Sugar and cane pricing and regulation in India

Abstract

Sugar and cane prices in India are highly regulated, causing high fluctuations in supply and demand conditions. Present price policy and regulation in the sugar sector in India has resulted in low sugarcane productivity, and stifled profitability and modernization of sugar mills. To unleash the potential of small-scale farming and sugar mills in India, there is a need to eliminate the excessive controls on the sugar sector, which will reduce the costs of production of cane and sugar production. This study suggests a formula that reflects fair and remunerative price for cane that takes into account both costs of production and international price trends. Furthermore, for better price signals in domestic markets, the decontrol of sugar prices should be accompanied by measures to strengthen free trade such as a reduction in the duties for trade, measures to widen participation in futures markets and the elimination of the levy on sugar mills.

Full text

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Sugar and cane pricing and regulation in India






A. Amarender Reddy

International Crops Research Institute for Semi-Arid Tropics (ICRISAT), Hyderabad
Patancheru 502324, Andhra Pradesh, India.

Tel: +91 40 3071 3071 Fax: +91 40 3071 3074
Email: a.amarenderreddy@cgiar.org



Abstract

Sugar and cane prices in India are highly regulated, causing high fluctuations in supply and demand conditions.
Present price policy and regulation in the sugar sector in India has resulted in low sugarcane productivity,
and stifled profitability and modernization of sugar mills. To unleash the potential of small-scale farming and
sugar mills in India, there is a need to eliminate the excessive controls on the sugar sector, which will reduce the
costs of production of cane and sugar production. This study suggests a formula that reflects fair and remunerative
price for cane that takes into account both costs of production and international price trends. Furthermore, for
better price signals in domestic markets, the decontrol of sugar prices should be accompanied by measures to
strengthen free trade such as a reduction in the duties for trade, measures to widen participation in futures
markets and the elimination of the levy on sugar mills.

Keywords: cane, India, price policy, sugar























Supply and demand conditions

International sugar prices have recently followed a steady
upward trend, moving from 12.1 US cents/pound in late 2008 to
29.7 US cents/pound, which is the highest price in 25 years, in
January 2011 before dropping to 23.91 US cents/pound in April
2011. Domestic free market prices have fluctuated widely from
Rs 17/kg in the first quarter of 2010 to Rs 50/kg in December
2010 before declining to Rs 30/kg in May 2011. However, the
levy sugar price (the administered price at which each sugar mill
has to sell 10% of its sugar production to the government) is
half that of free market sugar. As a result of higher free market
prices, the beginning of the 2009/10 sugar season (September/
October) was marked by a number of ad hoc policy actions
such as the imports of duty-free raw and refined sugar, stock
limits for traders, a ban on sugar futures trading, the declaration
of a higher Fair and Remunerative Price (FRP) and a
system for the fortnightly release of non-levy monthly sugar
quota by mills. However, in April 2011 following a surplus
production of sugar, the government of India decided to allow
the export of 0.5 MT (million tonnes) of raw, white and
refined sugar under Open General License (OGL) and
reintroduced the futures market in sugar. These ad hoc
policies affected the long-term competitiveness of the sugar
industry in India.
India’s sugarcane productivity has been stagnant at around 65
tonnes/hectare (t/ha) for the past two decades. Cane production
has averaged around 290 MT over the past decade (2001-2010):
63% of this was used for sugar manufacturing, 22% for gur 1, 11%
for seed and 3% for khandsari 2 (Table 1). The demand for cane
to make gur and khandsari is stable year-on-year (low coefficient

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Table 1. Basic production statistics of cane production and utilization

Area Yield Production Recovery
%
10.0
9.8
9.8
10.5
10.3
10.4
10.2
10.2
10.2
10.2
10.6
10.3
10.3
Year (mln ha) (t/ha) (MT)
Cane used for making (%)
Sugar Khandsari Gur Seed
13.1
11.5
10.7
11.6
11.8
11.6
10.1
11.6
12.6
10.5
9.2
14.2
13.4
1985/86 2.90 60.0 174.0 39.7 6.0 41.1
1990/91 3.70 65.4 242.0 51.4 5.5 31.7
1995/96 4.20 68.0 285.6 62.2 3.5 23.6
2000/01 4.32 68.5 296.0 60.0 3.7 24.6
2001/02 4.41 67.4 297.2 60.8 3.5 23.8
2002/03 4.52 63.6 287.4 67.9 3.3 17.2
2003/04 3.94 59.4 233.9 59.1 4.3 26.5
2004/05 3.66 64.8 237.1 53.4 4.0 31.1
2005/06 4.20 67.0 281.2 66.5 3.0 17.9
2006/07 5.15 69.0 355.5 75.0 2.5 12.1
2007/08 5.06 68.8 348.2 72.6 2.0 16.2
2008/09 4.40 64.8 285.0 58.9 2.6 24.4
2009/10 4.30 63.9 274.7 59.9 2.6 24.1
Mean
(2001-10) 4.40 65.7 289.6 10.3
1.4

