New Delhi: A high-level government panel has recommended a radical overhaul of the sugar market, including partial indexing of cane prices to the retail price of the sweetener and relaxing restrictions on setting up of sugar factories.

If implemented, the measures will reduce government intervention, usher in competition and make at least a section of the farmers happy with the ruling United Progressive Alliance.

The panel, headed by former Reserve Bank of India governor C. Rangarajan, was constituted in September and is expected to submit its report to the Prime Minister next month. It was set up to provide a road map for addressing structural problems underlying volatility in sugar prices, a politically sensitive issue.

At present, the sugar market is controlled, with the government deciding several factors from the price of cane to the quantum of offtake of sugar from the mills. To be sure, cane prices vary across the country as individual states fix the procurement price.

The committee is now proposing that to begin with, the government should move to a uniform pricing regime that will prevent state governments from determining the sugar cane price. This has often been a politically contentious issue with the strong farmer lobby in states such as Uttar Pradesh, which is due to go to polls in 2012.

According to the panel, the government should move to a uniform formula that will be based on a weighted average of the retail price of sugar across the country. For this purpose, the country will be divided into different zones and within each zone, based on certain criteria, the price will be uniform.

The panel has suggested that 67-70% of the zonal weighted average be added as mark-up on the fair and remunerative price (FRP)—the floor price of sugar cane determined by the Union government. As is the current practice, this FRP will be paid as an advance to the cane farmer by the sugar mills.

“By making the sugar cane price a function of the FRP and of the prevailing sugar price, an effective price mechanism, which benefits farmers, can be instituted," said a panel member on condition of anonymity.

According to the panel, the new regime would work only if the government dismantled the current practice of release of sugar by the mills to the market and to the public distribution system (PDS). This quota, monitored by the food ministry, varies every month depending on estimates of demand and supply.

Levy quotas require sugar mills to supply 20% of their output to PDS at a government determined price that is below the retail price.

“It would be best for state governments to procure sugar from mills through an open tender, rather than have fixed quotas. Once they have bought the requisite amount of sugar, they can then seek the subsidy from the Central government," said the same member quoted earlier.

The panel is also recommending that the government do away with the current practice of “cane area reservation" that restricts the setting up of competing sugar mills in an area. This is done to avoid aggressive price competition between mills for sugar cane. The panel has also suggested that the current controls on export and import of sugar should remain.

“The brief before the committee was to ensure that such a formulation was simple for the farmer to comprehend, offered a price of sugar that was attractive for the farmer and devise an enforcement mechanism for the same," said the panel member.

“We need a competitive environment. It is time to do away with the price control regime. Instead we need a prospective price regime. The government should ensure a fair remunerative price for sugar cane farmers," said Sudhir Panwar, professor at Lucknow University.