How sugar turns bitter for the consumer...

The Cabinet Committee on Economic Affairs (CCEA) has approved a proposal of the food ministry for creation of four million tons of sugar buffer stock between August 1, 2019 and July 31, 2020. The government will spend Rs 1,674 crore towards the cost of carrying the stock. The amount will be directly credited into farmers’ accounts on behalf of sugar mills against their cane price dues.

It has also decided to keep the Fair and Remunerative Price (FRP) of sugarcane unchanged at Rs 275 per quintal. FRP is the minimum price which mills have to pay farmers to buy sugarcane – the raw material for making sugar. The price is applicable to sugarcane purchases made during the sugar marketing year October 1, 2019 to September 30, 2020.

The objective of creating the buffer — according to the Minister for Environment, Forest and Climatic Change Prakash Javadekar, who briefed media on the cabinet decision — is to maintain demand-supply balance, stabilise sugar prices and enable sugar mills to clear arrears to farmers, currently about Rs 15,000 crore. The objectives are laudable. But the question is whether the measure approved by the CCEA will help in achieving them. Let us take a look at the demand-supply scenario.

During the 2018-19 marketing year, India’s sugar production is estimated to be about 33 million tonnes. Together with an opening inventory of 7.5 million tonnes as on October 1, 2018, the availability was 40.5 million tonnes. The consumption during this period being 26 million tonnes, the year will end with opening inventory of 14.5 million tonnes on October 1, 2019. This is 9.5 million tonnes higher than the normative requirement of around five million tons.

Thus, there has been excess availability of sugar during the 2018-19 marketing year. To deal with the impending problem, in August 2018, the Centre had created buffer stock of three million tons (involving payment of Rs 1,175 crore towards its carrying cost) to be kept for the year. Yet, the excess supply situation has continued throughout.

The fact of the matter is that the creation of a buffer does nothing to address the core factors responsible for creating an imbalance between demand and supply. All that it does is to temporarily withdraw that much quantity from the market which is pumped back after the stipulated period is over. Even during 2018-19, the excess supply in the market remained high at 6.5 million tons offering little comfort.

During 2019-20, too, the situation won’t change. Assuming the sugar output and demand stay at the level of the previous year, the excess over the normative stock as on October 1, 2020 would be 16.5 million tons. Making four million tons inactive— by putting them into a buffer stock — won’t bring any solace. Going forward, during 2020-21 marketing year, the excess supply will be more pronounced unless a much larger buffer is created. The vicious cycle will continue.

At the root of an ever-increasing imbalance between the demand and supply of sugar is too much intervention by the State on the supply side, even as the demand side is by and large unregulated. Even as the Centre fixes the FRP for sugarcane at an unrealistically high level, the states further inflate it by giving an incentive amount. For instance, in UP, the state advised price (SAP) is Rs 315 per quintal as against FRP of Rs 275 per quintal.

The sugar mills are obliged to purchase all of the sugarcane offered by farmers at the SAP. The quantum of sugar output is thus dictated by the sugarcane dumped on the mills, instead of being driven by demand. In this scenario, excess supply is inevitable, which leads to fall in the market price of sugar. The realisation from sale cannot fully pay for the cane cost, forget meeting expenses on other inputs and fixed cost. Unable to pay the farmers, the mills keep piling up arrears year after year. This triggers a spate of State interventions, such as hike in import duty, creating a buffer, etc, to regulate supplies and, in turn, lift the market price.

Early this year, the Union government even fixed a minimum ex-factory price at Rs 31.5 per kg (and there is demand for increasing it further), which defies logic. How can you force consumers to pay more than justified by underlying supply-demand conditions? This may help mills garner a few thousand crore rupees to clear the
arrears but won’t provide a lasting solution.

For a lasting solution, the Centre/states should shun the practice of fixing FRP/SAP of sugarcane. The sugar mills should be free to determine payments to farmers based on their revenue from sugar and its byproducts under a market-based framework. This will be a win-win for both the manufacturers and the farmers. Even if the farmers get lower price for sugarcane, that will be better than receiving short or delayed payments which forces them to borrow (from informal sources) at high rates resulting in a debt trap. That apart, the government can always give direct income support to the needy.

The farmers also need to re-think their cropping strategies. Instead of remaining glued to sugarcane where the returns are less and uncertain, they need to diversify to crops which are in greater demand, fetch higher price and uncertainties are less. This will be good for conserving water as sugarcane is a water-guzzling crop and any shift away from it will help this noble cause. It will also save on electricity consumption as farmers work less on pump sets. A collateral gain will be by way of
reducing oil imports/current account deficit.

Prime Minister Narendra Modi should take a call on this reform, which will extricate farmers from the ‘high SAP-arrears-debt’ trap even while protecting the interest of consumers and sugar mills.

(The writer is a New Delhi-based policy analyst)