Friday, November 29, 2013

BITTERNESS OVER SUGAR PRICING IN INDIA


FRIDAY 29TH NOVEMBER

This is an article from Business Line Paper appeared on 29th November, 2013

Please click on the following link to read :

http://epaper.thehindubusinessline.com/index.php?rt=email/viewemail&a=MjAxMzExMjlBXzAwOTEwMTAwNw==&V=SW1hZ2U=




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 FOR EASY READING  

BITTER POLITICS OVER SUGAR PRICING


Tejinder Narang

This year perhaps is the first time since 1976 that there is no single unified pan- India policy for the sugar sector. All States governments are deciding sugar cane prices or policies at their will, creating intra –state distortions in production, marketable values and exports. The nation stands divided by sugar.

Apparent absurdity has ascended to a level where the price of output- finished product- (sugar) equals input cost of sugarcane with traditional rate of recovery. Threats of farmers and counter threats by mills especially in Uttar Pradesh & Maharashtra are reflection of impending uncertainty in this sector. About 70% sweetener is produced by these two states.

The “sugar environment” at the beginning of 2013-14 season has altered.  First, the Centre decontrolled release and levy mechanism in April 2013, which created instant surpluses in the market. Second, because of election year, political pressures are mounting to balance interests of cane-growers, millers and consumers.  

In less than eight months from control to decontrol and then back to active and ad-hoc interventionism by the Centre, represents break down of liberalized profile that is under threat of reversal or modification. Briefly, new sugar policy has gone paralytic. Political doctors are attempting procedures for revival of severely diabetic patient.  

Rangrajan committee

Rangarajan Committee report on sugar decontrol mentions “Rationalization of sugarcane pricing and liberalization of sugar trade need to be introduced over a two to three year period, in a calibrated and phased manner. However, levy sugar obligation and administrative control on non-levy sugar need to be dispensed with immediately”. (Page 10 para 13 of the report).

A committee headed by Principal Economic Advisor to the Prime minister, an eminent Economist, cannot suggest a two-stage or split recommendation unless compelled politically. Rangarajan committee and the UPA Government erred in deferring the issue of sugarcane pricing to an unchartered territory. That is why the mess this year.

Uttar Pradesh

The trigger point is the last year State Advisory Price (SAP) for sugarcane of Rs 280/qtl  (or $44/mt) of Uttar Pradesh (UP). Now, farmers are echoing SAP of Rs 300/qtl plus (or $48/mt). The result-- mills are saddled with massive liability of sugarcane arrears due to non-remunerative market prices.

Since higher Indian sugar output (about 25 million tons) is foreseen in 2013-14 plus 9 million tons of carry in vs demand of 23 million tons, open market value may further decline below last year level of Rs 28-30/kg. Mills can lose heavily under such conditions.

Millers opine Rs 225/qtl (or $36/mt) in UP as the limit for viable operations, that is almost at par with other states (Maharashtra/Karnataka/Tamilnadu), after factoring percentage of rate of recovery.

UP Government finds itself in a bind. How can Socialist Party (SP) Government of Mr. Akhilesh  Yadav  afford to reduce the SAP when annual inflation is around 8% per annum? Nevertheless, Akhilesh administration has refrained from hiking it above Rs280/qtl(or $44/mt). A stalemate between farmers, millers and UP government has arisen.

Skewed market

In sugar cycle of 5-6 years, farmers claim that millers have made profits in some of these years each time due to high market prices. The counter point is that Government invariably intervened to check the abnormal rise in local prices, resulting into significant loss to millers’ potential profitability. However any additional investments made by them from accrued profits are an asset to the nation.

The fact being that sugar business is skewed. Markets can be right if inputs and outputs operate on principle of free trade, rather than one side being administered by irrational political considerations of SAP and the other side by uncertainty of supply-demand realization.

UPA intervention

Now, Agriculture, Food and Finance ministries of Central Government are interacting for bailing out both farmers and millers, though it has divested the responsibility to States. UPA cannot sort out the matter with SP run Government of UP. Mr Ajit Singh, Aviation Minister and of Rashtriya Lok Dal (RLD-another ally of UPA) has chipped in. Likewise Maharashtra, led by Congress Chief Minister is also approaching PMO for relief.  

Any Central support, if given, goes to the credit of Mr. Sharad Pawar of NCP, though Mr. Thomas (Food Minister) implements the relief from the funds authorized by Mr. Chidambaram (Finance Minister).  Thus, NCP, RLD, Congress and SP are vying each other for sugar vote bank. Any relaxation/subsidy means additional fiscal deficit.  That translates to erosion of value of rupee, higher inflation and diminishing buying power of savings. But in an election year good politics supersedes bad economics any way. BJP is silently watching the confusion to derive its own political mileage.

Buffer stock

Suggestions for 2 to 5 million tons of buffer stocks have been made. Apart from concern of fiscal deficit, the issue of storage is paramount. If this buffer is to be stored at the premises of the mills, the surveillance on such holdings may be controversial. NSEL scam is the case in point where warehouses reflected paper stocks --yet, physical tonnage went missing. CAG has already commented on the paddy stored by FCI in miller’s premises as highly objectionable and questionable.

Exports

Exports are not viable, due to surpluses available internationally, except for on and off niche opportunities. Any export subsidy will violate WTO commitments. Moreover, Brazil’s raw sugar value will further plunge down to match Indian competition.

Remedy

An emergent solution lies in approaching Supreme Court for  authorizing “Fair Remunerative Price” (FRP) announced by CACP, even as an “interim order” as the basis for sugarcane pricing for 2013-14—that is Rs 210/qtl or $33/mt at 9.5% recovery rate, with pro-rata hike linked to higher recovery on pan India basis. This will end diverse policies in different states.

The cause of judicial action has already arisen; the case is logical and doable legally with data, analysis and recommendations of Rangrajan report. The Governmental route may be messy and time consuming unless worked through an Ordinance for forthwith implementation of second phase of Rangrajan report, which may involve Election Commission consent as well.    

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