The impasse in Uttar Pradesh's sugar economy has been broken, with some concessions by all parties concerned: the government, mills and farmers. The state would forgo some levies, the mills would accept a steep cane price but have to pay it only in installments and cane growers have to settle for a price lower than their demand. This fits the pattern of the sugar industry lurching from crisis to respite to crisis. To get out of this cycle, the industry needs structural reorganisation, given the deep mutual dependence between growers and crushers.

 

The dramatic fall in sugar recovery, if cane is not crushed immediately after being harvested, preferably within 24 hours, greatly constrains the freedom of farmers/mills to market/procure their cane. It also calls for everyday coordination between farmers and mills. Economic theory says that when activities are so intricately interdependent as to make their coordinated execution too costly to be instituted via contracting, they should be integrated under the command and control framework of a single firm. Growing cane and crushing it to produce sugar and byproducts should, in other words, be vertically integrated. In India, mills cannot own farmland. But farmers can own mills. In theory, cooperatives achieve precisely this. But cooperative regulation is such that they are manipulated by politicians and are not real farmer bodies. The solution is to have farmer companies that own mills.

 

The Rangarajan committee on sugar implicitly recognised this when it recommended kicking back 75% of the revenue of the mills back to the growers. Not only is this difficult to administer, it leaves farmers without a directly felt compulsion to boost productivity. A lasting solution is farmer companies to, at least, set a benchmark.