We have too much sugar on hand but this may simply vanish if farmers take a holiday and switch over to other crops due to the lack of remunerative prices, and a bad monsoon ahead
The domestic demand for sugar in India is around 23 million and the projected production for this season, which just ended in September, is about 25.3 million tonnes (mt). This leaves a surplus of about 2 mt and the carryover stocks from the last season is 7.5 mt. In simple terms, we have too much sugar on hand but this may simply vanish if farmers take a holiday, switch over to other crops due to the lack of remunerative prices, and a bad monsoon ahead.
The government needs to fix the sugar cane prices realistically and practically and without any further delay.
The domestic sale price in retail market has gone down to Rs28 per kilo but this may go up to Rs32/34 in a kirana shop, which does not benefit the grower! The ex-factory cost varies, from location to location, and the millers are said to be losing upto Rs5.5 per kilo.
The other major issue that has plagued this industry continuously is the non-settlement of dues to farmers by millers, who want the states to adopt the ‘linkage formula’ in line with the Rangarajan Committee's recommendations.
UP sugar mills and many others in different states have already started crushing the sugar cane. The cane farmers co-operatives do not fancy the idea of standing crop and would like to monetize the same, despite outstanding arrears that the mills have to pay.
Millers have demanded that the government introduce the ‘linkage formula’ in line with the recommendations of the Rangarajan Committee, wherein the price of cane is linked to the sugar content.
It may be recalled that the UP Council of Sugarcane Research has estimated the cost of cultivation at Rs23,000 per tonne. The State Advised Price in UP was fixed at Rs280 as against which the Samajwadi Party had assured the farmers, through its manifesto prior to the election, that SAP would be fixed at Rs350. Haryana has fixed Rs310. Fixing a workable price is one thing but just as important is the actual implementation of the rate and ensuring payment of the same. The arrears in UP is said to be Rs2,300 crore, much lower than what it was in the beginning of the year.
In the case of Karnataka, according to the Karnataka State Sugarcane Growers Association President, Kurubur Shantakumar, the arrears to growers stood at Rs2,100 crore and, out of the 65 crushing mills, 54 had not settled the dues as per price fixed by the state.
As a sequel to the writ petition filed by the South Indian Sugar Mills Association (SISMA), the High Court has held that the state government could fix the price of sugar cane and directed the crushing units to pay the arrears within 15 days of the order and this will have to be complied in the next ten days or so. The court upheld the Karnataka Sugarcane (Purchase and Supply Control) Act 2013 and the law empowers government to frame rules to decide sugarcane price on revenue-sharing basis.
In the meantime, it has been reported in the press that as the Brazilian sugar mills have diverted a large chunk of cane for ethanol production, they may expect a fall in production. Upto 60% of the cane is reported to be diverted for ethanol this season.
In so far as India is concerned, export shipments of 1.2 million tonnes have been effected for the period ending September 2014, as per Indian Sugar Mills Association. However, if export subsidy is not given, India may lose its hold in shipping out raw sugar and this unilateral absence, by the world's second largest sugar producer, will enable our competitors like Brazil, Thailand and Australia to boost sales of their sugar to refineries in the Middle East and elsewhere.
So, the sugar industry is at its cross roads. Some urgent steps are of immediate concern, and these need to be addressed, without any further delay:
a) fixing of sugar cane price in relation to sugar content in line with the Rangarajan committee; NDA should not treat this as a ‘UPA’ proposal because we must realise that this committee was set up to resolve the problems faced by the industry. If necessary, make some modifications, if at all this is needed, but implement it nevertheless. After all, it can be corrected should the situation warrant otherwise, at a later stage!
b) direct mills that they should be producing "X" percentage of ethanol mandatorily
c) direct the oil companies to lift this ethanol and blend in line with directives already issued by the Government earlier
So far, all the concerned parties have been playing musical chairs in this industry and are not settling the issues in a firm and fair manner. It is time they did.
(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)
Universal allowance with clawback will deal with the twin issues of eligibility and distribution in subsidy targeting
Every country provides some sort of state aid to help the poor. In India, we have a large poor population and we provide state aid in the form of subsidies for food and fuel typically. How effective are these subsidies? What are the major points of failure in our subsidy system?
