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The Grey Shades of Sugar Policies in India

Lavanya B T (lavanyagowdabt@gmail.com) is a PhD scholar and A V Manjunatha (manjunath@isec.ac.in) teaches at the Institute for Social and Economic Change, Bengaluru.

India’s sugar industry is in the grips of a deep-rooted crisis. Pricing policies that had been designed to favour farmers have left them in severe distress. Sugar millers have also lost business and accumulated large amounts of debt. Consumers, however, have barely been affected due to the cap on the price of sugar. The impact of current policies on the problems plaguing India’s sugar industry is analysed here, and an attempt is made to determine whether partial decontrol was a real solution. Other policy measures—such as reviving sugar mills, addressing policy loopholes, and removing price caps—are suggested that could potentially help the sugar sector overcome the crisis.

The authors thank R S Deshpande for his constant support and valuable inputs which helped improve the article.

The financial assistance received from the Indian Council of Social Science Research while carrying out this research is greatly appreciated. The authors also thank the anonymous reviewer for their comments which helped improve the article further.

The Indian sugar industry is of an international stature and plays a key role in the country’s economy. However, it continues to be in deep crisis and faces many challenges. Despite the fact that the domestic sugar market is among the largest in the world, with demand increasing over the years due to changes in consumer profiles and an increased appetite for processed food, the industry is not performing as expected. Governmental interventions have not helped the industry avert the crisis. Various policies have failed to solve the problems faced by the stakeholders in the industry, with farmers being the worst hit among them.

India witnessed one of its worst periods of agrarian distress over the last few years and sugar cane farmers were among its major victims. During this period, failed monsoons and loan burdens were the most cited reasons behind agrarian distress and farmer suicides. However, a critical analysis of the situation reveals that interventions in the sugar sector were responsible for distress among farmers in sugar cane-growing belts. Of late, price politics, input subsidies, and income support for farmers are the most widely discussed agricultural policies (Jelic et al 2014). These policies have been deployed by various countries to protect domestic production and the sugar sector is a classic example of it. However, such policies have typically resulted in inefficiency and reduced competitiveness in the world market.

As stated by Jack Roney, Policy Director for the American Sugar Alliance, “Sugar is the most distorted commodity market in the world because of subsidies and other policies that manipulate the market.” The global sugar industry is highly politicised and has witnessed a number of policy changes related to domestic support and international trade. Even though these interventions have protected various stakeholders in several countries, they have allowed less efficient sugar industries to dominate the world market. For instance, in the 1990s, sugar production was mostly concentrated in the United States (US), the European Union (EU), and Japan—despite the cost inefficiency of their sugar industries—because of government intervention through subsidies (Borrell and Ronald 1990). But, with the revision of regulations through the World Trade Organization agreement, some of these market-distorting interventions were curbed and production has shifted to cost-efficient countries like Brazil, Thailand, and Australia.

It is also true that the dominance of these countries in the world market is not just because of their natural resources,
efficient farmers, and wise management, but also because of several years of government intervention (Chatenay 2013). Presently, Brazil tops the list of major sugar-producing countries in the world. It is followed by India, the EU, Thailand, China, and the US. The Brazilian sugar industry enjoys $2.5 billion worth of direct and indirect government incentives every year (Chatenay 2013). The support comes mainly in the form of soft loans to farmers, waiving or rescheduling of farm loans at favourable terms, transferring pension liabilities to other economic agents, and through arbitrary support to the country’s sugar and ethanol industries (Chatenay 2013).

Even in developed countries, the sugar industry is not devoid of intense government regulations. The US and the EU have always been protective of their domestic sugar sector. The sugar sector in the EU is one of the most regulated agro-based industries. The regulatory system involves production quotas for sugar mills, a pricing system for sugar beet and sugar cane, and trade-related policies. In the US, sugar policies are based on three pillars: price support through preferential loan agreements, domestic market controls, and tariff-rate quotas (USDA 2016). The EU’s decision to abolish production quotas from September 2017 was expected to have a significant impact on the world market in terms of increased production, fresh demand for raw materials (sugar cane and sugar beet), and better-balanced sugar prices. It was hoped that this measure could eventually help to abolish regulated pricing systems for raw material and lead to a more liberalised industry (DGIP 2016).

