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published Published on Oct 13, 2010   modified Modified on Oct 13, 2010

Uttar Pradesh is not a state readily associated with dynamic economic reform. But the state has taken giant strides in reforming one of the least reformed industries in India: the sugar industry. The country’s second largest sugar producing state after Maharashtra is undertaking an aggressive privatisation of its state-owned sugar mills. It has, just recently, successfully sold off 10 of the 11 operating units of the state’s Sugar Corporation to two private sector buyers: India Potash Limited and Wave Industries. In doing so, it has cut the annual burden on the exchequer from subsidising these mostly loss-making mills from Rs 800 crore to Rs 3 crore. There have been the usual protest noises about the “giveaway” prices at which some of the units have been sold, but realistically, the state is lucky to get any price (plus the savings on subsidy), given the outdated technology and huge losses the mills carry.

Some have expressed concern about the fact that the big private sector players in sugar, like the Birla Group and Dalmia Group, stayed away from the final bids after expressing interest initially. That does not mean much. Often, energetic new groups can turn around businesses that established groups may view as unviable. In any case, for the government, the priority was to get rid of an unnecessary burden. That said, there is much for the government to do to reform the sugar sector.

One of the reasons why even private mills often find the business unviable is that the state government has a right to fix a state advised price (SAP) for procurement that is higher than the fair remunerative price (FRP) for procurement determined by the Centre. Given the political economy of the state (and indeed other sugar growing states), the SAP is often set unreasonably high, and the burden falls on the mill owners. Mill owners would in normal course try and pass most of this additional burden on to the final consumers of sugar. This distortionary practice rewards a small group of farmers while penalising consumers who include a large number of poor people. The next step in sugar reform would, therefore, logically be to stop distorting prices through SAP.


The Indian Express, 13 October, 2010, http://www.indianexpress.com/news/sweet-pill/696899/


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