Reforms in Sugar Industry

ECONOMY/ GOVERNANCE

Topic:

• GS-3: Economy & Agriculture
• GS-2: Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

Reforms in Sugar Industry

Context: The Indian sugar industry has never stood on its feet. 

Issues

• Governmental Control distorting free market: The government’s debilitating controls and populist policies, often devoid of economic sense, ensured that Sugar industry was in perpetual crisis requiring support.
• Extremes in Production Cycle: Mindless sugarcane pricing triggered the sugar cycle which ensured that the country oscillated between massive surplus and severe shortage.
• Growing Arrears: The government grappled with large cane arrears while the industry survived on periodic government funded bail-outs and subsidies

All these may change soon if some of the recent measures announced by the government are any indication.

1. Beginning of Decontrol in 2013 

• The decontrol focussed on the sugar side of the business. It allowed sugar mills to sell whatever quantity they wanted at a time and price of their choice. 
• Supply of levy sugar at discounted prices to the government for distribution through PDS was also ended.
• However, the controls on the sugarcane side remained and it continues even today with government fixing the price of sugarcane. 

2. New variety of sugarcane (CO 238) in 2016-17

• This was developed for use in Uttar Pradesh (UP) which delivered significantly higher yield (30 tonne per acre against 22 tonne from earlier varieties) and even higher recovery (sucrose content was 11.5 per cent as against earlier 9.5 per cent). C
• Considering that UP produces bulk of India’s sugarcane, its share in the country’s sugar output rose to 40 per cent from 25 per cent.
• This made India a consistently surplus sugar producer. 

3. Surplus Management

• Today, production exceeds domestic consumption by 60 lakh tonne and the focus has shifted to managing the surplus.
• This necessitated government to re-introduce monthly sale quota and fixed minimum selling price for sugar to ensure the cash-strapped sugar mills do not flood the domestic market with sugar. 
• That kept the local prices stable. 
• To liquidate excess stock of sugar, it announced export subsidies. 
• Without subsidies Indian exports are unviable as cost of producing sugar (thanks to high cane price) is way above the international sugar price.
• This was promptly contested by other countries in the WTO. India has been allowed to continue with the subsidies till December 2023. The fear is what will happen post-2023.

4. Boosting Ethanol Production & using it as tool to manage surplus

• India’s ethanol programme — blending ethanol with petrol for use as auto fuel, was first announced in 2003.
• If implemented properly, it offers multiple benefits — 
  • Improve sugar mills’ cash flow
  • Ensure better prices for farmers
  • Enhance India’s energy security 
  • Reduce pollution.
• It never took off for multiple reasons — 
  • Poor pricing of ethanol supplied for blending 
  • Periodic shortages of sugar 
  • Competing demand from potable alcohol sector
• The Modi government revived the programme by fixing attractive prices for ethanol that oil marketing companies (OMCs) procured for blending. This motivated the sugar mills to produce ethanol.
• The government then allowed sugar mills to produce ethanol from earlier stages of sugar production (sugarcane juice & B-Molasses) rather than just C-Molasses.
• More importantly, it also offered higher prices for ethanol produced from cane juice and B-Molasses (to compensate mills for reduction in sugar output).
• These measures not only enhanced ethanol availability but also helped in tackling the sugar surplus. 
  • In 2019-20 sugar season (October-September), 8 lakh tonnes of what would have been sugar output was converted into ethanol. The plan is to convert the entire sugar surplus of 60 lakh tonnes into ethanol in the next 2-3 years.
• In case the sugar production drops in a particular year, the government can reduce direct conversion of sugarcane juice to ethanol by lowering its procurement price. Ethanol, thus, is proving to be a good tool to manage the sugar surplus.

To make the Indian sugar industry truly self-reliant, just one step remains — freeing up cane pricing. 

• Sugarcane price fixed by the government today has little correlation to the realisation from end products. This inflicts huge losses on the mills and causes cane arrears to build.
• A solution is available. The Rangarajan Committee has suggested a formula to fix cane price factoring in the price of sugar and other by-products
• In case the cane price, arrived by the formula, drops below what the government considers as a reasonable payment, it can bridge the gap from a dedicated fund created for the purpose and a cess can be levied to build up the fund.

Conclusion

If the government bites this final bullet, the sector will become globally competitive and financially independent. Cane arrears will be history. There will be no need for the government to subsidise the industry and offer large bail-outs. And Indian sugar industry will finally come of age.

Connecting the dots:

• Why Sugar Industry needed export subsidy
• MSP in age of Surplus: Sugarcane Pricing and Milk Pricing