The situation is similar in India as well, except for the fact that farmers are not really benefiting from these policies. The sugar industry, which is worth more than ₹ 80,000 crore (sugar and allied activities), is one of the largest agro-based industries in the country. It offers livelihoods to around five crore sugar cane farmers and nearly five lakh skilled and unskilled workers and also creates opportunities for commercial utilisation of rural resources (ISMA 2013). The sugar cane crop, which has no competitor as a raw material for the sugar industry, is known for its high net returns. And the fact that it is a key component of multiple products such as sugar, industrial/potable alcohol, bioelectricity, ethanol, and biogas means that the crop is very important in the agricultural economy. In addition to these factors, an assured market and a regulated pricing system have propelled the expansion of sugar cane cultivation in India.

The Indian sugar industry is highly politicised and closely monitored by the government. Under the Industrial Development Policy, the sugar industry was part of the five-year plans introduced in 1951 and has been under the direct control of the government ever since. Overall, the government’s policies have resulted in impressive outcomes in this sector. Sugar production has increased from less than 5 million tonnes in the 1950s to close to 30 million tonnes in 2017–18. It has become a mainstay in the alcohol industry and also helps generate surplus energy to meet India’s increasing energy demand.

Like other major producers of sugar, India’s government has also been highly protective of its sugar sector. It regulates almost all the aspects of the industry, including licensing, capacity, cane area, procurement, pricing, sugar pricing, distribution, imports and exports. At the outset, this creates the impression that government intervention in this sector has consistently protected farmers and consumers at the cost of sugar millers. However, a deeper analysis of these policies reveals the grey shades in India’s sugar policies.

The main focus of this article is current policies and their impact on different stakeholders: farmers, millers, and consumers. These policies fall under different categories like subsidies and taxes, price-related policies, and trade-related policies. The article attempts to determine whether sugar policies have been able to address the problems of the sugar industry and whether partial decontrol is a real solution.

The strength of any policy lies in how well it is able to balance the interests of different stakeholders who will be affected by it. Stakeholders, in any process, are actors who have a vested interest in that process. The stakeholders considered in this analysis are farmers, sugar mills, and consumers. The success of any policy lies in the achievement of a predefined goal. Current policies in the sugar sector have been analysed on the basis of how far they have been successful in balancing the interests of farmers and millers.

Pricing Policies

According to the Sugar Cane (Control) Order, 1966, the central government fixes a Statutory Minimum Price (SMP) for sugar cane that must be paid by producers of sugar for sugar cane purchased from farmers. This price was fixed in consultation with the Commission for Agricultural Costs and Prices (CACP) after accounting for the cost of production, recovery rate of sugar cane, the general trend of other agricultural prices in the market, the availability of sugar at a fair price to consumers, and the open market price of sugar (ISMA 2016).

However, states like Uttar Pradesh, Punjab, Haryana, Tamil Nadu, and Uttarakhand implemented their own State Advised Prices (SAPs), which are usually higher than the SMP (CACP 2013). These states adopted the SAP due to regional differences in the costs of production and productivity levels and also as a result of pressure from farmers’ groups. It is also argued that the SMP merely covered the cost of cultivation without offering farmers sufficient scope to make profits.

In states where a SAP is announced, mills mandatorily procure sugar cane at the SAP. Unlike food crops like wheat and paddy, the central government is not directly involved in procuring sugar cane from farmers and therefore it has less control over the SMP. This double pricing system created problems for sugar mills in states where SAP was implemented because the central government purchased sugar for fair price shops at a levy price which was based on SMP rates. But, mills in these states had to pay the SAP rate to farmers. This resulted in high arrears, especially in Uttar Pradesh. Unfortunately, states that had implemented an SAP to help farmers did not come to the rescue of mills despite the fact that it indirectly affected farmers in the form of mounting cane arrears.

This tangle culminated in litigation between the sugar mills and the central government, with the Supreme Court eventually directing the government to factor in not only the SMP but also the SAP while fixing levy price for sugar (DFPD 2016). Against the backdrop of this judgment, the central government decided to revise its pricing policy for sugar cane to remove all ambiguities. With the amendment of the Sugarcane (Control) Order, 1966 on 22 October 2009, the SMP was replaced with the Fair and Remunerative Price (FRP) from the 2009–10 season onwards (DFPD 2016). The new regime accounted for risk and profit over and above the factors used to calculate the SMP (DFPD 2016). Thus, the new pricing system ensured that the risk factor involved in the cultivation of sugar cane was accounted for. It also allowed for sufficient profit margins for the farmers irrespective of whether the sugar mills were performing well or not in terms of generating profit.