63.4 3.2 21.8 11.7
12.9
CV %
Source: Indian Sugar Mills Association (2010)
10.2 5.1 13.9
25.7 18.8 17.6

Table 2. Cyclicality in supply and demand for sugar in India (MT)

Particulars
Open stocks 5.6
Production
Imports
Availability
Consumption 13.1
For exports
Net exports 1.0
Source: Indian Sugar Mills Association (2010); Note: 1996 indicates for sugar season 1995/6
1996
1997
7.9
12.9
0.0
20.8
13.8
0.4
0.4
1998
6.6
12.9
0.9
20.4
14.7
0.1
-0.9
1999
5.6
15.5
1.0
22.2
15.2
0.0
-1.0
2000
6.9
18.2
0.4
25.5
16.1
0.1
-0.3
2001
9.3
18.5
0.0
27.8
16.2
1.0
1.0
2002
10.7
18.5
0.0
29.2
16.8
1.1
1.1
2003
11.3
20.1
0.0
31.5
18.4
1.5
1.5
2004
11.6
14.0
0.6
26.2
17.5
0.3
-0.3
2005
8.4
13.0
2.1
23.4
17.1
0.1
-2.0
2006
6.3
19.1
0.7
26.1
18.5
1.4
0.7
2007
3.9
28.2
0.0
32.1
19.5
1.3
1.3
2008
11.3
26.3
0.0
37.6
22.5
5.0
5.0
2009
8.1
14.8
5.0
27.9
23.0
2.8
-2.2
2010
2.0
18.5
6.5
27.0
24.0
0.0
-6.5
16.5
0.0
22.1
1.0

of variation) compared with the demand for cane for centrifuged
sugar. About 30% of sugar goes for domestic consumption
and the remaining 70% is used by food processors such as
bakeries, confectioners and soft drink manufacturers. Local sweet
manufacturers consume most khandsari, while gur is mostly
consumed in rural areas for household consumption. Khandsari
and gur are mostly consumed within the same year of production,
whereas sugar can be stored for a longer period.
The main source of fluctuation in sugarcane production is year-
to-year changes in acreage rather than in yield. Table 2 indicates
that the good crop years from 2001 to 2003 were a result of the
higher world prices since the early 2000s and stockpiles of sugar
in excess of the domestic requirement (the normative closing
stock requirement of keeping three months stocks is 7.6
MT). The subsequent two years of low sugar production reduced
stock levels to below normal by 2006. During 2005/06 and
2007/08, higher production of sugar resulted in stockpiles rising
above 9.2MT in 2007/08, before declining to 2.2 MT in 2009/10.
India was a frequent exporter of sugar to countries within Asia
up until the 1980s. It became a net importer in the late1990s

INTERNATIONAL SUGAR JOURNAL 2011, VOL. 113, NO. 1352
and once again emerged as an exporter in 2010/11. India
has the capability to produce sugar to meet global demand,
although its cost competitiveness is questionable under the
current highly regulated and highly unstable price
environment. To assess the potential and importance of
price policy on productivity and competitiveness of Indian
sugar sector, this study has the following objectives:

(i) to examine price trends of cane and sugar;
(ii) to evolve a formulae for fixing cane price that takes into
account both domestic costs and international price trends;
(iii) to examine the link between the cost of production of cane
and competitiveness;
(iv) to assess profitability and consolidation in mills;
(v) to investigate decontrol and deregulation; and
(vi) to review policy options. The balance sheet data were collected
from the Indian Sugar Mills Association from 1996 to 2010, the
cost of the production of sugarcane and price data were collected
from the Ministry of Agriculture and the data on sugar mills were
collected from the Parliament (2010) question and answer website

