Govt wants to play sugar daddy for 2 years. Is this reform?

Anyone who labels a decision to double the subsidy bill as reform ought to have his head examined. However, the cabinet decision to "free" sugar pricing has been dubbed a reform by an ecstatic pink press even though the resultant subsidy burden rises from Rs 2,600 crore to Rs 5,300 crore.

Yes, the old law under which sugar companies had to hand over 10 percent of their stocks as “levy” sugar at Rs 19 a kg (a hugely subsidised price) is gone. They also will not be burdened by the old system under which the government decided how much of sugar stock they can release every month into the market.

[caption id=“attachment_687805” align=“alignleft” width=“380”] The privilege of picking up higher subsidy bills has been handed down to states and that is supposed to be reform. Reuters[/caption]

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But in a convoluted decision, while sugar companies can sell in the open market, the price of sugar to the consumer picking it up from the public distribution system (PDS) will remain the same: Rs 13.50 a kg when market prices are Rs 18.50 higher at Rs 32. In another related decision, the ex-factory price on which the new subsidy will be calculated is frozen for two years.

There are more ifs and buts to this reform with a small ‘r’. The burden of subsidies in case prices rise above Rs 32 will rest with the states. The latter will have to buy the sugar from the market (or from the mills through tender) at whatever price and sell it through the PDS. This will affect the states if market prices rise above Rs 32 (which may happen in a bad production year).The sugar year starts from end-September, and the new policy applies from then.

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Who consulted states on this reform? No one knows. So much for Rahul Gandhi’s reverence for devolving power. The privilege of picking up higher subsidy bills has been handed down to states and that is supposed to be reform.

Not only that. The subsidy bill of the centre, assuming issue prices of Rs 13.50, will now be Rs 5,300 crore - twice the earlier subsidy. And after observing the impact of this new freedom on the sugar economy, farmer incomes and byproduct prices (ethanol, molasses, etc) for two years, the centre will take a call on what to do - abandon or embrace it.

It is clear what the two years is about: it is about kicking the sugar decontrol can two years down the road. By which time either the elections will be over, and who knows, it will be a ticking time-bomb in the hands of the next government. What fun.

Here’s what is wrong with this super-diluted reform.

First, private losses of sugar mills (roughly Rs 2,600 crore on levy sugar) have now been nationalised, with the centre picking up the tab.

Second, the additional subsidy burden (if prices rise above Rs 32) have been handed over to the states, who will yell blue murder if the market turns adverse.

Third, if the subsidy burden is going to devolve on the states, they could place more restrictions on sugar and byproduct movements in order to avoid revenue losses. This will pit the big sugar-producing states (Maharashtra, UP and Tamil Nadu, primarily) against the sugar consuming ones (the rest of the country).

And since the rest of sugar reform largely rests with the states - on cane pricing, regulation of cane areas, and minimum distance norms for sugar mills - one wonders if they will follow through or become more uptight about doing their bit.

Half-way houses to reform are seldom safe.