Is sugar de-control a good move?

Tue, 9 Apr Pre-Open

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Recently, government decontrolled the sugar sector. Though the decontrol was partial it was a step in the right direction. After this measure, the sugar companies are no longer obligated to sell a portion of their produce to government at subsidized rates. Secondly, quota system is also abolished which gave government the authority to decide the amount of sugar that was released in the market.

But the question is whether sugar decontrol is a reform or just tweaking of regulations to favor the sugar industry which was reeling under pressure?

For that, we first need to understand what exactly the word reform means. In simple words, reform is a corrective measure taken to improve the operating environment of the industry or country in general. And both these steps taken by the government will certainly improve the operating environment of the sugar industry.

For one, abolishing the requirement to mandatory sell a portion of sugar produce to the government will increase the profitability of the industry. That's because now these companies can sell that produce in the open market and get a market determined price for it. Secondly, abolition of quota system means that companies can sell as much as they want in open market. Thus, prices now will be more a factor of demand and supply. Earlier, in the quota system, prices were at the mercy of the government as increasing or decreasing the quota had a direct impact on the price.

The downside

Sugar being a necessary commodity the government has decided that it will still be sold through public distribution system (PDS) at subsidized rates. That means someone has to bear the subsidy burden of the produce that will be sold at below market determined rates. Earlier the sugar companies were bearing it and now the government will do that. Due to this move the subsidy burden of the government will double.

Also, there is a caveat that if the market price exceeds a certain amount then the subsidy will be borne by the states. Say for example, the market price is Rs 30 and sugar is sold via PDS at Rs 13.50. The balance Rs 16.5 deemed as subsidy is borne by the Centre. But say for example sugar prices rise to Rs 35. Then the additional subsidy burden above Rs 30 will have to be borne by the state government.

We believe that sugar prices cannot be completely de-controlled at one go as it is a necessary commodity. Thus, one cannot have a complete deregulation here which we had in the case of petrol.

However, line in the case of LPG, diesel and kerosene, the government should look for alternative measures to keep the industry viable without mounting its subsidy burden.