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Cane and sugar price trends

The determination of Statutory Minimum Price (SMP) or FRP for
cane is influenced by both economic and political factors.
The SMP/FRP almost doubled during the past decade from Rs
621/t in 2001/02 to Rs 1391/t in 2010/11. For 2009/10, the
government announced an FRP instead of an SMP and fixed it at
Rs 1298.4/t, which was 32% higher than the average cost of
production (Rs 873/t). In addition, most states announced that
the State Advisory Prices (SAPs) at which mills had to procure
the cane is above the SMP by a large margin. However,
sugar mills procured the cane above the SAP to attract cane
and increase production. For example, millers paid higher
prices (between Rs 2100/t and 2500/t) compared with an FRP
of Rs 1292.8/t in 2009/10. From 2003/04 to 2008/09, there
was a nominal increase in the SMP every year. The low SMP
regime reduced the burden on the government to pay millers
for levy sugar at this lower price. The levy price index increased
to just 121 in 2009/10 from 100 in the base year (2001/02). The
intention to switch from the SMP to FRP was to provide
remunerative pricing, which is substantially higher than the cost
of production for cane, based on a cost- plus approach.
However, the FRP ignores both domestic and international
free market prices. For example, the SMP/FRP index (224) has
been much lower than that of the free market price index (272)
over the past decade. This is also one of the reasons for the
higher volatility in domestic sugar demand and supply conditions
as well as the increase in free market prices. One of the reasons
for the rise in the price paid by millers to farmers for cane and the
free market prices of sugar is rising domestic demand because
of higher incomes, population growth and growing international
sugar prices on the demand side. On the supply side, high growth
in cane prices is because of stagnant productivity and rising input
prices such as wages (the input price index increased to 150 over
the past decade). The high volatility of free market price reflects
the flux in demand and supply over the years compared with the

steady increase in levy sugar and cane prices. To reduce volatility
in free market prices, administered prices need to be linked to
both domestic and world market prices.
The index of the cane price paid by millers increased significantly
(303) compared with the SMP/FRP index (224) and the input price
index (150). This shows that in the past 10 years prices have moved
in favour of farmers. In terms of the cost structure, the share of
labour is higher (58%) than the cost of seed cane (19%), fertiliser
(9%) and irrigation (7%). Most cane farmers have small farms (less
than 2 ha) and are not extensively mechanised.
The mismatch between cane and sugar prices also hinders the
progress of the sugar industry. There is little link between the SMP/
FRP of cane and sugar prices, even though they affect the payment
capacity of sugar mills, resulting in the accumulation of price
arrears year-on-year. An examination of price arrears to be paid
by mills to farmers revealed that whenever there is an increase in
production, price arrears as a percentage of cane purchased from
farmers increased and vice versa, resulting in the amplification of
production cycles (Table 4). To smooth the production cycle, there
should be a link between sugar and cane prices.
Linking the administered price (FRP) to market trends will not
have an adverse impact on consumers, given the weight of sugar
in the Wholesale Price Index (WPI) is only 3.6% and only about
30% of sugar is for household consumption. Further, reforming
the public distribution system (PDS), so that sugar required for
PDS to be procured from free market instead of levy on millers
and distribute to the poor households at the subsidised price
will eliminate any adverse effects of price rise on consumers.
With this in mind, a modified FRP* formulae is presented in the
equation below. The first term is the cost of production of cane
(which also includes a risk premium and normal profit) and the
second term is an adjustment factor for changes in the index of
international sugar price, which ranges between –1 and +1 and is
free from the problem of skewness. The FRP* should be linked to
a basic recovery rate of 9.5%.


Table 3. Different prices trends in sugar complex
Years
Sugar
availability
(MT)
29.2
31.5
26.2
23.4
26.1
32.1
37.6
27.9
25.8
29.4
100
SMP/ FRP
for cane
(Rs/t)
621
695
730
745
795
803
812
812
1298
1391
224
Price paid by
mills for cane
(Rs/t of cane)
925-1000
695-1000
730-1340
745-1650
795-1841
1250-1300
1300-1400
1500-1550
2110-2500
2800-2900
303
Price levy
sugar
(Rs/kg)
15.0
15.5
15.6
17.5
18.0
18.0
18.0
18.0
18.0
20.0
121
Free market
price (Rs/t)
for sugar
12850-16300
11470-15750
13200-15350
14100-18400
15500-19900
11000-18300
11400-14250
17000-18000
30000-32000
35000-39000
272
Input
price
index
100
105
109
115
117
118
130
134
142
150
150
2001/02
2002/03
2003/04
2004/05
2005/06
2006/07
2007/08
2008/09 (P)
2009/10 (P)
2010/11 (E)
Price index (2001/2=100)
Source: Indian Sugar Mills Association (2011): Note: p = provisional figures; E = estimates

