Sugar prices in India are set by political, not economic, factors. Hardly surprising then that cane growers needed to lay siege to Delhi to get better prices for their produce. The Centre, boxed in by a Supreme Court ruling that allows states to announce price floors much in excess of a nationwide support price, is now facing the prospect of rolling back a new “fair and remunerative price” it announced by fiat less than a month ago. A low price floor in a year when sugar is expected to be 7 million tonnes short of demand was ill-advised despite serving the goal of uniform cane prices across the country. The built-in disincentive for states like Uttar Pradesh, Punjab, Haryana, Tamil Nadu and Uttarakhand from announcing cane prices higher than what the Centre sees fit — they have to make good the difference — boomeranged into a rare show of Opposition unity.
The issue stems from the price-discovery mechanism in India’s sugar industry. A price floor serves little purpose in a year when the crop is short, as now, but turns the farmer off cane in the succeeding year. After three years of good crop, the fall in cane acreage in 2008-09, and the resultant increase in sugar prices, owes itself to the signals that emanate from mounting cane arrears. Sugar imports to make up the shortfall benefit farmers in Brazil, where, as in most parts of the world, cane prices are linked to the market price of sugar. It is not our case that the Indian sugar industry be decontrolled overnight, but administered pricing must factor in the legitimate concerns of the cane grower, the consumer and the sugar industry.
There is bound to be a degree of arbitrariness in whatever cane price the Centre — and states — comes up with, given the sizeable vote banks involved. If India must have a regulated sugar industry, the least it could do is set up an independent regulator that can align prices with the economic reality. The Centre must put in place a transparent and independent process for setting prices to de-risk the sector from the politics that surrounds it. Sickness in the milling industry, farmer distress and rising prices of table sugar have been around for long enough. The government should realise it is more efficient — and less expensive — to pay out an explicit subsidy on sugar for the poor than to fix prices on the farm, at the mill, and in the market.