Various Problems of Sugar Industry in India

India is second largest producer of Sugar in the word after Brazil. In the India, Sugar Industry is one of the largest farm based industry, only next to textiles and plays a very important role in the Indian Economy. The Industry affects the agriculture sector and the people related to it through the forward and backward linkages.

In 1930s Sugar was given protection. Since then, the industry has been traditionally called a “Child of Protection“. The Industry grew after India’s independence. From 143 factories in First Five Year plan, the number rose to 571 in the 11th five year plan. As a child of protection, government of India provided incentives for higher production and output of sugar. The result was that the sugar production, which was 11 lakh tonnes in 1951-56 periods, trebled in 3 plan periods.

But the journey from becoming a below average producer to a sugar giant saw a lot of fluctuations in the prices, frequent controls and decontrols by the government, mainly out of political compulsions.

Problems of the Sugar Industry – Before April 2013

The problems with the sugar industry can be broadly divided into two parts viz. natural issues and policy issues. Before dealing with them, we have to note that there are two policy scenarios viz. before April 2013 and Post-April 2013. We can also call it before Rangarajan and after Rangarajan scenario. In the Pre-April 2013 scenario, various problems of the sugar industry can be summarized in the following graphics.

 Sugar- A Political Sensitive Commodity

The biggest problem of the Indian sugar industry is that it is one of the most politically sensitive commodities. Despite having a very small share in the monthly household budget, the slightest price increase can trigger inflation in other commodities. On the other hand, a large number of farmers grow sugarcane, and a fall in the price of sugarcane can shake the state governments, particularly in UP and Maharashtra. Sugar is also an essential commodity as per essential commodities act.

Cyclicality in Production

Another big problem of the sugar industry is the cyclicality in the sugarcane production. By cyclicality, we mean to say that the sugar cycle in our country gives three years of good production in a row followed by consecutive years of bad crop. This creates difficulties in policy making.

Levy Sugar and Minimum distance between mills

To check the frequent rise and fall in the prices of sugar, government had introduced dual price mechanism. Under the dual price mechanism, the government fixed the ratio of Levy sugar and free sale sugar quota. By doing so, every sugar mill was allocated a command area in its vicinity. This command area varied from 15-25 kilometers radius. The mill is bound to purchase any sugarcane grown in that area and the cane farmers are also expected to sell only to the designated mill. A part of produce of these sugar mills is required to be sold to the Government. This part is known as Levy Sugar. The levy sugar is sold to the consumers through fair price shops of the public distribution system. This ratio initially was fixed 45:55, later kept revising till reached 20:80, before finally getting abolished in April 2013. At present, there is no levy sugar in India.

Monthly release mechanism

Under the Levy sugar regime, the sugar mills had to sell a part to the government. The remaining free sale quota was also under a different regime called Monthly Release Mechanism. Under this mechanism, the government would dictate the mills how much sugar they could sell in the open market on a monthly basis. Sugar factories could not sell over or below the amount stipulated by the Government.

Cane Pricing Issue

In most of the major sugar exporting countries, the sugarcane prices are linked to sugar prices. In our country, there is a disconnect between the two. This is mainly because at the same time, the one cannot sustain the low sugar price, high cane price and a healthy flourishing sugar industry at the same time.  Numerous committees have tried to design a formula linking sugar and sugarcane prices, but as of now, none of such formulae is perfect. The problem in arriving at a formula is as follows:

  • If there is abundant supply of sugarcane, the mills will drop the prices to be paid to farmers.
  • If there is an erratic supply of sugarcane, the mills will raise the prices to be paid to farmers.

Your never know, how will be trend of sugarcane supply.

Historically, first such formula was Bhargava formula, which said that if there is an erratic supply of the sugarcane, the farmers, under an agreement with the sugar mills will get a fraction of the profits of mills as incentives.

The FRP and SAP Issue

At present, the Central Government along with the CACP (Commission of Agricultural Costs and Prices)  releases an all-India sugarcane price called ‘Fair and Remunerative Price’ (FRP) every year before the start of the sugar season. This FRP is a formula-linked cane price to encourage higher productivity. This FRP is what the mills would have to pay to the cane farmers.

But some states would like the mills to bleed more. They would fix a cane price over and above the FRP, which the mills would have to pay to the farmers. This price is called State Advised Price (SAP). The problem with the State Advised Price is that it is generally politically motivated. We take an example of Uttar Pradesh here. In that state, successive governments kept SAP high for electoral gains. Consequent to this, the Sugarcane became the most attractive crop to grow. On the one hand, farmers increased the cultivation of sugarcane crops, while on the other hand, the mills were forced to pay higher prices. The result was that arrears to farmers kept rising until they reached record high.

A few years ago, the Ministry of Food has made a proposal for curbing the state’s political government’s maneuvers regarding sugar prices. It said that if the state governments want to fix a SAP over and above the FRP, they could do so, but instead of mills, the extra amount will have to be paid by the state government. This proposal finds place in dustbin as of now.

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