High stakes in sugar decontrol

Print edition : June 06, 1998

The Mahajan Committee's recommendations on the sugar industry are insensitive to the interests of consumers.

THE Indian sugar industry, with an annual turnover of nearly Rs. 16,000 crores, has over the years enjoyed tremendous political patronage with its stakeholders forming powerful lobbies. The Mahajan Committee report on the industry, submitted to the Government in April, reflects the concerns of all these groups but ignores one important segment: the consumer. The Government has not taken a decision on the recommendations, which include complete decontrol of the sugar industry in the next two years, in a phased manner. J.A. Chowdhury, Secretary, Sugar and Edible Oils, told Frontline that his department was studying the report.

At present all sugar mills are required to pool 40 per cent of their output as levy sugar at a price fixed by the Government for supply through the Public Distribution System (PDS). The Mahajan Committee has recommended that the levy be reduced to 20 per cent next year and be abolished from the subsequent year. It has also recommended that sugar be taken off the PDS once it is totally decontrolled and that the sugar subsidy be added to the subsidy on foodgrains supplied through the PDS.

Removing sugar from the PDS is a political decision that a coalition government may be reluctant to take. If sugar should continue to be supplied through the PDS, the Government can buy it from the mills at the market price. Shanti Lal Jain, president of the Indian Sugar Mills Association (ISMA), argues that as levy sugar is purchased by the Government at an uneconomical price, mills charge a higher price for free-sale sugar to compensate for the loss. If the levy system is dispensed with, the free-sale price of sugar will come down to around Rs.12 a kg (the levy price is Rs.11.40 a kg while free-sale sugar now costs around Rs.13.60), he says. He also argues that the higher excise duty chargeable on free-sale sugar will compensate for the higher subsidy incurred on the purchase of sugar from the market by the Government. (There are differential excise duty rates for levy and free-sale sugar now.)

However, highly-placed sources in Government told Frontline that the ISMA's assertion was not based on actual data, and that the additional excise duty recovered through decontrol (at current rates) would be far short of the additional subsidy involved in free market purchases to support PDS supply. The Excise duty level will have to be raised by about Rs.550 a tonne to compensate for the additional subsidy involved in free-sale purchases, they said. And since the mills will pass the burden of additional excise to the consumers, open market prices will rise. The other option is to hike the PDS issue price.

PERMANENT reservation of sugarcane areas is another important recommendation of the committee. The world over, it is a common practice to reserve captive cane areas, which are contiguous with each mill. This is necessary in view of economies of scale. Also, sugarcane needs to be transported to the mill immediately after cutting in order to prevent rapid deterioration in sugar content and quality. With the sugar recovery rate in India being abysmally low at 10 per cent, unless a firm and permanent linkage is established between the mills and the cane-growing areas, the mills are unlikely to take long-term steps to improve sugarcane quality and productivity. State governments routinely issue new sugar mill licences by carving out cane areas from areas already allotted to existing mills. This jeopardises the viability of both existing and new mills. The Mahajan panel has recommended that the State governments get Central clearance before supporting new mills this way. Currently they enjoy the power to do this under the Sugarcane Control Order.

The committee has recommended a distance of 25 km between mills: this can be flexible, depending on the region, the sugar content of the cane and the efficiency of extraction.

Sugar distribution at a ration shop. The Mahajan Committee has recommended that sugar be taken off the public distribution system once it is totally decontrolled.-V.GANESAN

At present, licences are given only to mills with a minimum economic capacity of 2,500 TCD (tonnes of cane a day). The Mahajan panel wants this stipulation to be removed and the size of the mill left to entrepreneurs and the financial institutions (FIs). It also recommends that restrictions on expansion of capacity be removed. The minimum for a mill in other sugar-producing countries is around 7,500 TCD. Of the 460 mills in the country, including 254 in the cooperative sector, only 63 mills have a capacity in excess of 2,500 TCD; 370 mills operate at less than 2,500 TCD and out of these 200 are more than 25 years old. While expansion of capacity is desirable, it must be ensured that new mills have at least a certain minimum economic size, as low-capacity mills will add to sickness in the industry.