Along with the other factors, the FRP pricing system also took the recovery rate of sugar cane into consideration. This helped in adequately rewarding higher recoveries considering variations among sugar mills. The FRP was fixed with 9.5% as the basic recovery level, with a specified premium to be paid for every 0.1% increase in the recovery rate. For instance, the FRP for the 2012–13 sugar season was fixed at ₹ 170 per quintal. This price was linked to a basic recovery rate of 9.5%, which was subject to a premium of ₹ 1.79 per quintal for every 0.1% increase in recovery above that level. The FRP for the 2013–14 sugar season was ₹ 210 per quintal, subject to a premium of ₹ 2.21 per quintal for higher recoveries (DFPD 2016). 

Basically, the FRP system was introduced to solve the problem of double pricing and to address the flaws in the SMP. But the FRP that was announced was lower than the SAP of some states, which clearly indicated that the basic purpose of introducing a new pricing system had failed (Figure 1). Farmers were also irked by the central government’s attempt to discourage states from implementing a separate pricing system that favoured them.

In order to correct the drawbacks of the FRP system, a committee was constituted under the chairpersonship of C Rangarajan. It suggested the adoption of a hybrid pricing formula (HPF) in 2012. The HPF approach was a combination of the revenue sharing formula (RSF) and FRP. Under this pricing system, the farmers were entitled to 75% of the value of the total output from one tonne of sugar cane (including the value of by-products). In order to make it feasible, the committee advised sugar mills to make payments at different stages: FRP was to be paid at the first stage and the balance amount was to be paid after realising revenues from sugar and other by-products. It was argued that under this approach, farmers would realise better revenues from sugar cane when sugar prices were experiencing an upswing. However, when sugar prices were down, farmers’ share would be affected negatively. But, in such cases, the committee recommended that the FRP be paid and the difference between the FRP and the prices determined by the RSF was to be met by a Sugar Cane Stabilization Fund. This pricing approach was expected to provide a logical solution to the travails of sugar cane farmers and sugar mills. Karnataka was the first state to adopt the system, with Maharashtra following in its wake. But several major sugar-producing states, including Uttar Pradesh continue to hold out.

Subsidies and Taxation Policies

 

Subsidy on drip irrigation equipments and cane harvesters: Agricultural subsidies are instruments of fiscal policy used by governments to support farmers and agribusiness firms by supplementing their income, managing the supply and demand of agricultural commodities, and influencing the prices of such commodities. Sugar cane is a water-intensive crop and the cost of irrigation is a major burden for farmers. In addition to the recent decline in surface water levels due to uneven rainfall patterns, groundwater levels have also registered a considerable decline.

Since 1992, the government has launched many initiatives promoting micro-irrigation in the cultivation of water-intensive crops like sugar cane. This effort received a big push with the launch of the centrally sponsored scheme for micro irrigation in 2006 (FICCI 2016). The scheme included both drip and sprinkler irrigation. The scheme offered 50% subsidy to farmers, of which 40% was borne by the central government and 10% by the state government. The remaining 50% was to be borne by beneficiaries either through their own resources or through soft loans from financial institutions. The maximum area that could be covered per beneficiary was five hectares. Panchayats were responsible for the selection of beneficiaries.

This scheme later became the National Mission on Micro Irrigation (NMMI) in 2013–14. In 2014–15, the NMMI was absorbed into the National Mission for Sustainable Agriculture and was implemented under the On-Farm Water Management component of the scheme (FICCI 2016). Projects aimed at helping sugar cane farmers to adopt drip irrigation have also been taken up by a few states with the aim of increasing water-use efficiency and alleviating water scarcity to some extent. For instance, in Karnataka, the state government announced a ₹ 1,800-crore project that aimed at covering 1.8 lakh hectares of sugar cane under drip irrigation (Business Standard 2015). Apart from improving irrigation, this initiative could also potentially reduce interstate water disputes.

 

Incentives to use machines: Mechanisation is considered an important intervention in the wake of labour shortages. But, the feasibility of mechanisation in Indian farming is debatable, since more than 70% of marginal and small farmers would confront access barriers and economy of scale hurdles. But, there are a few government initiatives that provide subsidies on farm machinery, offering hope for rejuvenating the farm sector by tackling labour shortages. Sugar cane cultivation is the least mechanised and most labour-intensive agricultural activity in almost all major cane-growing states of India (Sharma and Prakash 2011). Therefore, a subsidy on cane harvesters (of 25% all over India and 40% in Maharashtra) did little to solve the issue of labour scarcity or increase the penetration of machinery on sugar cane farms.

