The Cabinet Committee on Economic Affairs [CCEA] has approved a proposal of food ministry for creation of 4 million tons of sugar buffer stock during August 1, 2019, to July 31, 2020. The government will spend Rs 1,674 crore towards the cost of carrying the stock. The amount would be directly credited into farmers’ account on behalf of sugar mills against their cane price dues.
It has also decided to keep Fair and Remunerative Price [FRP] of sugarcane unchanged at Rs 275 per quintal. FRP is the minimum price which mills have to pay to farmers for purchasing sugarcane – raw material used in making of sugar. The price is applicable to the sugarcane purchase made during October 1, 2019 to September 30, 2020.
The objective of creating the buffer – according to the union minister for environment, Prakash Javadekar [who briefed the media on decisions of the cabinet] – is to maintain demand-supply balance, stabilize sugar prices and enable sugar manufacturers clear arrears to the farmers [estimated to be over Rs 15,000 crore].
The issues raised by the government are grave. But, the key question is whether the measure approved by the cabinet will help in addressing them. At the outset, let us take a look at the demand-supply scenario.
During 2018-19 marketing year, India’s sugar production is estimated to be about 33 million ton. Together with opening inventory of 7.5 million tons as on October 1, 2018, the availability was 40.5 million tons. The consumption during this period being 26 million tons, the year will end with opening inventory of 14.5 million tons as October 1, 2019. This is 9.5 million tons higher than the normative requirement of around 5 million tons.
Thus, there was excess availability of sugar during 2018-19 marketing year. To deal with it, in August 2018, the union government had created a buffer stock of 3 million tons of sugar [involving payment of Rs 1,175 crore towards its carrying cost] to be kept for the year. Yet, excess supply situation continued throughout.
The fact of the matter is that creation of buffer does nothing to moderate the supply needed to maintain the demand-supply balance. All that it does is to temporarily withdraw that much quantity from the market and after the stipulated period [one year in this case] is over, this is pumped back to the market. Even so, given the quantum of excess i.e. 9.5 million tons, removal of 3 million tons won’t make a dent even during that particular year [read: 2018-19].
During 2019-20 also the scenario is unlikely to change. Even if the sugar output and demand stay at the level of the previous year, the excess over the normative requirement would be 16.5 million tons. The proposed removal of 4 million tons is too small to make a dent on the excess supply during the year. Its release thereafter will aggravate the situation during 2020-21 marketing year unless more quantity is impounded in that year. The vicious cycle will continue.
At the root of an aggravated imbalance between the demand and supply of sugar is too much of intervention by the state on the supply side even as the demand is by and large unregulated. Even as the centre fixes fair remunerative price [FRP] of sugarcane at an unrealistically high level, the states further inflate it by giving an incentive amount. For instance, in Uttar Pradesh [UP], state advised price [SAP] is Rs 315 per quintal as against FRP of Rs 275 per quintal.
The sugar mills are obliged to purchase all of the sugarcane offered by farmers at the SAP which in turn, is processed to produce sugar. The quantum of sugar output is thus dictated by the sugarcane dumped on the mills instead of being driven by the demand. In this scenario, excess supply is inevitable which leads to fall in the market price of sugar. The realization from sale can’t fully pay for the cane cost, forget meeting expenses on other inputs and fixed cost. Unable to pay the farmers, the mills keep piling up payments year-after-year.
This triggers a spate of state interventions such as hike in import duty, creating a buffer etc to regulate supplies and in turn, lift the market price. Early this year, the union government even fixed a minimum ex-factory price at Rs 31.5 per kg [and there is demand for increasing it further] which defies logic. How can you force consumers to pay more than justified by underlying supply-demand conditions? This may help mills garner a few thousand crores to clear the arrears but won’t provide a lasting solution.
For a lasting solution, centre/states should shun the practice of fixing FRP/SAP of sugarcane at an artificially high level. The sugar mills should be free to determine payments to farmers based on their revenue under a market-based framework. This will be a win-win for both the manufacturers and the farmers. Even if the farmers get lower price for sugarcane, that will be better than receiving short or delayed payments which forces them to borrow [from informal sources] at high rates resulting in a debt trap. That apart, the government can always give direct income support to the needy.
The farmers also need to re-think their cropping strategies. Instead of remaining glued to sugarcane where the returns are less and uncertain, they need to diversify to crops which are in greater demand, fetch higher price and uncertainties are less. This will be good for conserving water as sugarcane is a water guzzling crop and any shift away from it will help this noble cause. It will also save on electricity consumption as farmers work less on pump sets. A collateral gain will be by way of reducing oil imports/current account deficit.
Modi should take a call on this reform which will extricate farmers from the ‘high SAP-arrears-debt’ trap even while protecting the interest of consumers and sugar mills.