The bitter lesson from the UP sugar crisis

The crisis in Uttar Pradesh’s sugar sector illustrates the point made on this page by Swaminathan Aiyar on Wednesday, that a large number of the problems that hobble Indian industry and depress India’s rank in global surveys of ease of doing business lie at the state level. The central government has liberated the sugar sector from levy obligation and control on monthly sales. This is substantive reform for the sugar sector. But this has not shielded the industry from demands for high cane price from state governments and farmers. As it is, payments for last year’s cane purchases are in arrears to the tune of Rs 2,400 crore in Uttar Pradesh alone. States have to abandon populist cane pricing.

The Rangarajan committee nailed the problem in the sugar sector: the vertical linkage between cane farming and cane crushing and the need to reflect this in how much either segment earns. The committee had recommended that 75% of the sugar mills’ earnings from sugar and other by-products should be passed on to farmers. But farmers want no such linkage. They demand a high price for the cane, to be paid upfront, on grounds of steady increase in the cost of production. The reality is that sugar is a globally traded commodity, albeit with huge price distortions in different markets, and has benchmark prices to go beyond which would be anti-consumer.

Ideally, sugar mills should be allowed to grow cane or cane farmers should own sugar mills, through either cooperatives or farmer companies. The first option is not allowed. Cooperatives are controlled by politicians via the overweening role of the Registrar. While these policy glitches get fixed, the interim solution is to make contractual arrangements that allow farmers to realise 75% of the sugar mills’ revenues, a number legitimised by the Rangarajan committee. The initial payment for cane should be seen as the first instalment and the final payment should depend on the mills’ realised revenues. It is pointless to promise cane farmers prices unrelated to the sugar industry’s economic viability.