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Table 4. Price arrears (%) and sugar production trends

Year
Price arrears
(% of purchases)
Cane
production
(MT)
296.6
286.2
231.7
239.4
281.0
358.8
Sugar
production
(MT)
18.5
20.1
13.6
12.7
19.3
28.2
2001/2
2002/3
2003/4
2 004/5
2 005/6
2006/7
20.0
27.0
17.0
4.0
3.0
16.0
Source: Parliament (2010)

This takes into account both the domestic cost of
the production of cane and international price trends for
sugar independent of efficiency in sugar factories. Hence, it
will act as an incentive for sugar factories to improve
efficiency and profitability and facilitate the consolidation of the
industry based on efficiency and cost reduction. It will also
reduce cyclicality, which helps in reducing price arrears. It
will also eventually reduce the governmental cost of the
management of the sugar economy. Bigger and more efficient
sugar mills will enlarge their jurisdictions through mergers and
acquisitions in the long run, and this will enable them to be
internationally competitive. The larger and more efficient sugar
mills bring stability to the sector and reduce the cyclicality in
production with little government intervention. It is in line with
price policies in other developing countries such as Brazil
where cane prices are determined by a formula based on the
end use, either sugar or ethanol. Formula- based cane pricing
should be implemented simultaneously with the complete
decontrol of sugar prices. The political pressure from both
farmers and millers would then be curtailed towards market-
oriented prices.

Cost of production, opportunity cost, support price
and competitiveness

Cost of cane represents 65-75% of the overall production
cost of sugar. A cost/benefit analysis for sugarcane and its
competing cropping systems (opportunity cost) for 2009/10 for
three major cane growing regions is given in Table 5. Generally,
in all regions, net returns from sugarcane are higher than they are

from competing crops; however, sugarcane also requires higher
investment. The margin is much higher in western India because
sugarcane is irrigated, whereas competing crops are usually
rainfed. In northern India, the cost of cultivation (Rs 40825/ha) and
cost of production (Rs 740/ha) are lower and thereby the cost/
benefit ratio is higher (1.77) because of the short duration of the
crop. However, cane yields are higher in western India (86.6 t/ha)
and southern India (83.6 t/ha) compared with northern India (55.5
t/ha). The higher cost/benefit ratio and abundant water in northern
India suggests that it is a good candidate for expansion in cane
production at the least cost.

Regulation, capacity utilization and profitability
of mills

Although sugar production has increasedsignificantly from 5 MT
in 1980/81 to 26 MT in 2009/10, it is facing a crisis
regarding its price policy. In the long run, on an average basis,
even large sugar firms have struggled to generate a return
on invested capital over and above their costs of capital
(Rais, 1990). This is primarily because of high government
regulation from raw material supply to final consumption. In
the current scenario, industry has the potential to meet the large
and growing domestic and international sugar demand.
The installed capacity of all sugar mills is about 23.9 MT, but
actual production was about 26.3 MT in 2007/08, 15.0 MT
in
2008/09 and 18.5 MT in 2009/10 (Parliament, 2010). Production
was higher than installed capacity in 2007/8 because of the
increase in crushing duration (days of operation of sugar mills/
year). Average crushing duration varies from 150 days (2007/08)
to 104 days (2008/09). The capacity counts only in the years
of surplus production. Because of the increase in the
average capacity of plants from 1394 Tonnes of Cane per Day
(TCD) in
1971 to 3694 TCD in 2009 (Table 6), the Mahajan Committee
(1998) and KPMG (2007) recommended that the government
should consider increasing the radial distance between sugar
mills for cane reception from farms to 25 km from the
existing norm of 15 km to address the problem of underutilisation.
During 2006/07 and 2007/08, increase in sugar production
resulted in low sugar price that was uneconomical for millers. This
led to a large accumulation of price arrears to be paid by millers
to farmers. In 2008/09, because of a reduction in cane output,

