Sugary Tears – The crisis brewing in India’s Sugar Economy

On January 12th and 13th, offices of sugar factories in Sangli, Satara and Kolhapur districts of Maharashtra were torched by angry farmers, reflecting a deep malaise pervading India’s sugarcane farms. The farmers were protesting the non-payment of, even the first instalment of payment for the sale of their sugarcane.

India’s sugar economy, for years, has been beset by cumbersome laws and regulations that have set up perverse incentives for farmers while inducing inefficiency and anti-competitive behaviour among the millers. Although formulated with the noble intention of keeping the price of sugar at an affordable level and making it available through the Public Distribution System (PDS), this regime has given rise to vicious cyclicality in the sector making gluts and scarcity commonplace

Under the current system, for every designated mill the area in its vicinity, called the ‘cane reservation area’, is reserved. The mill is bound by law to purchase all the cane that is produced within this area and conversely, the farmers within this area are bound to sell their cane only to the designated mill. A distance of 15 km must be maintained between two sugar mills and the State Governments have the authority to enhance this distance. Thus, setting up a mill requires approvals creating barriers to entry for new firms. The incumbent players are shielded from competition and thus, monopolies are created. They have no incentive to invest in better technology or improve the efficiency of their operations.

The mills are mandated to pay a ‘fixed and remunerative price’ (FRP) to the sugarcane farmers based on the recommendations of the Commission for Agricultural Costs and Prices (CACP). Apart from this, many state governments announce their own State Advised Price (SAP), which lacks transparency and is often politically motivated to placate the demands of the farmers. As the prices of the end-product – sugar – vary, a significant share of the value of the sugar being sold is sometimes owed to the farmers, which the mills are not able to pay immediately leading to mounting cane arrears. After its peak (when the prices were low), in the subsequent years, there has been a fall in the farmers’ share of the sugar value (sometimes even going below 50%) as the prices have risen. This mean reversion happens in a very disruptive manner and sets up the conditions for another rise to the peak. Thus, vicious cycles get created in the production of sugar.  

The trade policy on sugar has been formulated keeping the objective of self-sufficiency in mind. At the beginning of the year, the Directorate of Sugar forecasts the production and demand of sugar and exports are allowed only if the estimated production is higher than the demand. The tariffs on imports are also relatively higher compared to other South Asian countries like Bangladesh, Pakistan and Sri Lanka. However, the Government allows duty-free imports when inflationary pressures are felt. Thus, the policy focused on disincentivising exports and allowing imports from time to time prevents firms from having a long-term presence in the global sugar trade, impeding the growth of the sector. At the same time, while the farmer feels the brunt of lower prices in the form of mounting arrears, any benefit from the rise in prices is negated by duty-free imports. This policy is an important reason for the financial distress among the sugarcane farmers.

The chief by-products produced in the processing of sugarcane are molasses, bagasse and press mud. The markets for these by-products are regulated tightly leading to their full value not being realised by the manufacturer. Although, there is no pricing, production or distribution control on molasses, its allocation and movement is controlled by the excise authorities of the State Government. Across the states, there is variation in the excise regulations on molasses. These regulations have prevented the formation of a national market for these goods, reducing economic efficiency.

The most bizarre regulation relates to the controls on packaging of sugar. Under the Jute Packaging Materials (Compulsory Use in Packing Commodities) Act, 1987 (JPMA), packing of sugar needs to be compulsorily carried out in jute bags. It has been estimated the usage of jute as a packaging material instead of the commonly used HDPE has added an additional cost of Rs. 0.4 per kg of sugar to the end consumer. Furthermore, the supply of jute bags has been unable to keep up with the rise in demand of sugar. Another drawback of using jute bags is their effect on the quality of sugar. The ingress of jute fibres into the sugar leads to a loss in quality.  

Introduction of newer varieties of sugarcane like Co-0238 has made the state of “permanent surpluses” in the production of sugar a real possibility. The introduction of these new varieties, along with the regulations mentioned earlier, has led to the current crisis in the sector. The old sugar cycle, wherein three bumper years for the crop were followed by two troughs, has been replaced with a cycle characterised by one bad year in five. Excessively high mandatory prices and low demand coupled with higher yields and sucrose content of these varieties has led to overproduction of the sweetener. The market price of sugar has become unremunerative for the mills leading to the problem of mounting arrears. Till the end of January this year, sugarcane arrears had touched Rs. 20,000 crores.

The spectre of a crisis is haunting India’s sugar economy. The most preferred options of the government to tackle this crisis include bailouts, packages and subsidies for the mills and resorting to public stockholding of sugar. These measures will provide only temporary relief unless the policymakers realise the fundamental shift to a permanent surplus in the commodity and free the sector from its regulatory shackles.   

References:

  1. Bavadam, Lyla. “Bitter Aftertaste.” Frontline. https://frontline.thehindu.com/the-nation/agriculture/article26119650.ece.
  2. Report of the Committee on the Regulation of Sugar Sector in India: The Way Forward. http://eac.gov.in/reports/rep_sugar1210.pdf

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