Curiously, the Mahajan Committee does not recommend delicensing of sugar mills although in today's decontrolled environment, very few commodities require a licence to manufacture. Although 470 letters of intent have been issued, only some 10 mills are added every year. Even if licensing is abolished, there is no danger of mills proliferating. Yet the sugar industry wants licensing to remain, and this is reflected in the committee's recommendations.

Cooperative mills, which account for 60 per cent of the capacity, have signally failed either to improve productivity or to expand capacity. This is because they distribute profits among their members instead of ploughing back at least a portion of them into the industry. In fact, their balance sheets rarely reflect any surpluses, so much so that they routinely have no resources to pay for sugarcane in the following year. In Maharashtra, arrears in payments to be made to cane growers have been so high that the FIs have decided not to provide working capital to the sugar cooperatives in the State.

Instead of tackling this problem and prescribing a formula for the sharing of surpluses between cane growers and the mills, the Mahajan panel's recommendations try to perpetuate the status quo. It says: "The cooperative sugar mills in Maharashtra, Gujarat and North Karnataka may continue the present practice of distributing the sale proceeds amongst the member-growers if they so desire as growers are effectively owners of these mills. The cooperative mills in other States may also be free to adopt that system at their option."

Sugar cooperatives are a powerful group. Politicians have encouraged the setting up of cooperatives. Exemption from levy is an added incentive for new mills. One can set up a cooperative sugar mill with almost no equity contribution, says an official. The National Cooperative Development Corporation finances the promoter's equity, the Sugar Development Fund and the FIs contribute 40 per cent and 50 per cent respectively to the equity. As a result, sickness is rampant in the cooperative sector. The Mahajan report, instead of addressing this problem, recommends that the promoter's equity for sugar cooperatives be at least 2.5 per cent.

However, the report rightly supports control of distribution by the Government through transparent, controlled releases to check violent fluctuations.

A major grievance of the sugar mills relates to the zero import Open General Licence (OGL) regime for sugar. The World Trade Organisation allows up to 150 per cent duty and many European Union sugar producers have tariffs ranging from 100 to 120 per cent. It was certainly an anomaly to impose excise duty on domestic production with no corresponding duty on imports. The industry has been demanding a countervailing duty (CVD) of Rs.850 a tonne plus a customs duty of 40 per cent. This has been conceded by the Mahajan panel. "That will push up prices by Rs.3 to 4 a kg," says an official source. From April 24, the Government has imposed a CVD of Rs.850 a tonne and a customs duty of 5 per cent, which means that a duty of Rs.1,450 will be slapped on a tonne of imported sugar.

The report also recommends a committed export quota of one million tonnes a year. That, however, may not be feasible, considering that in 10 out of the last 14 years, demand exceeded supply. There were deficit years when imports and carry-over stocks helped tide over the situation. Sugar consumption is increasing at the rate of 7 to 8 per cent a year without a corresponding increase in cane acreage or productivity.

A mound of sugarcane. The Mahajan Committee does not recommend the delicensing of sugar mills.-V.GANESAN

The panel has recommended the retention of the Statutory Minimum Price (SMP) for cane even after the decontrol of the industry. It has also said that the SMP should be linked not to recovery of sugar but to the sucrose content of the cane in order not to reward inefficiency in extraction. Currently, the SMP is fixed by the Commission for Agricultural Costs and Prices (CACP) on a cost-plus basis. The panel suggests a statutory Sugar Pricing Board to determine the advance price for different price zones for the coming crushing season. The final price will also be determined by the board, based on actual ex-factory sale prices in the zone, excluding excise duty and cess and purchase tax and the cess on sugarcane and the recovery rate.

The panel has also recommended the establishment of an authority to fix the State Advised Price (SAP). The SAP is usually higher than the SMP. State governments use the SAP often as a means to dispense favours to farmers. Whether the proposed authority can force the sugar units to pay the SAP fixed by it is a moot point.

The panel has advised that no new licences be issued to khandsari units within the reserved area of a sugar mill and suggested a levy on khandsari units with a capacity of 500 TCD.

The Mahajan Committee report's main weakness is that its recommendations fail to take into account the interests of the consumers. Besides, many of its recommendations are not supported by data.

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