Business Today

Sweet tidings

In a historic move, the Centre lifts some of the controls on the sugar industry. The states must now act.
N. Madhavan | Print Edition: April 28, 2013

For a government desperate to bolster its reform credentials and attract foreign investment, lifting controls over the sugar sector offered a great prospect. Not only because sugar was among the most tightly controlled commodities but also because the sweetener affects the daily lives of almost everyone. But lifting all controls requires the blessings of state governments. This was difficult as some states, such as Uttar Pradesh and Tamil Nadu, are ruled by political parties which are not favourably disposed to the Congress party-led central government.

So, the Centre found a convenient way out. It chose to free the industry from all controls under its jurisdiction and leave the rest to the states. The Centre on April 4 allowed mills to sell their entire output at market rates. Until now, mills were required to sell 10 per cent of their output at discounted rates to the government for supplying to the poor. While the market price is over Rs 30 per kg, the discounted rate was Rs 19.04 per kg. The losses mills incurred by doing so will now be borne by the government, which buys about 2.8 million tonnes a year. As a result, the government's sugar subsidy bill will rise to Rs 5,300 crore from Rs 2,300 crore.

The Centre also scrapped the practice of fixing the amount of sugar that mills can sell in the open market. Besides, it eased the trade policy. This will help India shed its image of an unreliable exporter. India is the world's secondlargest sugar producer, after Brazil, but has an erratic export record due to frequent government interventions.

Industry has welcomed the steps. "The reforms will make the sector more viable and attractive," says Abinash Verma, Director General of industry group Indian Sugar Mills Association. "This will help attract investment." Some niggles remain, however.

Sugarcane pricing, the area from where a mill can buy cane, and the distance between two mills still pose problems. "The sugar side of the sector has been freed and that is a welcome move, but the challenges on the sugarcane side remain," says Ram V. Tyagarajan, Chairman and Managing Director of Thiru Arooran Sugars. "The action now shifts to the states."

The immediate worry for the centre is how lifting controls will impact sugar prices

Cane pricing is critical as it constitutes 80 per cent of the cost of producing sugar. Currently, the Centre announces what it calls a "fair and remunerative price". States top up that price for reasons entirely political. This creates havoc in the sugar economy. A government-appointed panel led by C. Rangarajan, Chairman of Prime Minister Manmohan Singh's Economic Advisory Council, had suggested scrapping the practice of states setting cane prices. This, however, requires states' consent. The industry will have to convince the states to ease controls - a tall order given the ground realities.

The Centre's immediate worry is how its decisions will impact sugar prices. Will prices drop as mills increase supplies? "There could be initial chaos but the industry will soon learn to handle the freedom," says Tyagarajan.

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