 

Levy sugar obligation on sugar mills: The sugar industry is the only industry in India which bears the burden of cross-subsidisation. Under the levy sugar obligation enforced by the central government, every sugar mill in the country mandatorily submits a part of their production to the government at a fixed price. This produce is then distributed through the public distribution system (PDS). The price fixed for this levy sugar is generally far below the cost of production. The difference between the levy price and the cost of production represents a tax that is indirectly levied on sugar mills. The tax burden on the sugar industry through the levy sugar obligation amounts to around ₹ 2,500–₹ 3,000 crore annually. In addition to this, sugar mills are forced to carry physical stocks of levy sugar, which increases storage costs as well as the interest burden. There has been a revision in levy percentage from time to time based on the recommendations of various committees formed to study the Indian sugar sector. The system was abolished in accordance with the recommendations of the Rangarajan Committee in 2012.

According to the National Food Security Act, 2013, sugar distribution through the targeted public distribution system (TPDs) is to be universally implemented by all states and union territories in India. Around 2.5 crore families covered under the Antyodaya Anna Yojana benefit from this scheme. The central government offers a subsidy of ₹ 18.5 per kg and the state governments have the option of bearing the burden of transportation and handling charges or transferring it to beneficiaries (DFPD 2018). In order to ensure adequate supply of sugar to the PDS and ease the burden on state governments, the central government grants up to 90% of its estimated quarterly subsidy in advance. State governments have also been given permission to use Food Corporation of India godowns to store sugar as per mutual terms and conditions.

 

Credit subsidy to sugar mills: The inefficiency of the sugar sector has been evident from the cane arrears that have mounted over time. Despite a continuous increase in the regulated price of sugar cane, farmers have not benefited. They were instead deprived of their rightful revenues from the sale of sugar cane to mills. This created a kind of distress among farmers and also among millers, which in turn resulted in a downward swing for the entire sugar industry. In order to fix the crisis, the government intervened and approved soft loans of up to ₹ 6,000 crore for sugar mills in 2014 (Parsai 2015). This soft loan scheme was introduced to infuse liquidity into the industry and to allow sugar mills to clear their dues to farmers. The mills which had cleared at least 50% of their arrears were eligible for this scheme. As a result, there was a considerable reduction in arrears since 2014–15. However, it did not appear to be of real help to the industry.

Ethanol Blending Policy

In 2001, India began a pilot run of an ethanol blending programme, which required petrol to be blended with a certain proportion of ethanol. Besides being eco-friendly, this programme also offered an economic advantage: 5% blending of ethanol in petrol had the potential to save 1.8 million barrels of crude oil, thereby reducing the import burden of crude oil (GoI 2014). Ethanol, which is a biofuel, burns cleaner and results in less emission of carbon dioxide, carbon monoxide, and hydrocarbons. Ethanol is a by-product of the sugar industry and this programme also offered an assured market for sugar mills willing to process wasted cane and produce sugar by-products.

The Ethanol Blended Petrol Programme, which targeted nine states and four union territories, was initiated in 2003 with the target set at 5% blending of ethanol in petrol. But that year turned out to be one of lean production for the sugar cane crop in India. This led to a shortage of sugar cane, which in turn resulted in ethanol prices shooting up. The higher price of ethanol made it uneconomical for oil marketing companies to blend ethanol with petrol. Consequently, the production of ethanol reduced almost to zero in 2004, forcing the government to repeal the blending mandate (USDA 2016; Goldar et al 2012). Prior to 2007, direct production of ethanol from sugar cane was banned in India to avoid competition for sugar cane between ethanol and sugar-producing firms. Due to the acute shortage of ethanol required for blending with petrol, the Cabinet Committee on Economic Affairs had to lift the ban (GoI 2007). This committee also fixed the minimum price for purchase of ethanol at ₹ 21.5 per litre till 2010.

In 2008, the government announced its National Policy on Biofuels, mandating a phased implementation of the ethanol blending programme in various states. The primary objective of this policy was to encourage the domestic production of ethanol and increase the blending level of ethanol with petrol. In 2009, the government set an official target of 20% blending of ethanol in petrol by 2017 (Choudhary 2016).

