Indian sugar mills association

Sugar sector decontrol to benefit all stakeholders

Date:	17 Jan 2012

Source:	The Financial Express

Reporter:	Ajay Shriram

News ID:	851

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The sugar industry is the largest agro-based industry in rural India supporting around 50 million farmers and their families and generating employment for around 12% of the rural population. It is one of the most environment friendly industries producing green power and also addressing the energy need of the country through ethanol. India is the largest consumer and second-largest producer of sugar in the world after Brazil.

Yet, the sugar industry continues to be throttled by excessive regulations and controls, not faced by any other industry in the country. It has to abide by various decisions made by central and state governments at every stage of its value chain. And the problem is further compounded by the fact that multiple ministries and departments govern the industry. Some of the key issues faced by the sugar industry are as follows:

Repetitive cyclicality: It is the outcome of excessive regulations. The present structure has created a vicious cycle wherein the industry keeps oscillating between deficient and surplus years.

Levy sugar obligation: The sugar industry is required to provide 10% of the total production as levy sugar obligation to the government for the public distribution system at prices far below the cost of production. No other industry in the country is required to bear the financial burden of the government`s welfare programme and social obligations.

There is a need to address this situation at the earliest by removing levy sugar obligation on the industry, which will cost the government less than R2,000 crore (miniscule as compared to the overall food subsidy bill of around R70,000 crore) and liberalising and reforming the sugar sale policy.

Regulated monthly release mechanism: In addition, there is a regulated monthly release mechanism scheme which governs the supply and sale of sugar in the market. Any unsold release of free sugar gets converted into levy sugar. Hence, the industry is forced to sell sugar in the market within the limited time frame and the rest of the sugar has to be kept as stocks leading to higher interest burden.

To address this issue, the government should maintain strategic stock and promote a transparent and robust forwards and futures market for sugar in order to bring stability in prices.

Sugar industry can`t export under OGL on its own: The industry has to abide by the export quota decided by the government for the export of surplus stocks. This leads to fall in prices in years of surplus production.

The industry needs a stable export policy under the open general licence (OGL) that will help in maintaining domestic prices and reducing excessive fluctuations.

No linkage between sugarcane price, and sugar and by-product prices: At present Central & state governments decide the price of sugarcane each year without any linkage with sugar price. How can the industry keep paying remunerative prices of sugarcane when the price of sugar is controlled to be on the lower side? How can you have a viable sugar Industry if the sugar prices are low and sugarcane prices are high?

A transparent pricing mechanism of sugarcane, which links sugarcane price to the rates of sugar and by-products (imputed value of molasses and bagasse), will help the industry as well as farmers in planning demand and supply in the market, and, thus, reducing volatility in the availability of sugar as well as its prices.

The controls on the sector are disproportionate to the impact on farmers and consumers. Only one-third of sugar is consumed by households while two-thirds are consumed by institutions or bulk users. Hence, it is a false notion that the impact of sugar price hike would be high for households, as the share of sugar is only 2.4% and 1.5% of the total consumer expenditure for rural & urban India, respectively. For example, in a medium-income household, if the usage of sugar is 5 kg per month and the price of sugar is increased by R5 a kg, the impact would be of R25 per month which is marginal, but this can be passed on to the consumer and would be very beneficial for paying a better price to the farmer.

Molasses have a vital role to play in the alcohol industry and also in the production of ethanol for blending with petrol. However, the lack of a proper ethanol pricing formula is affecting its use. Therefore, the government needs to finalise an ethanol pricing formula at the earliest.

The way forward: The sugar industry is being strangulated by so many controls. The industry is asking the government for three immediate policy changes: removal of levy sugar obligation, scrapping of the regulated monthly release mechanism and linking of sugarcane price to sugar and by product prices.

The sugar industry is seeking complete liberalisation and reform of the sector in the larger interest of all the stakeholders. The decontrol of the sugar sector is the only way forward, lest it gets destabilised under the excessive burden of regulations and becomes structurally unviable and sick.

The author is chairman of CII National Committee on Sugar and chairman & senior managing director of DCM Shriram Consolidated. The views expressed are personal

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