Table 5. Cost benefit analysis of cane and competing cropping system (2009/10)


South India
(Andhra Pradesh, Tamil Nadu)
Western India
(Maharastra)
North India
(Uttar Pradesh)
Sugarcane Paddy-Maize
52120
79713
27593
1.53
Sugarcane Cotton
24732
24450
-282
0.99
Sugarcane Paddy-Wheat
43841
65832
21991
1.50
Total cost (Rs/ha)
Gross returns (Rs/ha)
Net returns (Rs/ha)
Benefit cost ratio
Cost of production (RS/t)
FRP (Rs/t)
Yield (t/ha)
Source: Ministry of Agriculture (2010)
79049 79950 40825
108473 112456 72066
29424 32506 31241
1.37
960
1298
83.6
1.41
920
1298
86.6
1.77
740
1298
55.5

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Table 6. Sugar mill capacity utilization in India

Year No. of factories
working
Crushing
duration
(days)
Actual
capacity
(TCD)
1970/1 215 139 1394
1980/1
1990/1
2 000/1
2006/7
2007/8
2008/9
315
385
436
504
516
500
104
166
139
174
149
104
1718
2088
3080
3474
3546
3694


Source: Parliament (2010)

the industry also suffered from the underutilisation of capacity
and increased costs of production. Out of 485 operational sugar
mills, only a fifth have capacities of at least 2500 TCD, which
is estimated to be the base economic viability in India. Sugar
factories in other leading sugar-producing countries operate in a
range of 10,000 to 30,000 TCD. Tax incentives and profit sharing
among employees, management and farmers will help in reducing
costs and increasing efficiency. Shortage in cane supply, obsolete
technologies, underutilisation, poor financial performance and high
government regulation are some of the chronic problems resulting
in a high cost of production and persistent losses (KPMG, 2007).
The number of non-functioning mills rose from 119 in triennium
ending (TE) 2005 to 162 in TE 2009 (Table 7).
Studies have found that profitability, short-term market
position and capacity utilisation can significantly discriminate
between functioning and non-functioning sugar mills (Rais, 1990).
Net profit/working capital and the interest coverage ratio are the
best discriminators for functioning units, which are directly related
to the cane price policies.
In India, out of 634 sugar mills, 318 are in the cooperative
sector, 254 in the private sector and 62 in the public
sector. Almost one-quarter (23.7%) are non-operating, of which
26.1% are in the cooperative sector, 66.1% are in the public
sector and
10.2% are in the private sector (Table 8). The higher proportion of
non-operating units in the public sector and cooperatives may be
because of the highly regulated environment, uneconomical size
and lack of profit motives.
Large scale millers (both public and private) are better placed
to profit from new revenue streams such as bagasse-based
power generation and biofuels production if the industry is

deregulated, facilitating access to cheaper funds through
initial public offering, external commercial borrowing and rights
issues. Combination of competition
overheads and capitalizing on revenue opportunities from
biofuel and power production has increased the need for
consolidation in the sugar industry. However, the necessary
market infrastructure in terms of roads, transport facilities and
institutional development for ethanol and power purchases does
not exist in many states and needs to be improved.

Consolidation and efficiency

Many large private companies (e.g. Balrampur Chini,
Bajaj Hindusthan and Sri Renuka Sugars) with large capacities
and multiple plants have consolidated through mergers in recent
years (Damodaran, 2009). The main driving force for
consolidation is to secure greater bargaining power compared
with farmers and state governments and to cogenerate power
and produce ethanol rather than simply enhancing capacity. In the
past, there have been frequent and destructive ‘cane wars’ as mills
were established too close to each other. At present, a cane area is
reserved for a sugar factory mainly based on its crushing
capacity. No regard is paid to the recovery rate in the factory.
However, the SMP for cane is linked to the recovery rate. The cane
growers of high-recovery sugar factories receive higher prices and
vice versa. Many sugar factories continue to have recovery rates
below 8.5% mainly because of their obsolete machinery.
Modernisation has not progressed despite the availability of
assistance by the sugar development fund. Furthermore, most
mills have undertaken little cane development work in their allotted
areas. One of the ways in which sugar factories can be encouraged
to improve their recovery rates is to establish cane reservation
areas, inter-alia, based on the recovery rate of the factory. Thus, an
efficient factory with a high recovery rate should preferentially have
access to larger cane acreage than an inefficient factory whose
recovery rate is less. Such a move would stimulate factory
modernisation and cane development.
Given the projected growth in domestic and international
markets, India would need to produce a total of 32 MT of sugar
by 2017 to meet demand (KPMG, 2007). This can be
achieved through both productivity improvements and higher
recovery rates without even increasing cane acreage. By
adopting the appropriate production technology and applying
latest research products, cane farmers can easily increase
yields by 20% and
factories improve their recovery rates by 50 basis points by
for cane, increasing
Table 7. Capacity utilization in sugar industry

