What is the arrears problem in Sugar Industry of India?

It has been more than two years since April 2013, when the union government decided to lift some control on the sugar industry. Via this government scrapped the obligation to sell 10 per cent of a mill’s output to the Public Distribution System at prices below the cost of production and also the government’s power to control the supply of sugar to the open market.

However, two years down, the industry is still in problem. The current problem is that the industry is not able to pay the price of sugarcane to farmers, nor able to sell its sugar stocks.

The reason is that sugarcane is the raw material and sugarcane price is still decided by the state governments. The Fair and Remunerative Price proposed by the central government for cane was Rs 145 a quintal in 2011-12 while it is Rs 220 in 2014-15. The State Advised Prices are even higher than that. Even if there are bumper harvests, these prices keep the sugarcane to be an attractive crop for farmers. But as the sugar prices went down; sugar mills found themselves unable to make payments to farmers and arrears started accumulating. Year after year, sugar prices kept falling and arrears kept rising. At present, the total arrears are in the tune of Rs. 19000 crore.

The possible solutions to this problem are as follows:

• Fixing the price of raw material (cane) without considering the price of final product (sugar) is a bizarre phenomenon. Cane prices are attractive so farmers don’t get any signal of imbalance caused by what they produce. Thus, taking the final product into consideration is needed. Recently, the Maharashtra and Karnataka government had announced a formula which gives weight to the price of sugar before fixing the cane price that industry has to pay to farmers. This needs to be done in other states also.
• The government can go for full decontrol of sugar. Ever since government went for partial decontrol; the sugar prices have gone down; but sugarcane price have risen.
• Government should create an strategic buffer reserve for sugar; incentivize more ethanol production and increase the liquidity of the mills from banking system. Currently, sugar mills face difficulty in accessing credit from banks.