In India, ethanol has three main uses: 40% of ethanol produced in India is used in the alcohol-based chemical industry, 45% is used in the production of potable alcohol, and the remaining is used for blending with petrol and other purposes. However, there is a huge gap between the demand and supply of ethanol in India. Consumption has mostly been higher than production in the period 2004–17 (Figure 2, p 39). The difference between the quantity produced and consumed is met by imports. Though there has been a significant improvement in the production of ethanol in India from 2010–11 onwards, India has not been able to achieve self-sufficiency till date. In fact, in recent years, the gap between production and consumption has been widening. This scenario creates an opportunity for sugar mills to improve their business by increasing their efficiency or production capacity.

Trade-related Policies

 

Minimum indicative export quotas: The low price of sugar in India is blamed for the recent downfall of the sugar sector. The discrepancy between sugar cane price and sugar prices has resulted in high arrears and has affected both sugar cane farmers and mill owners. Sustained surpluses of production over domestic consumption have created substantial inventories, which has depressed prices and created a liquidity stress that has resulted in cane arrears. In order to help sugar mills take advantage of higher sugar prices in the world market, the government fixed Minimum Indicative Export Quotas (MIEQ), which encourage sugar mills to sell a certain portion of their produce in the world market by providing a fixed subsidy per tonne of sugar exported. This scheme was supposed to provide the twin benefits of allowing sugar mills to reap a better price for their produce from the world market while reducing domestic supply, which would in turn increase sugar prices in the domestic market. But, in reality, the scheme did not seem to be working. In order to increase the liquidity of the sugar mills, the central government granted 90% of the advance estimates of the first quarter as advance subsidy to sugar mills.

 

Import tariffs: The Indian government provides the domestic sugar industry a considerable amount of protection. Import of sugar into the domestic industry is restricted by high tariff rates. The tariff rate increased from 15% to 50% in 2014. For 2018–19, the import tariff on sugar has been hiked to 100%.

Impact of Policies on Farmers

Farmers are the most important stakeholders of the sugar sector. Therefore, at the outset, it is believed that most sugar-related policies are inclined towards helping them. The following section tries to test this well-established belief by analysing the impact of these policies in different ways.

 

Area, production, and productivity of sugar cane: With the announcement of the FRP in 2009–10, the area under sugar cane cultivation in India increased from the cropping year 2010–11 after being on the verge of falling. The top three sugar cane-producing states—Uttar Pradesh (7.65%), Maharashtra (26.60%), and Karnataka (29.79%)—reported noticeable growth rates in the area under sugar cane cultivation between 2010–11 and 2014–15 (Figure 3). Sugar cane production in India follows a cyclical trend. From 2006–07, the production curve was on a downswing before plateauing out in the 2008–09 cropping year (Figure 4). This acted as a warning sign, forcing the government to rethink its pricing policy. As a result, the FRP system was introduced in 2009–10. This caused a significant upward shift in the production curve and considerable smoothening of the overall trend. The increase in production was due to increase in both area under cultivation and productivity after the introduction of the FRP system. The new FRP pricing system, which accounted for risk and profit, undoubtedly motivated farmers to bring more area under sugar cane cultivation and adopt new technologies that increased productivity levels. But, whether farmers actually benefited as a result of the FRP system is a complicated question that this article will attempt to answer through further analysis.

 

Impact on intercrop parity and net return from sugar cane: Though the price of paddy and wheat is also regulated by the central government through the minimum support price (MSP) system, the FRP rose faster than the MSP. Between 2010–11 and 2014–15, the FRP for sugar cane grew at 36.77% while the MSP for wheat and paddy grew at 26.47% and 22.75% respectively. This is evidence that sugar cane has been treated as a political good in India. Due to the FRP regime, sugar cane stood first in intercrop parity with average net returns being 58%, whereas paddy and wheat had returns of 12% and 36% respectively (Table 1). Despite paddy and wheat being food crops, the increase in the price for these crops was lower than in the case of sugar cane. This is also evidence of the strong lobbying capacity of sugar cane farmers compared to other farmers (Figure 5).

As mentioned before, sugar cane is very important in the agricultural economy as it is a commercial crop and the only raw material to the second largest agro-based industry in India. Due to the announcement of a new pricing system in 2009, farmers’ hope in this crop increased, as was evident from the increase in cultivation area and productivity levels. As expected, the net return also went up under the new price regime. But, this positive impact on net returns was restricted to calculations in documents and did not materialise in farmers’ hands. For the 2011–12 cropping period, net returns as a percentage of cost of cultivation was 81% in Karnataka, 67% in Uttar Pradesh, 57% in Tamil Nadu, and 47% in Maharashtra (Table 2).

