New Delhi: Providing relief to sugar cane farmers, the Union cabinet on Wednesday approved Rs.6,000 crore in interest-free loans to sugar mills to enable them to settle pending dues of farmers.

Sugar mills owe farmers over Rs.21,000 crore. Having procured cane, sugar stocks have remained unsold because of falling prices of raw sugar in domestic and international markets.

But to ensure that farmers are paid their dues, banks will obtain a list of farmers owed money, along with bank account details, from the sugar mills, so that the central assistance is directly deposited into the farmers’ accounts. The balance, if any, will then be credited to the mills’ accounts.

“This is a pro-farmer decision. All payments will be made directly to the accounts of farmers under the Pradhan Mantri Jan-Dhan Yojana,” transport minister Nitin Gadkari said at the post-cabinet briefing. “Sugar prices have fallen due to over-production and interest-free loans will allow mills to settle (some) dues; the rest will be paid through sale of sugar,” he added.

The soft loans for sugar mills are the latest in a series of decisions by the National Democratic Alliance NDA() government to project a pro-farmer image after drawing flak for repeatedly pushing the land acquisition ordinance.

The government had earlier announced export subsidies on sugar and increased import duties to enable mills to pay farmers their dues. The government also decided to reopen closed urea units to increase domestic production of the fertilizer, widely used by farmers.

The industry, however, is not overjoyed with the loan sop. The government will only bear the interest on the loan for a year (compared with five years in the last such scheme announced in February 2014) and it will not address the basic problem of surplus sugar and depressed prices, saidAbinash Verma, director general of the Indian Sugar Mills Association (ISMA).

Sugar mills can repay the loan after a year only if they are making profits, said Verma, adding that this is not possible with a surplus of over 10 million tonnes (mt) and prices around Rs.10 per kg lower than the cost of production.

ISMA has been pressing the government to create a buffer stock of 2.5-3 mt (which it will pay for) as a way to reduce surplus stock and boost prices, but according to Gadkari, the cabinet did not discuss this.

“The persistent crisis cannot be addressed by giving interest-free loans. In the past, too, such loans have not helped,” said T. Haque, director, Council for Social Development, Delhi, and former chairman of the Commission for Agricultural Costs and Prices. “The solution is to give the right price signal to the farmer as (despite the dues) they are growing more sugar cane. Additionally, the government needs to have a policy for diversification into ethanol (a biofuel) that will stem the excess supply of sugar.”

In addition to the issue of cane arrears, the cabinet also discussed the issue of rising prices of pulses, Gadkari said, adding that Prime MinisterNarendra Modi has cleared import of pulses in large quantities to tackle the shortage.

Prices of pulses are up over 50% compared with last year due to a shortfall in production and India is set to import more than the 4.5 mt it imported last year. Due to the rain deficit last year and unseasonal rains ahead of the winter (rabi) harvest this year, production of pulses dipped nearly 10%, from 19.2 mt in 2013-14 to 17.3 mt in 2014-15.

In another decision, the cabinet committee on economic affairs allowed three naphtha-based fertilizer companies to continue to manufacture urea till the time they are supplied with gas.

The companies are Madras Fertilizers Ltd, Mangalore Chemicals and Fertilizers Ltd and Southern Petrochemicals Industries Corporation.

“This will ensure supply of 1.5 mt of urea to farmers in south Indian states,” fertilizer minister Ananth Kumar said.