion of food processing for increasing farm income. Can the food processing sector help in curbing fluctuations in the prices of fruits and vegetables?

All over the world, the prices of fresh fruits and vegetables are volatile in nature because of the perishable nature of the produce. They are stabilised either by holding stocks in cold storages or through food processing. Food processing is a sunrise industry in India which, I believe, will benefit millions of farmers and consumers alike, create millions of jobs in rural areas, and also help cut post-harvest losses which are unduly high in the country. I would put it at a much higher priority in policy than what it is being accorded today. The concerned department needs to have a clear vision and roadmap, with a much bigger budget to put it on a high growth trajectory. Remember, our processing levels (of fruits and vegetables) are less than 5%, while in much of Southeast Asia they range from 20% to 50%. We need to move in that direction, and move fast.

Given the recent spike in onion prices, what are your suggestions for the government to avoid such a scenario year after year?

This is not the first, and surely not the last, time that onions prices have brought tears to consumers and policy makers. Price stability within an acceptable band needs buffer stocking of onions for crucial months when stock-to-use ratio dips to its lowest levels, i.e., in September-October, which triggers the possibility of hoarding and undue rent-seeking by everyone in the value chain. But stocking of fresh onions is costly as it starts losing weight quickly, given that 80-85% of onion is water. The solution lies in opting for de-hydrated chopped onions or onion powder. Ten kg of fresh onions can be reduced to just one kg of de-hydrated onions which can be stored for two years in one-tenth the space required for fresh onions. Since de-hydration takes place when the arrival of fresh onions is at the peak and prices touch the rock bottom around January-February and then again in April-May, the de-hydrated onions are normally exported at a price of R150 per kg, which works to a price of R15 per kg of fresh onions.

Currently, there are several units for de-hydrating chopped onions in Gujarat, but the biggest one perhaps is Jain Irrigation, head-quartered in Maharashtra. We need a major awareness campaign to promote this new product innovation. I have been using this personally at home and find it very useful and perfectly acceptable. Besides this, we need to de-list fruits and vegetables from APMC Act to develop value chains that encourage direct buying from farmer groups, bypassing the mandi system.

You have been critical of the Food Corporation of India (FCI) for holding huge amounts of foodgrains stocks. Is it impacting prices of foodgrains in the open market?

I am not critical of the FCI per se. It has played a yeoman’s role in the past to support prices for the farmers, and I salute that. But, like any other organisation, over time, there are challenges of containing costs, remaining lean, efficient, and corruption-free. The problem is more with the policy of open-ended procurement from states that either impose high taxes and statutory levies (up to 14.5% in Punjab) or announce high bonuses on top of Minimum Support Price (MSP) like Chhattisgarh which announced 22% bonus on paddy last season. Such policies drive the private sector out of the market, and as a result much of grains (70% to 90% of market arrivals) have to be procured by the state agencies. That is not good for the country. It is de facto nationalisation of grain trade, taking us back to 1973-74. I am critical of that and CACP has recommended to the government saying that the Competition Commission of India should look into this matter and ensure competition in the grain markets.

The FCI has got an encouraging response for its wheat export bids and also for selling excess wheat to bulk buyers. Is it correct for the FCI to procure huge amount of wheat at the first place then store it and sell it later to private players?

As I said earlier, the FCI’s role should be like a lender of the last resort. But distortions in our tax and bonus policies make it the first buyer. So, it is sometimes saddled with large stocks, much above its requirements for PDS system. These need to be liquidated. I feel today at least 20 million tonne must be liquidated in domestic market or exported from FCI stocks. Else, we are already sitting on a crisis of plenty in government stocks which is raising prices in the open market.

What would be your take on growth in agricultural sector this year given that this year, large parts of the country got reasonably good monsoon rains?

Our analysis reveals that we may get an agri-GDP growth of 5.1% to 5.7% during the current agricultural year (July 2013 to June 2014) resulting from good rainfall and filling up of water in the reservoirs.

CACP has estimated that a large chunk of foodgrains under PDS is diverted in states such as UP, Bihar and other states. Has PDS reform progressed in the country given that the government is set to implement National Food Security Act?

Well, we may try in that direction, but frankly, I don’t have much hopes of seeing it set right. The best international practices suggest that we need to gradually move towards conditional cash transfers. We can start this in 33 cities with one-million-plus population, scaling it up to farmers. We may still continue with some physical distribution of grains in certain pockets dominated by tribals or far-flung areas.

Essentially, we need to learn using an income policy to attain our equity objectives and not use price policy for this purpose. Else, we will mess up the markets, and efficiency losses will outweigh the welfare gains we are trying to achieve. It is fundamentally a wrong design of policy.