 

Impact on agrarian distress: The FRP pricing system was introduced in 2009 to combat the drawbacks of the SMP. But, it did not actually serve its purpose. This can be clearly seen when the increase in net returns and sugar cane’s leading position in terms of intercrop parity is contrasted with the agrarian distress in 2013 that led to farmer suicides that shook the whole nation. Suicides by sugar cane cultivators came as a shock as they were considered a better-earning farmer group. Farmers did not reap the benefits of the new pricing system. For instance, Karnataka, which registered the highest net return and the highest productivity, stood third in the number of farmer suicides in 2015–16, with the largest number of farmer suicides being from Mandya district, a major sugar cane-growing area in the state. Why did the farmers not benefit even though there was an impressive increase in the price of sugar cane? And, if not farmers, who benefited from this new pricing system?

Impact on Sugar Mills

After farmers, sugar mills are the most important stakeholders in the sugar sector. They were equally affected by the FRP system. With the introduction of the FRP, the problems of both farmers and sugar mills were expected to be solved. But, it did not seem to work out that way. With the FRP increasing over time, the cost of production for mills went up (CACP 2016). The share of cane price in the total value of sugar crossed 75% in 2013–14 (Table 3). Under the double pricing system, in states like Uttar Pradesh where the SAP was highest, the share of SAP in the total value of sugar was in the range of 81% to 99%. This happened because there was a constant increase in the raw material price but the price of sugar was very volatile and mostly on a downswing. This mismatch between the price of sugar cane and sugar led the sugar mills into a deep crisis (Figure 6).

Additionally, the levy sugar obligation on mills was a form of tax that was levied indirectly on sugar mills, consuming substantial amounts of mill revenues. As sugar mills ran into losses, they were unable to pay farmers, resulting in arrears mounting over time (Figure 7).

In addition to this, the structure of the sugar industry also changed. After delicensing, huge investments were pumped into the sector and private sugar mills began to dominate the industry. But, due to the heavy losses incurred by these mills, many of them shut down and only around 60% of the existing ones were operational in 2015–16. In major sugar-producing states like Karnataka and Maharashtra, only 30% and 43% of the mills were operating, respectively (Table 4).

In addition to facing huge losses in the domestic market, the Indian sugar industry has also become uncompetitive in the world market. Borrowing by sugar mills to clear arrears to farmers has been increasing over time. Within a span of five years, the industry’s debt has increased threefold (Figure 8).

The protective intervention of the government through higher import tariffs and export subsidies does not seem to be having its intended effect. Though some policies—like the soft loans offered to mills to clear cane arrears—seem to be slightly positive (Figure 7), it is questionable whether they really help the sugar industry. The soft loan scheme allowed mills to borrow and clear arrears instead of helping them improve their businesses. As a result, the debt of the sugar industry rose by ₹ 1,000 crore between 2014 and 2016 and sugar mills were not able to repay the loans which were due in 2016 (Economic Times 2016). Though these policies look very favourable to millers, the favouritism was nullified by other government measures which were not so friendly such as stock limits, capped retail prices, increased cess, and non-payment of export incentives (Economic Times 2016).

Impact on Consumers

Compared to the other two stakeholders, the impact of these government interventions on consumers has been minimal. The only way in which consumers are affected is through sugar prices. And sugar prices in the Indian market have been constant over the years. According to a nationwide study, almost 75% of non-levy sugar is purchased by industries, small businesses, and high-income households. The analysis also reveals that even among low-income households, a price hike would not have a significant impact. For example, a 10% increase in the price of sugar would result in an increase in monthly food expenditure of less than 1% since the share of expenditure on sugar was low (KPMG 2007). Therefore, it has been suggested recently that sugar should be excluded from the Essential Commodities Act.

Lobbying and Inefficient Government Interventions

The sugar sector in India has the most lobbying power among agro-based industries because sugar cane is a commercial crop and the only raw material to the sugar industry, unlike in other countries where sugar beet is also used in the production of sugar. Most big sugar cane farmers are rich and have strong political connections. Farmers’ organisations and millers’ associations in the sugar sector are stronger than any other agro-based organisations in India. Most of the private sugar mills are owned by politicians or their relatives. Therefore, lobbying by the sugar industry through politicians rewards both parties. This lobbying capacity has helped the sugar sector to pressurise the government into framing policies that favour the industry and keep intact the benefits applicable to different stakeholders. The sugar sector also gains special bargaining powers by virtue of being the sole bearer of the social welfare programme burden among several different industries.

