Sugar Crisis: What is plaguing Sugar Industry

May 6, 2018

 

Context: 

  1. Union Minister for Consumer Affairs, Food and Public Distribution Shri Ram Vilas Paswan said that Centre is taking various steps to help the Sugar Industry.

  2. World Economic Outlook of International Monetary Fund (IMF) says that the international price of sugar decreased by 6.7 per cent between August 2017 and February 2018. IMF estimates India's production to exceed that of the previous season by as much as 40 per cent. It also informs that strong supplies from Brazil and Europe in 2018/19 are likely to lead to another surplus year.

  3. According to industry body Indian Sugar Mills Association (ISMA), the sugar prices have been under severe pressure in the last four to five months and have fallen by Rs 9 per kilo across the country.

 What is plaguing Sugar Industry?

 

Surplus Sugar Production: 

Sugar production in the current season up to April 15, 2018 has crossed the expected levels and the Indian sugar industry has already produced 299.80 lac tons. "Maharashtra's production has almost reached its past record and the sugar mills therein have produced 104.98 lac tons upto 15th April 2018. Similarly, other states like UP, Karnataka have produced sugar in large quantity. 

 

Falling Prices: 

The reason for falling prices is basic economics of demand and supply. As the supply of Sugar is constantly increasing but the consumption is same, it is leading to a demand deficit  which is causing fall in prices. 

 Impact of Sugar Crisis:

  1. Cane price Arrears:  Sugar mills are unable to pay cane prices because of highly depressed sugar prices. This has resulted into huge cane price arrears of farmers. As on March 15, 2018, cane price arrears were over 18000 crore across the country.

  2. Farmer Suicides: As either sugar is being procured on credit basis or not being procured at all, the farmers are losing their source of income. Also, when the sugar is procured on credit basis, the money is not being paid and it is just leading to accumulation of arrears with no hope in sight of payment. This has led to spike in farmer suicides in Karnataka, Maharashtra and other sugar belts.

  3. Unemployment: Large no. of Sugar mills are closing their operations. As on April 2018, only one sugar mill continued its crushing operation in Karnataka. Thus, it is leading to unemployment for all the Sugar mill workers.

  4. India-Pakistan relations: India imports large quantity of sugar from Pakistan every year. To protect Indian sugar industry, Indian government is following protectionist policies which is leading to difficulties with Pakistan exports and thus gives an excuse to Pakistani Fundamentalists in creating anti-India sentiments. 

Root Cause of Sugar Crisis: 

  1. In India, Government decides the benchmark price at which the Sugar Mills need to procure cane from farmers. This, benchmark price is decided on the basis of Rangarajan Panel's linkage formula. The linkage formula has proved to be insufficient to cater to the changing dynamics of sugar industry and thus leading to a loss of Rs. 63 on purchase of each quintal of cane to the Sugar Mills. Also, Since the law of the land mandates that sugar mills can’t refuse to buy cane from farmers, they are forced to crush and produce surplus sugar even at the risk of further straining their balance sheets

 Steps taken by Indian Government:

  1. Import duty has been doubled to 100% on Feb 6, 2018.

  2. Central Cabinet has approved financial assistance of Rs. 5.50 per quintal of cane crushed in sugar season 2017-18 to sugar mills to offset the cost of cane, in order to help sugar mills to clear dues of farmers.

  3. To facilitate and incentivize export of surplus sugar by sugar mills, the government has allowed Duty Free Import Authorization (DFIA) Scheme in respect of sugar. 

  4. The imposition of sugar cess for revitalising the sugar industry by the Union government under the GST in June 2018.

    1. Economic dilemma: It raises important contestations regarding the bail-out package of the government.

    2. Legal dilemma: GST was supposed to subsume all the cesses and surcharges under the slogan "One Nation, One Tax".

      1. Agriculture and agricultural loans are state subject under Schedule 7 of the Indian Constitution. Any amount of cess imposed is entirely kept by the centre and need not be shared with the respective state governments. The sugar cess imposed in June 2018 will enhance the dependence of the state governments on the union. (A cess is an earmarked levy, meaning that the proceeds are to be applied for a pre-determined end purpose. Proceeds from such cesses are to be identified separately within the Consolidated Fund of India. The proceeds must be appropriated and utilised only for the earmarked purpose. Cesses imposed by the Centre for ‘specific purposes’ are not shared with the state governments on account of Article 270. By itself, Article 270 does not empower the Centre to impose cess taxes. The competence has to be drawn from other provisions of the Constitution.)

        1. The critiques say it would be advisable for the union government to first exhaust the amount collected through Krishi Kalyan cess for re-boost the industry.

      2. Under the GST regime, the power to impose cess shall come from Article 297A which talks about powers of the Council.

        1. The powers of the Council to impose any special rate(s), in addition to the GST, are circumscribed in Article 297A(4)(f): only to the event of a natural calamity or disaster. It seems difficult to justify the present situation within the limited and narrow grounds contemplated. 

    3. Suggestions:

      1. Encouraging farmers to follow crop patterns to avoid excess production and maintaining demand-supply dynamics.

Conclusion:

  1. The financial assistance of the centre is clearly below the expectation of Sugar industry and is insufficient to help industry clear farmer dues. Also, The exports are not lucrative as even in International market, the prices of sugar are down due to high production by countries like Brazil. Thus, the solution lies in diversification of crop cultivation and also promoting multiple uses of cane such as in Biofuels, Paper industry, Alcohols etc. 

     

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