A Bloomberg article mentioned, "One 2009 study estimated not only that a majority of India’s poor did not have a BPL card, but also that about 44% of BPL cards went to the non-poor." Other studies have come to similar conclusion. Recently, the Rajasthan government found more Food Security Act (FSA) beneficiaries than the total population in certain districts of the state. Even in a city like Bengaluru, at one point the total below poverty line (BPL) population was more than the city's population!
These "eligibility" issues are a major point of failure in our subsidy system. In addition, if the majority of the poor actually don't get aid, then what is the rationale for subsidies?
Once eligibility is established, people have a right to get their full quota of subsidies. Unfortunately, a large portion of these subsides are misappropriated and lost. Some 40% of subsidised food grains do not reach the intended beneficiaries. Kerosene distribution suffers from 45% leakage. These "distribution" issues are the second point of failure in our subsidy system.
What can be done to resolve these issues? The government seems quite keen on Direct Benefit Transfer (DBT). This will probably help reduce distribution losses, but will not be of much help with eligibility - the bigger issue.
One reason why the eligibility issue is not tackled is the political cost. Those ineligible or undeserving receiving subsidies will not like to lose their subsidies. The UPA government quickly went back from six subsidised LPG cylinders to 12 per year. And the present National Democratic Alliance (NDA) government has decided to leave things as they are - at least in their first budget. There are also practical difficulties. For example, even given political will, the government simply does not have the capability to identify all ineligible BPL cardholders.
Efforts to solve the subsidy system cannot be successful till both -distribution and eligibility -- issues are resolved. A new approach that is both politically feasible, easy to implement and solves both these issues is required. "Universal Allowance with Clawback" may be one such solution.
There are 125 crore people in India while the central budget estimate for subsidies (food and LPG) is Rs2.60 lakh crore. What if we offer a universal allowance for all of Rs190 per month (pm). A Rs190 allowance for 125 crore people comes to Rs2.85 lakh crore per annum. We need to find another Rs25,000 crore. We can curtail these subsidies gradually and add a "Clawback" (explained later) of Rs25,000 crore.
A monthly allowance of Rs190 pm might seem like a small amount for the "poor", but the subsidy given on 5kg grain as suggested in Food Security Act (FSA) at a typical Rs20 per kg is only Rs100. A representative amount for kerosene subsidies is Rs50pm. Most importantly, all this food and fuel can be universally delivered with significantly reduced leakages. Almost everyone should see a net improvement. What's more, if distribution is done through banking route (Jan Dhan?), it will bring everyone in the banking fold.
This approach need not lead to diversion of scarce funds to the "rich". A major part of the universal allowance will be recovered because there will be no more subsidies on LPG.
To fully recover the allowance, the LPG prices can be increased by a further Rs300 through taxes. This "Clawback" itself will bring in Rs25,000 crore additional revenue that will be added to the subsidy pot.
Just like in DBT, where the LPG user pays the full price and gets the subsidy portion credited to bank account, here too the monthly allowance will be set off against the increased LPG sticker price. There is no net gain or loss to a typical LPG user, so it should be politically doable. By a happy coincidence, the prices for domestic and commercial LPG will now converge and the government can completely deregulate/ privatise the LPG sector!
Once this "Universal Allowance with Clawback" framework is ready, "Clawback" can take a number of forms. Over a period of time taxes can be increased on certain items so that the subsidies on rich are set off against these taxes. This approach is politically easier and the amount of "Clawback" can be controlled based on the needs of the government of the day. Both the preferred outcomes - less aid to the rich and aid to all poor without exception can be achieved.
Tamil Nadu is one of the more successful states in subsidy delivery. It is interesting that, a lot of the credit for the success has been attributed to its universal Public Distribution System (PDS). If a relatively prosperous state can achieve such results by going universal, imagine the benefits to less developed states.
"Universal Allowance with Clawback" significantly reduces eligibility issues because everyone is invited - there are no eligibility criteria. And it helps in distribution because all in one lump sum transfer is easier to execute than piecemeal cash transfer under different headings. Finally, it is politically easy to do because we do not eliminate freebies for anyone.
(Nemi Jain studied Engineering at IIT Bombay. He has spent a major part of his career working in banks)