Hard to decontrol sugar industry

NEW DELHI: It couldn't have come at a worse time for the sugar industry. No sooner was the prime mover of sectoral decontrol, ex food minister Sharad Pawar , dropped from the portfolio then the roadmap for liberalising the industry itself seems to have turned topsy turvy.

Speaking to the media the first time after he lost his food, PDS and civil supplies portfolio, -Pawar dropped a virtual bombshell by maintaining that sugar sector de control was not possible since many in the industry itself, inlcuding mills in top cane producer state UP, were opposed to the decision. "We have discussed (the issue of sugar decontrol) with states. Unfortunately, many states are not ready," the minister, who now holds only the agriculture ministry, said.

"States like Uttar Pradesh, Punjab and Karnataka are not ready for decontrol of the sugar industry, while Gujarat and Maharashtra have expressed their willingness.If only three-four states accept, it is difficult to implement. And Prime Minister had always said that for this kind of policy, states should be taken into the confidence,"

He maintained that this need not mean that sectoral decontrol proposal was off the table altogether. Should sugar production in the ongoing 2010-11 year be big enough to push down sugar prices noticeably, he said, mills in various sugar states could rethink their opposition. But it is patently clear that with Pawar's exit and the other big proposal of allowing long-frozen free exprots of sugar put off, at least for its high political symbolism, sugar decontrol has been relegated to the backburner for the present. Coming in the wake of the reluctance of the government to de controll the price and distribution of urea in the ferrtiliser sector, today's development has put a big question mark vis a vis liberalisation in the food/fertiliser sectors.

The assertion comes at a time sugar prices have been consisently dropping both in the spot and in futures trading and ex factory prices have dropped to below Rs 2700/qtl. Mills have maintained that if prices drop below Rs 2900/qtl, it makes production economically unviable for them. Compared to this, January 2010 saw sugar retail prices at a record high of almost Rs 50/kg, riding on the back of poor (this later turned out to be highly erroneous and off the mark by a good 4mt, bringing sugar prices crashing to half its January 2010 level) sugar output estimate of only 14.5mt for 2009-10.

Pawar's own assertion has come when the political sentiment has turned, on the back of record food inflation, against any move that could remotely suggest higher food commodity prices. Sugar prices have always been politically sensitive and the general apprehension is that liberalisation of the sector, which includes doing away with the monthly release quota by the government, asking states to procure PDS sugar from the open market and other such key measures, could allow mills to manipulate sugar prices for the consumer.

Infact, the food ministry had asked the CCI to probe the possibility of sugar prices being manipulated by the industry after mills decided to hike the ex factory price at which traders buy the sugar, ostensibly in order to stop prices from falling below a level when production price would break even. Doing away with the powers to announce the free sale sugar quota each month for individual mills is a key tool with which the Centre calibrates the price and supply of sugar in the open market.

Worried over the possibility of sugar prices soaring in January, for instance, the Centre ordered release of 17lt, which is much higher than the three year average of sugar release in the same period over the last three three years, at 14.5mt. In a decontrolled scenario, however, the Centre would only hold the power to fix a benchmark Fair and Remunerative Price ( FRP )) for sugarcane. All other controls would be dismantled including the provision in states such as UP that farmers can only sell their cane to a particular sugar mill. Ex food minister Sharad Pawar, who has dominated the food ministry for several years now, was not only the most vocal enthusiast of sugar sector decontrol, but has been pushing aggressively for the development over the last few years. Last year end, he declared (in consonance with industry) that in view of projections of bumper sugarcane and sugar production in the 2010-11 year, there could not be a better time for decontrol. This is also the first time in almost two decades that global supplies are tight and prices firm even while the industry is setting on plenty.

But last year end, the food ministry;s ambitious proposal that mills should sell sugar directly to ration shops or, alternatively, state governmetns should procure from the open market and sell in PDS shops, was stalled by the PM who asked the food ministry to first consult states before going to town over impending de regulation of the sugar sector.

source: ET