23-01-2011 The Hindu Business Line : How to proc…

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How to proceed on sugar decontrol
News

Front Page There are too many restrictions governing production, pricing, sale and export, which discourage a
Corporate forward-looking approach. A simpler set of norms can b e devised.
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Approximately two-thirdsof the cost of sugar is made up by sugarcane. Uncertainty over commodity
Columns
States prices
T. Nandakumar
Web Extras
Predicting inflation pattern
Index Sugar is one of the most controlled industries in India. Attempts to decontrol sugar were made in
Archives 1971-72 and again in 1978-79, only to be rolled back. It is once again time to initiate moves in this Wake up bosses, a
direction, given India's requirements and the need to spur investment. revolution is on!
Features
The control on sugar is effected mainly through control orders issued under the Essential Significance of caste in
Investment World Commodities Act and some State legislation, like the one in Uttar Pradesh. Census
eWorld
Brand Line AREAS OF CONTROL How to proceed on sugar
Mentor decontrol
The main areas of control are:
Life
Brand Quest Allocation of cane area: This is purely discretionary in most States and done by State governments. Maruti's drive to success
The New The allocation becomes more ad-hoc when two factories vie for the same area. There are no
Manager Financial innovation
predictable policy guidelines. Poaching becomes the practice in deficit years.
BL Club
Smartbuy Credit cards business
Restrictions on setting up new factories: There are clear guidelines on the distance between two
Books factories, irrespective of productivity and area under sugarcane.
Gallery
Statutory Minimum Price: As opposed to a minimum support price, there is a statutory minimum
Stocks price in operation. This is now replaced or supplemented by Fair and Reasonable Price (FRP) and
State Advised Price (SAP).
Quotes
SE Diary Restrictions on sale of sugar: Sugar is sold by sugar factories on the basis of release orders
Scoreboard issued monthly (recently, weekly) by the Sugar Directorate, Government of India. The dynamics of
Open-End Mutual this release mechanism changes in a surplus year. There are, however, many sugar factories
Fund which obtain court orders to release more sugar than the quantity allocated, thereby making the
allocation system irrelevant.
Foreign Exchange
Levy sugar: A certain percentage of production in each sugar mill is allocated as levy sugar. This
year it is 20 per cent. The lower the production, the higher the percentage levy.
Rates
Restriction on exports: Usually resorted to in deficit years, while in surplus years, exports are
encouraged. There are also restrictions on movement and use of by-products, particularly
Shipping molasses.

Ports Finally, there are restrictions on gur and khandsari as well.

DAMPENER TO INVESTMENT
Archives
The sugar industry is cyclical in nature. The oft-repeated pattern has been two years of surplus
Yesterday followed by two or three years of deficit. Deficit years see higher prices for farmers while surplus
Datewise years see delayed payments. The uncertainties created by the various control measures act as a
Resources dampener to better technology and investments in sugar.
In Focus
The sugar industry is closely linked to farmers. When the industry produces about Rs 45,000 crore
worth of sugar in a normal year, Rs 30,000 crore goes to sugarcane farmers. Approximately two-
thirds of the cost of sugar is the cost of sugarcane. People who complain of high sugar prices
forget this fact.

This must be the only industry where the farmers are required by the Government to sell their
Search sugarcane to particular factories and wait indefinitely for payment. Given these constraints, the
industry cannot ever grow to its potential.

But it must grow. India will need more and more sugar every year. Land for growing sugarcane will
Group Sites remain limited. The same land will compete with cereals and oilseeds. Water will remain a major
constraint. To ensure that the sugar industry remains profitable and to keep the sugarcane farmer
The Hindu interested in growing sugarcane, the Government will need to ensure that the policy framework is
The Hindu ePaper predictable and encourages investment in the sector. The potential of the industry to generate
Business Line about 3,000 MW power in decentralised locations will be an added bonus.
Business Line
ePaper DEREGULATION PROCESS
Sportstar
Frontline The following controls can be done away with:
The Hindu
eBooks Abolish levy obligations: Levy is the most inefficient way of ensuring cheap sugar to BPL families.
The Hindu Whether sugar should be in the fair price shop at all is a debatable issue. For the time being, let
Images us assume that it is not politically feasible to remove sugar from the list. Moving 20 per cent of

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23-01-2011 The Hindu Business Line : How to proc…
production each month from each factory to the consuming centres is a logistics nightmare, apart
from being inefficient.

It is easier to make location-specific purchases through an open tender and subsidise the sale to
the beneficiaries. This could increase the financial burden of the Government to some extent, but
will be more efficient and easy to operate.

Abolish monthly release orders: The monthly release order mechanism does not work. Apart from
court orders, the factory can take out the sugar, keep it outside and not release it to the market.
There is no effective instrument to check this. As this mechanism affects the cash flow of the
company, the hit is normally taken by the farmers who do not receive payments in time.

Abolish cane area allocation: Cane area allocation is more often an arbitrary exercise without any
reference to investment and productivity. This system does not provide any incentive to investment
in cane development to sugar factories. It is better to create a statutory framework to enable
contract farming for a longer period (say, 3-5 years).

Such a medium-term arrangement will spur investments in the sugarcane fields and in
modernisation and consolidation of factories. If we accept the fact that that we need more sugar
and this has to come from the same land, productivity increases both in terms of per hectare yield
and sucrose content are crucial. This cannot happen under the present arrangement.

Abolish FRP, SAP etc: Create a system to assure a certain percentage of sugar price as cane price
-- 65-66 per cent should normally be acceptable. While a benchmark price can be declared as a
base sugarcane price for the year, an independent agency like the Commission for Agricultural
Costs and Prices can declare the average sugar price for the season at the end of the sugar year.
The additional payments to farmers can then be transferred to their accounts quickly. This process
of payment through banks will also ensure financial inclusion.

Declare a predictable import-export policy: This is difficult in the context of multiple objectives. But
we also need to answer the big question: when will the Indian farmer benefit from globalisation?

The time has come to take this call. The best time to roll this out is a surplus year, probably the
next sugar year.

Related Stories:
Sugar output may top 25 m tonnes next season
Leave sugar to market forces

More Stories on : Sugar | Insight

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