The more the sugar industry seeks decontrol, the more it sinks into the quicksand of controls. The government has decided to revise the ethanol blending policy. But the essence of the new policy is that the ethanol procurement price will be fixed by the government, and both oil marketing companies (OMCs) and sugar mills have to honour their commitments. But sugar mills are not complaining, as they expect to benefit from it. In the earlier scheme, even though OMCs set a price benchmark, a tendering process was followed, in which OMCs would invite price bids for specified quantities. However, actual volumes transacted were low, as mills asked for more than what OMCs were willing to pay. Still, sugar mills benefited. The ethanol benchmark price allowed them to set a higher price for raw material supplies to alcohol companies. United Spirits Ltd, India’s largest spirits firm by volume, had cited this as one of the reasons it was investing in units to secure raw material supplies. photo The government’s press release says some of the deficiencies in the existing scheme were that OMCs got only 45% of their requirement in 2013 and there are differing views on fixing prices. In a free market, ideally speaking, prices should be market determined. The new scheme fixes a price and imposes an obligation on OMCs to procure, and the mills to supply. This will be backed by a supply or pay agreement, with a bank guarantee to boot. Failure to meet an obligation would mean the guarantee could be cashed. And, how is this price fixed? The release is silent on this aspect, but only mentions that it has relied on the food ministry’s input of the ex-mill price of ethanol. This is Rs.42.02 per litre at present, to which it has added Rs.6-8 per litre to meet transportation costs. There is no clarity yet on how it will be determined, although it would ostensibly be linked to the production cost. This robs the sugar industry of the opportunity of getting a higher price, when petroleum prices peak. And, it becomes another external financial variable to be watched for, every year. Sugar stocks rose on this news, as investors factored in the benefits from higher ethanol sales and realizations. This year may indeed bring some benefits, especially as sugar prices have tumbled. But if annual price increases of ethanol and the procurement quantity are to be determined by the government, it becomes an administered price and supply mechanism. While this move may bring near- to medium-term benefits, as history has shown, administered prices can cause nasty side effects in the longer term.