Context: It has been a spectacular growth story for the Indian sugar industry over the last decade. In 2012, the industry was semi-decontrolled. The Rangarajan Committee set up by the then government to look at the long-term sustainability of the sector made several key recommendations.
Key recommendation of Rangarajan committee and challenges thereof
1. Cane reservation area and bonding- Every designated mill is obligated to purchase from cane farmers within the cane reservation area, and conversely, farmers are bound to sell to the mill. This ensures a minimum supply of cane to a mill, while committing the mill to procure at a minimum price.
- This arrangement reduces the bargaining power of the farmer. He is forced to sell to a mill even if there are cane arrears (occurs when sugar mill owners delay payment to farmers for the sugarcane supplied).
- Mills, on their part, lose flexibility in augmenting cane supplies, especially when there is a shortfall in sugarcane production in the cane reservation area.
- Mills are also restricted to the quality of cane that is supplied by farmers in the area.
- The Committee recommended that over a period of time, states should encourage development of market based long-term contractual arrangements and phase out cane reservation area and bonding. Such individual contracts with farmers would give them the flexibility to decide which mill they want to sell their produce to.
2. Minimum distance criterion- Under the Sugarcane Control Order, the central government has prescribed a minimum radial distance of 15 km between any two sugar mills. This regulation is expected to ensure a minimum availability of cane for all mills.
- However, this criterion often causes distortion in the market. The virtual monopoly over a large area can give the mills power over farmers, especially where landholdings are smaller.
- In addition to restricting competition, the regulation inhibits entry and further investment by entrepreneurs.
- In order to increase competition and ensure a better price for farmers, the Committee recommended that the distance norm be reviewed. Removing the regulation will ensure better prices for farmers and force existing mills to pay them the cane price on time.
3. Price of sugarcane- The central government fixes a minimum price, the Fair and Remunerative Price (FRP) that is paid by mills to farmers. States can also intervene in sugarcane pricing with a State Advised Price (SAP) to strengthen farmer‟s interests. Typically, SAP is higher than FRP. There have been divergent views on which is a fair price to both farmers and millers.
- The Committee recommended that states should not declare an SAP. It suggested determining cane prices according to scientifically sound and economically fair principles.
4. Levy sugar obligation- Every sugar mill mandatorily surrenders 10% of its production to the central government at a price lower than the market price – this is known as levy sugar.
- This enables the central government to get access to low cost sugar stocks for distribution through PDS. At present prices, the centre saves about Rs 3,000 crore on account of this policy, the burden of which is borne by the sugar sector.
- The policy of levy sugar puts the burden of a government social welfare programme (PDS) on the industry. A price lower than the open market price implies lower returns for mills, which eventually impacts cane payments to farmers.
- The Committee recommended dispensing with levy sugar and doing away with a centralized arrangement for PDS sugar. States that want to provide sugar under PDS may henceforth procure it directly from the market.
5. Regulated release of non-levy sugar-The central government allows the release of non-levy sugar into the market on a periodic basis. Currently, release orders are on a quarterly basis. Thus, sugar produced over the four-to-six-month sugar season is sold throughout the year by distributing the release of stock evenly across the year.
- The mechanism of regulated release imposes costs directly on mills (and hence indirectly on farmers). Mills can neither take advantage of high prices to sell the maximum possible stock, nor dispose of their stock to raise cash for meeting various obligations.
- This adversely impacts the ability of mills to pay sugarcane farmers in time.
- The Committee recommended removing the regulations on release of non-levy sugar. Removal of these controls will improve the financial health of the sugar mills. This, in turn, will lead to timely payments to farmers and a reduction in cane arrears.
6. Trade policy for sugar- The government has set controls on both exports and imports. These controls are imposed after taking into account the domestic availability, demand and price of sugarcane. A number of cascading import controls and export permits are used to achieve this.
- As a result, India‟s trade in the world trade of sugar is small. Even though India contributes 17% to global sugar production (second largest producer in the world), its share in exports is only 4%.
- The committee recommended all existing quantitative restrictions on trade in sugar should be removed and converted into tariffs.
- Appropriate tariff in the form of a moderate duty on imports and exports, not exceeding 5-10%, should be applied.
7. Regulations relating to by-products- Certain restrictions have been placed on by-products of sugarcane such as molasses and bagasse.
- State governments fix quotas for different end uses of molasses and restrict their movement, particularly across state boundaries. Some states have also imposed restrictions on the mills that can sell power generated from bagasse to users other than the local power utility.
- Mills are also restricted from selling power generated from bagasse to other states.
- Such restrictions impede the revenue realization from cogeneration and reduce economic efficiency.
- The committee recommended that there should be no restrictions on sale of by-products and prices should be market determined. States should also undertake policy reform to allow mills to harness power generated from bagasse.
8. Other issues: The Jute Packaging Materials (Compulsory use in Packing Commodities) Act, 1987 (JPMA) mandates that sugar be packed only in jute bags. The sugar industry estimates that this leads to an increase in cost by about 40 paise per kg of sugar besides adversely impacting quality.
- The committee recommended removing the sugar industry from the purview of the JPMA.
Recent developments - ethanol blending push in India
Through the efforts of sugarcane farmers and the sugar mills, the country witnessed surplus sugar production from the 2010-11 sugar season, with seasons 2017-18, 2018-19 and 2020-21 seeing bumper sugar production.
- The annual sugar production of the country outpaced the total annual sugar consumption requirement, leading to over-availability of sugar
- . Excess sugar supply led to reduced prices, straining revenues while costs related to sugarcane payments soared, causing financial constraints to the industry.
- The government announced the ethanol blending programme, marking a significant shift in the industry.
- The programme faced issues related to pricing and infrastructure.
- The Government has taken measures in 2018 that helped accelerate the programme and boost local ethanol production.
- The goal is to achieve 20% ethanol blending within the next two years
Recent Challenges to ethanol blending program
- The need to balance food security with ethanol production has influenced government policy.
- Unpredictable monsoon rains affected sugar production estimates, leading to:
- Lowered sugar production projections.
- Imposition of curbs on ethanol production from sugarcane juice and B-heavy molasses.
- A complete ban on sugar exports.
Key suggestion/measures for boosting ethanol blending
- Ensuring a steady supply of raw materials and feedstocks for the ethanol programme is critical.
- The industry needs to work to increase sugarcane acreage to secure crop availability.
- A stable ethanol pricing policy is essential to cover production costs and meet the 20% blending target.