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Mills gain from politics of sugar cane pricing

Mills gain from politics of sugar cane pricing
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First Published: Tue, Dec 01 2009. 09 47 PM IST

Updated: Tue, Dec 01 2009. 09 47 PM IST
Last month the capital was besieged by thousands of farmers on the issue of sugar cane pricing, forcing the government to withdraw a controversial ordinance. After a long time, New Delhi saw farmers’ strength uniting the disparate political opposition.
While the government capitulated, did the farmers win? Not exactly. In this shadow-boxing between the government and the farmers, the real beneficiary are the sugar mill owners.
But let us understand the genesis of the farmers’ discontent. Unlike rice and wheat, the prices of which are fully administered, sugar cane pricing is partially administered. That is because of two factors that distinguish the government’s intervention. First, unlike rice and wheat, the government does not procure it directly from the farmers. It announces a statutory minimum price (SMP), but the actual purchase is done by the millers. Second, unlike rice and wheat, where there is only one minimum support price (MSP) set by the Central government, state governments are allowed to suggest their own prices, which are called the state advised prices (SAP). Usually, SAP is higher than SMP.
The state governments have no financial obligation because they do not have to buy sugar from the millers. The Central government buys sugar from millers for its public distribution scheme (PDS). For PDS, the Central government imposes a levy quota, which is paid on SMP. This was challenged in court by the millers on grounds that they are buying sugar cane at SAP, which is higher than SMP, and therefore, the Central government should purchase sugar from them at SAP. They won their suit in the Supreme Court last year, which ruled that the government should factor in SAP while fixing levy sugar price along with SMP. The Central government has not yet implemented this although it is facing a contempt petition in the apex court.
To reduce its financial obligations and also to rein in state governments, the Central government decided to pass on the financial obligation of differential pricing between SAP and SMP to the states, but rolled it back due to farmer protests.
But were the farmers the real beneficiary? They did benefit to an extent because of the higher prices received for their crop. But the real beneficiaries are the millers. This is more so because sugar prices are on an upward spiral for quite some time and are expected to remain there because of the fall in sugar cane production this year.
The increase in sugar prices is largely a result of the policies of the present United Progressive Alliance government. This is not only through the induced shortfall in production, but also the way sugar prices have been handled by the government. It is primarily because of a nexus between politicians and sugar mills. This is, of course, obvious in Maharashtra, where almost all politicians of stature have interests in sugar mills directly or indirectly, including agriculture minister Sharad Pawar.
It is also worth noting that even though Maharashtra is the second biggest producer of sugar cane in the country, there were no protests in that state. That is largely because the political class has made sure that the sugar industry is protected and patronized through subsidies and tax cuts.
The decline in sugar cane production is not because of the drought or a fall in productivity. It is because unlike rice and wheat, whose MSP has increased by more than 60% in the last five years, sugar cane prices have remained stagnant.
Second, what hurts the farmers most is the delay in payment by millers, which sometimes runs into two to three years. In fact, the issue is not new. The first intervention by Rahul Gandhi in Parliament on 21 March 2005 was on the delay in payments to farmers by millers. The situation has worsened subsequently.
But is the demand of the millers to pay the farmers at SMP or SAP justified? Not exactly, considering that under the millers’ pressure the government has already reduced its levy quota from around 40% till the 1990s to 15% now. That means almost 85% of the output of the mills is available for open market sale.
With increasing prices, the real profit is made by millers, who buy at SAP but sell it in the open market. The binding rate of SAP or SMP only affects 15% of their produce. Despite this, the millers have always insisted on paying the farmers at SAP, thus denying the farmers their legitimate share in increased sugar prices. But SMP or SAP is hardly benefiting the consumer, with reduced availability of sugar under PDS.
The Central government’s ordinance was essentially a way to wriggle out of the Supreme Court order, but also to protect the interests of mill owners. It would have meant that the millers would continue to buy sugar cane from the farmers at a lower rate than SAP. But if SAP was higher, they would be compensated out of state government’s finances. Either way, the millers would have been happy. As matters stand today, the dual pricing policy is neither benefiting the farmer nor serving the purpose of keeping prices down for consumers. It is time a uniform pricing policy for sugar cane is introduced.
Given that the millers are happy to pay SAP, which is much higher than SMP, it makes sense to have one price that is at least as much as SAP in different states. But what is also required is a stricter regulation of sugar mills to ensure timely payment to farmers. This appears difficult as the present government is keen to protect the interest of millers than farmers or consumers.
Himanshu is an assistant professor at Jawaharlal Nehru University and visiting fellow at Centre de Sciences Humaines, New Delhi. Farm Truths looks at issues in agriculture and runs on alternate Wednesdays. Respond to this column at farmtruths@livemint.com
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First Published: Tue, Dec 01 2009. 09 47 PM IST
More Topics: Farm Truths | Himanshu | Capital | Farmers | Sugar cane |