Sugar package: We need to cut cane acreage but that’s a political call nobody will take, Abhijit Sen tells Firstpost

The government announced a Rs 1,600 crore sugar package on 6 June to help address the problem of mounting arrears due to sugarcane farmers. Doubts have been raised about whether it will help meet the Rs 20,000 crore worth of arrears and whether it will address long terms structural problems facing the sector. In this two-part interview with Seetha, eminent agricultural economist and former member of the Planning Commission Abhijit Sen holds forth on the package and the issues facing the sugar sector. Excerpts:

Will the sugar package help, even in the short term?

Sugar this year is a big problem mainly because you’ve got a huge increase in output (both of cane and, even more so, of sugar). And world market conditions are such that you can’t export a lot. Under the circumstances, one part of the package – building up buffer stocks - clearly makes sense. What it does is - gives a support immediately to the price level. But since you are making up the buffer stock of sugar, not of sugarcane, it is the mills that are being bailed out primarily and secondarily the farmers. And that is expected. Because all the sugarcane ends up in the mills and unless the mills are able to pay the money, the farmers will not get it.

But you can’t build up buffer stocks of sugarcane. . .

No, you can’t. You can build up buffer stocks of sugar and, to some extent, put sugarcane to other uses, which is the other part of the package – the ethanol production. Except that this has been on the government’s radar for a long time, but it has not been doing particularly well.

A file photo of Abhijit Sen. IBNLive

A file photo of Abhijit Sen. IBNLive

Why?

Not very clear, but one of the things I suppose is that it was very attractive when world oil prices were very high. When they fell, ethanol became less attractive. Now that prices have started going up again, they presumably will start getting more attractive than before.

But nonetheless I don’t think one should be thinking that is the real solution to the problem. The real solution to the problem is we should be cutting down on the sugarcane area. But that’s a political call nobody is going to take.

The arrears problem keeps surfacing every few years. Is the political fixation of prices the main problem?

The sugar problem is a classic problem of what is called a cobweb. Essentially it goes through cycles. But the interesting thing is that this has become more marked in the last ten years. The period when the price control was much greater, that cycle had been much less. If the MSP is set at some level which is in between the high price and the low price of the cycle, without intervention, then a minimum price when the price is low (to keep it up) would actually also reduce the high price at the high level. And therefore an effective functioning of the price support system should, in theory, actually reduce the cycle and that is precisely what it did.

The centre sets a fair remunerative price (FRP) and the states give a state advised price (SAP) that is much higher. Is that what leads to this problem?

That has always been a problem but there is only one state that really does that – Uttar Pradesh (UP). A lot of states have something called a SAP but usually there is not much difference between the central and state prices.

Cane arrears are also a major issue only in Uttar Pradesh as well. .  .

No, cane arrears are an issue everywhere. They take somewhat different forms at different times. UP and Maharashtra are two big producers and they are two quite different states. In UP the vast majority of the sugar mills are private while in Maharashtra the majority are in the cooperative sector. The cooperative sector doesn’t go into arrears basically because they have a system by which they make a payment upfront and then they give a proportion of what the mill earns. Therefore farmers have got used to the fact that if the mill does badly they will also do badly.

The whole SAP issue comes in because this is inflicted on the private sector and the private sector tries to guzzle up the money when prices are high when you don’t have arrears but have huge profits and then complain when the prices are low. When they actually should have been prepared for the fact that it will happen this way.

Only in UP does it become so politically fraught. . .

UP makes the headline because it is a big player in this game. When prices are low they are low across the country; other states also have arrears. The extent of arrears is much more in UP than in others because the SAPs are considerably higher.

The current package is said to be far short of the arrears.

The revenue flow this year of mills is unlikely to be such is that by simply telling them to pay up they will be able to pay up. So the mills will actually be making losses and their ability to pay up will be limited. The only way it can happen is if they are given huge amounts of bank credit to see off their arrears. But if I were a banker I would be vary wary of lending to them unless government guaranteed help.

A major issue in farm prices is that the government is always doing balancing act between producers and consumers; in the case of sugar, the mills are a third element. Does this complicate things more?

Oh yes. Industry becomes the most important player in this. Where the cooperatives are strong, as in Maharashtra and, to some extent, Gujarat, the cooperative bosses decide sugarcane pricing. In UP, where private mills dominate, essentially the government works through the Cane Development Office. This is separate from the agriculture ministry and it talks to the mills rather than the farmers. So what the mills are saying is heard more easily and farmers are heard only when they come out on the streets.

Now between the farmers and the mills, especially in UP, there are people who are middlemen. Mills have to arrange and tell farmers come to the mill with their produce on a particular day. Or they try sometimes (the good mills always try to) to manage even the planting in such a way that some are planted earlier, some later, so that they can get a continuous flow. That requires a fair amount of extension work. The agriculture extension workers are not doing this and the mills don’t have that many people. So this work is done on behalf of the mills by very local guys. Most of these guys are political workers.

(The second part deals with issues relating to deregulation of the industry)


Updated Date: Jun 12, 2018 09:43 AM

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