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How fair is 'fair' sugarcane price? by Bhupesh Bhandari

While the government may have got reprieve with the fair and remunerative price, the mills are expected to move the courts

On October 21, the Central government came out with an ordinance that it will henceforth announce a fair and remunerative price for sugarcane, instead of the statutory minimum price. Millions of farmers across the country grow sugarcane which they sell to sugar mills. To make sure that prices don’t tank when there is a good crop, the government had come out with the statutory minimum price. And now we have the fair and remunerative price. At first blush, it looks like an innocuous name change. But there is more to it than meets the eye.

Mills were always free to offer more to farmers than the statutory minimum price. The idea was to protect the downside for farmers but keep the upside open. Many states latched on to it quickly and began to announce their own price for sugarcane, which came to be called the state-advised price. Of course, it was always higher than the statutory minimum price. Large sugar-producing states like Uttar Pradesh, Punjab, Haryana, Uttarakhand and Bihar in the North and Tamil Nadu in the South jumped on the bandwagon. Maharashtra, the country’s largest sugar producer, has stuck to the statutory minimum price. Most mills there are owned by farmers’ cooperatives. So, a state-advised price didn’t make sense. Elsewhere, the state-advised price took very good care of the farmers.

Then there were the consumers. To protect them from high prices, the government has, for several years, sold sugar through the public distribution system at below the market price. This is where the seed of discord was sown. The subsidy for sale to the public distribution system, called levy sugar in industry parlance, was borne by the sugar mills. At one time, mills had to turn over as much as 70 per cent of the sugar they produced for the public distribution system. As production increased, this was brought down to as low as 10 per cent. It has been raised once again to 20 per cent because of the recent surge in open market prices.

The price for levy sugar was fixed on the basis of the statutory minimum price. Mills that had operations in Uttar Pradesh argued in the courts, way back in the early 1980s, that it should be linked to what they actually paid and not to the statutory minimum price. The Supreme Court first upheld the plea of the mills. This meant the mills had to be compensated for all the loss they had suffered on levy sugar. The bill will have to be settled by the government.

This is where the fair and remunerative price comes in. The government reckons the liability from 1981 to the present could be as high as Rs 14,000 crore. Initial estimates had suggested Rs 5,000 crore and that is the industry’s estimate too. Speculation is that by talking of a higher liability, the government has ensured wide support to its plan. But that’s a different story. In addition, there would be a liability in perpetuity. The fair and remunerative price would provide the government the escape route it was looking for.

Here’s how. The criticism against statutory minimum price was that it only took into account the cost of production of sugarcane. There was no account of the risk taken by the farmer and no share of profits. There was a clause — 5A — in the Sugarcane Control Order of 1966 that said that any profit from the sale of levy sugar should be shared equally between the mills and the farmers who sold their sugarcane to them. Since the mills never made any profit on levy sugar, the clause never came into play. At present, while the production cost of sugar is close to Rs 30 per kg, it is sold in the public distribution system for Rs 13.5 per kg! This is why the states came out with their own price. It is this gap that the fair and remunerative price seeks to plug, because it takes into account profit and risk undertaken by the farmer. It thus does away with the need for a state-advised price. And, therefore, there is no question of any compensation to the mills for levy sugar. The fair and remunerative price of Rs 129.84 per quintal for 2009-10 is 50.5 per cent higher than the weighted average cost of production and transportation of Rs 86.27 per quintal.

In its enthusiasm, the government had also said that mills, on the advice of the states, were free to pay a higher price. But the difference would be paid by the state government. When farmers held huge demonstrations in Uttar Pradesh and Delhi, the government lost its nerve and scrapped this part of the ordinance. Mills in North India, by the way, are buying sugarcane at Rs 210 per quintal — over Rs 80 higher than the fair and remunerative price.

Will this be the end of the wrangle between mills, the states and the Central government over sugarcane prices? It looks highly unlikely. While the government may have got reprieve with the fair and remunerative price, the mills are expected to move the courts one more time. The money involved, after all, is huge. Another protracted legal battle is on the cards.