Jun 30, 2014

India continues to subsidise an inefficient sugar industry.

This pill may be bitter for the consumers but is certainly sweet for the sugar barons. Within hours after Food Minister Ram Vilas Paswan announced an economic stimulus package for the sugar industry, shares of sugar companies jumped by 10 per cent. In the days to follow, open market prices of sugar increased by roughly Rs 2 per kg.

This is probably the first time I am witnessing a unique trend. A bailout package generally is expected to offset industry’s losses and thereby reduce the open market prices. But in the case of sugar it is working the other way around. An economic stimulus package brings relief to the industry and at the same time results in a higher monthly bill for the average consumer. In fact, it’s a double whammy for the consumers. It is the aam tax payer who first pays for the stimulus package and then again has to pay by way of a high price for sugar.

Raising the import duty on sugar from 15 per cent to 40 per cent to curb cheap imports, and continuing the export subsidy of Rs 3,300 per tonne till September, cheered the investors. Shares of Bajaj Hindustan, Shree Renuka, Dharampur Sugar mills and Balrampur Chini Mills rose by 7-10 per cent. Mr Paswan’s assurance that the government will ensure that the retail prices of sugar do not increase fell on deaf ears as the sugar prices rallied up. 

The sops also included an additional interest free loan of Rs 4,400 crore. This is in addition to Rs 6,600 crore interest free loans that were given just six-months back in December 2013 so as to enable the industry to clear the backlog of cane arrears to farmers. Add both the figures and it totals Rs 11,000- crore. This is exactly the same amount that is pending as cane arrears for the sugar cane farmers. Mr Paswan says that the stimulus package will only be allowed if the industry gives in writing that it will clear the pending dues of Rs 11,000 crore to cane growers. I wonder why didn’t he direct the sugar industry to immediately clear the pending arrears from the interest free loans, let’s say before September 2014?

Healing the sugar industry that has been the top beneficiary of government subsidies and support all these years is certainly not easy. For an industry that has got used to massive doles, and that too year after year, it is not easy to give up. And that tells you how complex and intricate are the issues of sugar prices and cane arrears. Let me therefore make an effort to decipher the complex web that determines the price at which you buy sugar and the price the farmers are paid for the sugarcane they supply to sugar mills. 

Before we go into the specific case of sugarcane prices, let us first look at the economics of agriculture in general. As I have been saying for quite some time several studies have shown that farmers as a class fall in the lowest category of income slab in the country. The Ministry of Agriculture has acknowledged in Parliament that the average monthly income of a farming family is less than Rs 2,400 per month. This is less than what we in the cities pay to our maid servants. Isn't it a travesty of justice to know that the person who produces food for the country -- annadata -- himself lives in poverty and hunger?

It shouldn’t shock people to know that roughly about 60 per cent of the daily wage workers under MNREGA are actually land owners.  Several studies have also shown that roughly 58 per cent farmers go to bed hungry every night.

Sugarcane farmers are no exception. Except for some big farmers, most of the cane growers are small farmers whose livelihood depends upon sugarcane alone. Let's not forget that unlike wheat and paddy, sugarcane is an annual crop. Farmers wait for a year to get a remunerative price. The one-time payment they receive for the sugarcane crop runs their families expenses throughout the year. Often they are not paid for months if not years. In Uttar Pradesh alone, cane arrears stand at Rs 7,900-crores. And when sugar mills across the country form a cartel and refuse to pay a remunerative price, what do you expect the farmers to do? They take to streets in protests.

Many economists feel that unless the core issue of a higher cane prices, which are state controlled, is not addressed the industry cannot become economically viable. They want the cane price to be lowered for farmers. I don’t agree with this argument. The problem is that those who want the cane prices to be reduced for farmers very conveniently skirt the real issue behind the mills running in losses. The fact is that the sugar industry is highly inefficient, and both the farmers as well as the consumers are being made to pay for its continuing inefficiency.

The fault lies in the reluctance of mills in not modernizing and diversifying (Read my earlier blog post: Are sugarcane farmers at the mercy of sugar mills? http://devinder-sharma.blogspot.in/2013/12/are-sugarcane-farmers-at-mercy-of-sugar.html) Not only sugar that each mill produces, there are more than 24 byproducts which can be produced commercially, including ethanol and methanol. Why haven’t the private mills been able to make adequate investments into utilizing the byproducts? You can’t blame the farmers for that. Former Agriculture Minister Som Pal says each mill with a minimum crushing capacity of 2,500 tonnes should be able to generate 12 MW power. Using 3 MW for own consumption, at least a sugar mill should be able to sell 9MW to the grid.

Now take a look at an exhaustive study done in 2012 by Dr T N Prakash of the University of Agricultural Sciences in Bangalore, who is now the Chairman of Agricultural Prices Commission of Karnataka. His analysis shows how the contribution of farmers in the sugar economy is being deliberately underplayed. On an average, one tonne of sugarcane produces 100 kg sugar, 150 units of electricity and about 35 litres of alcohol (and I am not including other byproducts). Market values of these manufactured products exceed Rs 40,000. Aren't the farmers therefore justified in demanding at least 10 per cent of the market value of what they produce?

At present, farmers in Haryana are being paid the highest cane price of Rs 301 per quintal. If the sugar mills were efficient, there is no reason why farmers should be underpaid. They can still be paid a higher price. Where is the farmers fault if the sugar mills are not running efficiently? How long should the farmers and consumers subsidise and inefficient industry? #

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