Sugar industry is of significant importance to the Indian economy. Nearly 90 million people are dependent on either sugarcane farming or employment generated by the 637 sugar factories (as of end 2009) and other related industries using sugar in India.
Recently the Centre has unshackled the Rs. 80,000-crore sugar industry on the recommendations of the Rangarajan Panel by abolishing the monthly release mechanism and doing away with the mills’ obligation to supply levy sugar for subsidised distribution under the Public Distribution System, thus allowing market forces to come into play.
A major step to liberate the sugar sector from controls was taken in 1998 when the licensing requirement for new sugar mills was abolished. Delicensing caused the sugar sector to grow at almost 7% annually during 1998-99 and 2011-12 compared to 3.3% annually during 1990-91 and 1997-98.
Although delicensing removed some regulations in the sector, others still persist. For instance, every designated mill is obligated to purchase sugarcane from farmers within a specified cane reservation area, and conversely, farmers are bound to sell to the mill. Also, the central government has prescribed a minimum radial distance of 15 km between any two sugar mills.
However, the Committee found that existing regulations were stunting the growth of the industry and recommended that the sector be deregulated. Deregulation would enable the industry to leverage the expanding opportunities created by the rising demand of sugar and sugarcane as a source of renewable energy.
Rangarajan Committee’s recommendations on deregulation of the sugar sector:
A major recommendation of the committee relates to revising the existing arrangement for the price to be paid to sugar-cane farmers, which suffers from problems of accumulation of arrears of cane dues in years of high price and low price for farmers in other years. The existing arrangement comprises a Fair and Remunerative Price (FRP) announced each year by the Centre, under the Sugar-cane Control Order and on the advice of CACP, as the minimum price of sugar-cane. However, many states in north India also announce a State Advised Price (SAP) under state legislation. Generally, the SAP is substantially higher than the FRP, and wherever SAP is declared, it is the ruling price. Instead of the present arrangement, the committee has proposed that at the time of cane supply, farmers be paid FRP as the minimum price, as at present. Further, subsequently, on a half-yearly basis, the state government concerned would announce the ex-mill prices of sugar and its by-products, and farmers would be entitled to a 70% share in the value of the sugar and by-products produced from the quantity of cane supplied by each farmer. Based on the share so computed, additional payment, net of FRP already paid, would then be made to the farmer. Since the sugar value estimate includes return on capital employed, this implies that farmers would also get a share of the profits. With such a system in operation, states should not declare an SAP.
The committee has also recommended dismantling of the levy obligation for sourcing PDS sugar at a price below the market price. States should be allowed henceforth to fix the issue price of PDS sugar, while the existing subsidy to states for PDS sugar transport and the difference between the levy price and the issue price would continue at the existing level, augmented by the current level of implicit subsidy on account of the difference between the levy price and the open market price. This will free the industry from the burden of a government welfare programme, and indirectly benefit both the farmer and the general consumer since the industry passes on the cost of levy mechanism to farmers and consumers.
The committee has recommended that cane area reservation ultimately be phased out and contracting between farmers and mills allowed for enabling the emergence of a competitive market for assured supply of cane, in the interest of farmers and economic efficiency.
The government has set controls on both exports and imports. These controls are imposed after taking into account the domestic availability, demand and price of sugar-cane. A number of cascading import controls and export permits are used to achieve this. As a result, India’s trade in the world trade of sugar is small. Even though India contributes 17% to global sugar production (second largest producer in the world), its share in exports is only 4%. This has been at the cost of considerable instability for the sugar cane industry and its production. Thus the committee recommended that all existing quantitative restrictions on trade in sugar should be removed and converted into tariffs. Appropriate tariff in the form of a moderate duty on imports and exports, not exceeding 5-10%, should be applied. Such a trade policy will be neutral to consumers and producers. The tariff can be changed when world prices are very high or low.