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Licence raj

Sources suggest Indian sugar deregulation is nearing reality

By RJ Whitehead , 19-Feb-2013

The fraught issue of government regulation on the Indian sugar industry might be on its way to a solution if a report in the Wall Street Journal is to be believed.

According to the paper, which cited ”three senior officials”, India’s food ministry has called on the cabinet to consider lifting the government’s control, including the obligation for sugar mills to set aside a portion of their output for subsidised sales.

With the United Progressive Alliance government in full reform mode ahead of the Lok Sabha elections next year, it is widely tipped to dismantle one of the last vestiges of the “licence raj” era, which is widely blamed for holding back the sugar industry and crippling cane farmers.

Levy sugar

Under the current regulations, it is mandatory for mills to sell 10% of their output, known as “levy sugar”, to the government at below-market prices. This sugar would subsequently be sold to the poor.

The proposal by the food ministry would force the government to buy sugar at market rates and then increase their subsidy—effectively costing the Centre more money, which would then be made up through increased excise duties.

India is the world’s second-biggest producer of sugar, with more than 500 sugar mills and last year’s crop totalling around 26m tonnes. It is also its toughest regulator and can dictate the amount mills can sell on the open market each month, as well as limit the geographical reach of each mill. 

Protecting farmers

The most recent figures suggest the sugar industry owes almost Rs5,490 crore (US$1.02bn) in payment arrears to farmers. The ensuing temptation for cane farmers to move into other crops has led to occasional shortfalls in sugar output, thereby pushing up consumer prices.

According to the WSJ’s sources, the ministry has also proposed scrapping quarterly allocations of sugar for sale in the domestic market, a mechanism aimed at preventing any sharp rise in prices paid by consumers.

The proposals are based on the recommendations of a panel which last year asked the government to lift its controls in order to free the sector from years of low investment as well as wild production swings and export supplies.

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