Sugar decontrol proves a sticky problem

With the govt putting in strong caveats while partially decontrolling sugar, the road to full decontrol can be a difficult one
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First Published: Sun, Apr 07 2013. 03 49 PM IST
Getting Rs32 a kg instead of Rs19 a kg (the 2012-13 levy price) is indeed good for sugar mills, but it’s not freedom by any stretch. Photo: Priyanka Parashar/Mint
Getting Rs32 a kg instead of Rs19 a kg (the 2012-13 levy price) is indeed good for sugar mills, but it’s not freedom by any stretch. Photo: Priyanka Parashar/Mint
Updated: Sun, Apr 07 2013. 09 36 PM IST
Nearly six months after the Rangarajan Committee report on sugar sector reforms was released, the government took its first step towards implementing the report’s recommendations. It has freed sugar mills from their obligation to supply sugar at cheap rates to the states for the public distribution system, or PDS (known as levy sugar).
This should have been the easiest decision to implement, as all that the central government had to do was to revoke its levy order and agree to reimburse the states for the difference in the market rate and the PDS rate. But instead of a clean cut, the government has retained its hold over the control lever. Newspaper reports indicate that the government has said the new arrangement will be valid for two years and also that the reimbursement will be capped at a purchase price of Rs.32 a kg. In other words, states may refuse to pay more than this price, as they will have to pick up the tab, even if market prices trend higher.
What logic could have led to this misstep, which was not part of the Rangarajan Committee recommendation? One may be the unexpected consequences of decontrol, especially on the price front. The government has already made it easier for sugar mills to sell their output, and not depend on government prescribed monthly releases. If prices fluctuate wildly (especially on the upside) the government can clamp down on the industry after two years. Or, it may have wanted to ensure that state governments do not overpay for sugar since the centre has signed a blank cheque.
But a narrow view from an investor’s viewpoint is that this is not real decontrol; getting Rs.32 a kg instead of Rs.19 a kg (the 2012-13 levy price) is indeed good for sugar mills, but it’s not freedom by any stretch. It is reminiscent of the petroleum sector where decontrol exists on paper but the invisible hand of the government is very much in control.
The short term impact is perhaps already factored in valuations, as it was assumed that levy had become history. The only uncertainty is that the government has not announced how it will meet the higher subsidy burden. Some sort of a duty increase could be in the offing unless the government decides that it wants to do nothing that will result in higher sugar prices.
The symbolism of this event has much more relevance than the actual financial impact. It could have been the harbinger of an eventual complete unshackling of the industry. But if the simple task of removing the levy sugar burden has been implemented with strong caveats, then the road to full decontrol can prove a very difficult one to traverse. Investors should hold their horses.
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First Published: Sun, Apr 07 2013. 03 49 PM IST
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