The strong lobbying capacity of the sugar sector is a global phenomenon. In the US, the system of price support and quotas keeps the domestic price of sugar higher than the world sugar price. American politicians have consistently supported such programmes because of the strong lobbying capacity of the sugar sector. Flo-Sun, America’s largest sugar cane-growing and refining firm, raising $1 million through soft-money donations for the US elections in 2000 is a great example of the sugar sector’s lobbying capacity. The sugar industry making direct donations of $9,40,000 to US congressional and presidential candidates is another example. The sugar industry in the US is the largest donor to political campaigns despite its share of total farm receipts being just 1% (Virata 2004; Stokes 2012).

This lobbying has resulted in policies which have created shields around domestic sugar sectors that protect them from developments in the world market, ensuring that the domestic industries remain inefficient and uncompetitive.

Was Partial Decontrolling a Real Solution?

Most of the committees formed to study the Indian sugar sector have reported that the unending woes of the sugar industry are the result of government interventions and over-regulation. For many years, both state and central governments controlled the sugar industry by regulating the price of sugar cane procured by mills, by placing ceilings on the monthly release of sugar by mills into the open market, by imposing the levy sugar policy, and through other interventions. These policies are seemingly out of place in the post-liberalisation era and have given added impetus to the long-pending demand to decontrol the sugar industry completely so that it can grow in a free environment regulated by market forces.

One major step towards decontrolling the sugar sector was taken in 1998, when the Bharatiya Janata Party (BJP)-led government abolished licensing requirements for new sugar mills. As expected, the sugar industry witnessed a significantly improved growth rate of 7% between 1998–99 and 2011–12 as opposed to 3.3% before delicensing (Balani 2012). However, there was a structural transformation in the sugar sector after delicensing. Sugar cooperatives had dominated the industry till 1997–98. But, after delicensing, a lot of private investment was pumped into the sector by multinationals, giving private mills an upper hand in terms of total installed capacity.

Despite the long-pending demand for the complete decontrol of the sugar industry in India, successive governments have hesitated to take this step. The United Progressive Alliance government partially decontrolled the sugar sector in 2012–13 based on the Rangarajan Committee’s report (Priyanka et al 2016). The government abolished the 10% levy sugar quota for a period of two years, after which levy sugar was to be procured by state governments from the open market at prevailing prices. The difference in price amount, including the cost of transportation, storage, and distribution, was to be compensated by the central government. This increased the subsidy burden on the government. Regulations on the amount of sugar that mills could release to the open market were also abolished. The Rangarajan Committee had also recommended easing regulations on export and import. Though the government removed export and import quotas in response, it continued to exert control over the sugar trade through import duties and tariffs. This allowed some firms to take advantage of price differences between the domestic and international markets. The 100% jute packaging mandate was also reduced to 40%.

There have been no major positive developments in the industry since it was partially decontrolled. Between 2007–08 and 2012–13, debt has increased threefold and millers have defaulted on soft loans from the central government. The sugar cane pricing formula suggested by the Rangarajan Committee has not been accepted by the millers and only Karnataka and Maharashtra have put it into practice. During the 2015–16 sugar year, around 40% of sugar mills did not operate. This clearly indicates that partially decontrolling the industry is not helping in the way it should have.

Conclusions

The sugar industry’s tale of woe continues despite government’s efforts to end them. Regardless of the government’s many protective policies, the industry is not able to resolve the crisis. Deeper perusal of those policies reveals the fact that they are not favourable to any of the stakeholders in the industry. With the evolution of the sugar cane pricing system, farmers’ expectations also rose. However, that hope soon turned into disappointment as the new pricing regime resulted in increased cane arrears rather than increased income to farmers. The policies, which were framed as a result of strong lobbying from different stakeholders in the industry, did not help much. Instead, they pushed the sector into a much deeper inefficiency trap. The partial decontrolling of the industry also did not rescue the industry from its predicament.

The main reason behind the crisis in the sugar industry is that there is a mismatch between sugar cane and sugar prices. Sugar prices have been constant while the cost of production is increasing. Some short-term solutions—like removing the cap on sugar prices, providing access to extension services to reduce cost of cultivation for farmers, and trade strategies—could help alleviate the immediate stress. In the long term, measures such as the diversion of cane to jaggery and ethanol production, revival of cooperative sugar mills, and promotion of export-oriented sugar products might help solve the current dilemma. These solutions are discussed in detail below.

