While the central government did well to not raise the Fair and Remunerative Price (FRP) for sugarcane from last year’s Rs 275 per quintal for the next procurement season, the good news stops here; mills have to buy all cane at this price unless the state government has a higher State Advised Price (SAP) as states like Uttar Pradesh normally have. The central government has done nothing to stop the cycle of rising dues followed up by farmer protests and then arrests of sugar mill managers and owners. As in the past, since the arrests, while popular politically, do nothing to make it possible for the mills to pay farmers for their cane—the cane costs a lot more than is justified by the price at which sugar can be sold—the government has also come out with a relief package. This time around, the package comprises a 4 million tonne buffer stock of sugar—it was 3 million last year—so this ensures the government will pay the mills Rs 1,674 crore as the carrying costs of the cane; also, since the 4 million tonnes is a buffer, this stock will no longer be available for sale this year, so this will raise the market price of sugar.

The basic problem arising out of the higher sugar price, however, is a more serious one. If mills have to buy cane at Rs 275 per quintal—and in UP, the SAP is an even higher Rs 315—they need to be able to sell the sugar at around Rs 35 per kg; yet, the market price is just around Rs 31-32. This loss, when applied at an industry level, works out to around Rs 12,000 crore; it will be higher depending upon how much cane is bought at SAPs that are higher than the central FRP. Given this, it is hardly surprising that the outstanding dues of mills to farmers on July 15 were Rs 15,200 crore. This is lower than the Rs 30,000 crore on March 31, but that is what the sugar cycle looks like; dues typically peak in March and start reducing later as the mills are able to sell the sugar they produce and clear farmer dues.

So while the government did well not to hike the FRP, in the last two years, ex-mill prices of sugar fell by around 15% while the FRP rose by 19%. Between FY10 and FY19, the FRP rose 2.1 times while the ex-mill price rose by around 5%. This is obviously a recipe for disaster; and while the central government had come up with a formula—based on a committee headed by former RBI Governor C Rangarajan—this has not been implemented in states like Uttar Pradesh and, even at the central level, the FRP is above the Rangarajan price. Without any serious attention being paid to coming up with a long-term solution, apart from the buffer stock solution—which is a temporary fix—the government has tried to get oil marketing firms to buy more ethanol. But there is a limit to how much more ethanol can be produced by the mills—this requires more capital investment—in the short run; also corn-based ethanol is a less water-intensive solution than sugarcane-based ethanol. Until the government gets its cane-pricing right, the cycle of rising dues and rising farm protests will continue; with stricter RBI norms on repayment of dues, the game cannot continue indefinitely either.