What the sugar industry can expect from the Budget
N. Madhavan February 26, 2013Will the forthcoming budget set the Indian sugar industry free? Expectations are high but with sugar being a politically sensitive commodity, disappointment may be the order of the day. This is not the first time a government is talking of freeing the sector, which is controlled tightly , right from pricing of raw material to the sale of end products.
There are certain factors that give hope of partial if not total "decontrol" of the sector. A committee headed by C. Rangarajan, Chairman of the Prime Minister's Economic Advisory Council, which looked into the issue submitted its report to the prime minister on October 18 last year. Though many other committees have looked at the sector, this one is by far the most powerful one.
The Rangarajan Committee has called for total decontrol of the sector. It has recommended that the levy obligation be scrapped. The obligation required every sugar mill to supply 10 per cent of its production to the government at a price lower than the prevailing market rate.
The panel also suggested that government sugar supplies through the public distribution system (PDS) should be bought through open tenders. In addition, it called for scrapping of the command area (a specific area demarcated around a sugar mill from where it can exclusively procure sugarcane), thus giving the farmer the freedom to sell his produce to any mill.
Other far-reaching recommendations include scrapping of the monthly release mechanism that determines the quantum of sugar a mill can sell every month, ending the practice of state governments fixing the price of cane over and above that fixed by the central government, and calling for a more stable sugar export/import policy.
The government is keen on projecting its reformist credentials. Freeing the sugar sector will boost those credentials. More importantly, such a move will not hit its pocket hard - an ideal option at a time when the government is struggling to rein in the fiscal deficit and balance its budget.
The only cost element in freeing up the sugar sector is the levy obligation. Today, the sugar industry is footing the Rs 3,000 crore bill for supply of sugar at a subsidised price through the PDS. (Mills supply sugar to the government at Rs 19.04 per kg when the market price is Rs 30.) If the levy is removed, this liability will shift to the government. There are already reports that the government has found a way to fund this. It is planning to impose an additional excise duty of Rs 150 per quintal on sugar. Considering that 20 million tonnes of sugar is consumed every year, the revenue this tax will raise will be about Rs 3,000 crore and will be enough to fund PDS sugar supply. The remaining reform measures are revenue neutral.
But reforming the sugar sector is not entirely in the hands of the central government. State governments, too, have a say in some aspects of the industry. Without the state government's co-operation, policies involving minimum distance criterion between mills, the command area and pricing of sugarcane cannot be changed. It is highly unlikely that the UPA government will get necessary support from non-Congress state governments on this.
Thus what can, at best, be expected is a partial decontrol of the sector. The part under the purview of the central government - levy obligation, release mechanism, jute packaging order and a more resilient trade policy - may happen immediately. Polices relating to sugarcane, where state governments have a say, will take a while to be implemented.
On its part, the sugar industry will not complain even if the sector is freed only partially.