The sugar sector, which has always been one of the most important components of the agricultural economy, has repeatedly gotten embroiled in policy tangles. This has occurred as a result of the grey areas available in the implementation of policies in the sector. The result was intense distress among cane growers (45 suicides in a single year in only one district). Labourers who depended on the sector, such as cane harvesters, were affected even more.

The policy flaws begin with the pricing system. The central government fixes FRP for sugar cane based on cost of cultivation data received from the CACP, which is drawn from various states. While reporting support prices, CACP uses the average cost of cultivation across different states, without taking into account the different methods of cultivation, input-use practices, infrastructure, and other state-level constraints. Under political pressure to protect the welfare of the farmers, the state governments resort to the SAP, which leads to more issues. In order to resolve the tangle, the first step should be to discourage the implementation of ad hoc SAPs, which would reduce politicisation. After the CACP declares the FRP, it would be advisable for the concerned states to compute their SAPs under the ceiling of the moving average percentage difference between the FRP and the SAP for the past 10 years. Such a policy will discourage political lobbying.

The irrigation policy in the sugar sector also requires changes. Sugar cane is a water-guzzling crop that puts severe stress on water resources. The way out of this problem would be to make micro-irrigation systems compulsory for the cultivation of sugar cane. Sugar mills should make it mandatory for every member farmer to adopt micro-irrigation in their fields. Mills can invest the initial capital required for the installation of micro-irrigation systems in farmers’ fields, avail a subsidy from the government for each installation, and deduct the remaining amount from farmers’ accounts or even receive it in the form of a state subsidy.

Sugar cane has many by-products and ethanol is an important one among them. Importing crude oil increases the stress on the country’s finances. The government is attempting to address this problem by encouraging ethanol production and blending through a minimum price system. In 2017, the government fixed the price of ethanol at ₹ 40.85 per litre to ease the pressure on suppliers of the fuel and to cut crude imports. Monitoring the procurement and use of ethanol through a dedicated institution will also help drive the substitution of Brent crude. Though direct production of ethanol from sugar cane was recently allowed in India, it is yet to pick up pace. Even now, not all sugar mills producing sugar are producing ethanol. Setting up of ethanol production plants to meet the demand arising from ethanol blending programmes can help the industry improve its business prospects. It would also be advisable to shift to flexible-fuel engines, which would allow ethanol blending to be increased to 30%. With the growing number of vehicles in India causing pollution to reach dangerous levels, this would also have the added benefit of protecting the environment.

At this stage, diversion of agricultural products to the energy sector can turn out to be a boon for India. Countries like the US and Brazil are already a step ahead with such initiatives, which help their respective sugar sectors sustain and develop when world sugar prices are low. Ethanol blending policies in India are slowly gaining momentum. The target of 5% blending was reached in 2016 and the target of 20% blending has been set for 2020. The sugar industry can also look to export some of its products and by-products. These will open a window of opportunity for the sugar sector to diversify its production for better business. Diversifying products will minimise risk and help the sector remain sustainable even when world sugar prices are low.

The benefit of supplying sugar through the PDS goes to low-income households (below poverty line card holders). Since the abolition of the levy sugar obligation on sugar mills, many states have stopped supplying sugar through the PDS. But, if some states are bearing the burden of purchase of sugar from the open market and distributing it through the PDS, they have to put efforts to curb the malpractices in the distribution process. Sugar stamps and Aadhaar-based authentication can be used to increase the efficiency of the PDS.

Scrapping the 20% export tax and forcing sugar mills to export a certain portion of their produce under the MIEQ scheme is the strategy that India is currently using to cut bulging stocks at home. But, this strategy will not serve its purpose unless sugar mills in India produce sugar at a lower cost through economies of scale. Technologies that can increase the sugar content in sugar cane as well as the recovery content must be deployed to enable mills to reach the desired economies of scale. Even if sugar mills produce sugar at higher economies of scale, it will not suffice unless quality meets international standards. Hence, concentrating on producing higher quality sugar will open up many opportunities for sugar mills to better business. This, in turn, will have a positive impact on domestic prices and international trade.

Reviving sugar mills, especially cooperatives, is another area that the government should focus on. Taking cooperative sugar mills out of the control of politicians and rich farmers and making their management boards and memberships more inclusive to all sections of the farming community are vital at this stage.

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Updated On : 26th Nov, 2018

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