State
Installed capacity (MT)
Production (MT)
Capacity utilization (%)
Number of
non-working
sugar mills
TE 2005 TE 2009
2008 2009 2010 TE2010
2008 2009 2010 TE2010
5.5
6.2
6.7
4.8
19.9
2008 2009 2010 TE2010
68
86
145
69
85
UP
Maharashtra 7.2
South India
Other
India
Source: Parliament (2010)
7.3 8.5 8.5 8.1
7.2
4.6
6.9
23.4
7.3 4.0 5.3 100 47 63 13 27
37
33
65
162
7.2 7.2 9.1 4.4 5.1 126 61 71 50
4.5 4.7 4.7 10.8 4.2 5.0 240 89 106 23
6.8 7.0 7.0 8.8 2.4 3.1 129 34 45 33
22.5 23.9 23.9 26.3 15.0 18.5 117 63 77 119


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Table 8. Number of mills and percentage of units not
operating in sugar season 2008-09

State
North India
Western India 165 (27.9)
South India
Other
India
Cooperative
28 (10.7)
Public
33 (57.6)
Private
94 (3.2)
30 (6.7)
88 (12.5) 150 (18.7)
42 (23.8) 134 (36.6)
254 (10.2) 634 (23.7)
All
155 (16.1)
195 (24.6)

55 (25.5)
70 (28.6)
318 (26.1)
7 (42.9)
22 (86.4)
62 (66.1)
Note: Figures in parenthesis are percentage of non-operating mills to total mills in the zones.
Source: parliament (2010)
2017 (IISR, 2008). This would enable the sector to produce
an additional 8.2 MT of sugar. Water management is
another key focus area since sugarcane is a water-intensive
crop. The adoption of drip irrigation would increase water
productivity in cane cultivation. In order to crush the additional
cane, crushing capacity would need to be increased by 0.46
million TCD by 2017 (KPMG, 2007), which could be met
through an increase in the capacity utilisation of existing mills.

Deregulation of the sugar industry

The perishable nature of cane, the need for immediate processing,
small-scale farming and the need to protect consumers’ interests
are some of the justifications for government regulation. Hence,
some regulations such as land demarcation for mills need to be
continued, although considerable scope for deregulation exists in
line with the Mahajan Committee Report (1998) recommendations.
The full decontrol of sugar prices should be coupled with the
removal of the levy sugar quota and monthly release
schedules with free international trade. The committee also
recommended that the required quantity of sugar distributed under
a PDS for poor households should be purchased from the open
market through tenders. However,
implementing a deregulation program in a phased manner: first
through the reintroduction of futures trade in January 2011 and
the reduction of the quota on levy obligation on sugar factories to
10%. The Committee on the Revitalization of the Sugar
Industry (Tuteja Committee Report,
2004) has suggested scrapping the release mechanism for the free
sale of sugar but this recommendation has not yet been accepted.
The futures market can also help in price discovery in open
market and transmit world sugar price signals to Indian producers
and consumers to help plan their production and consumption
strategies. The Abhijit Sen Committee Report (2008) pointed out
that the daily price volatility of the WPI has been reduced from the
pre-futures (2002 to 2004) volatility of 10.8% to 8.2% in the post-
futures period (2004 to 2007). Even though the data are for a short
period, we can conclude that there is no evidence of an increase
in price volatility after the introduction of futures trade in
sugar, especially because it is a highly liquid commodity.
the government is

Policy options and conclusion

Even though liberalisation started in India in the 1990s, the
sugar sector remains highly regulated today. It is imperative
that it is decontrolled to unleash its hidden potential. Since cane
is produced primarily in nine states but cane-based products

are consumed across the country, uniform policies should be
adopted across states. Moreover, for a sustainable price band
to be effective across the country it is necessary that cane and
sugar prices reflect market conditions across states. Furthermore,
being a highly traded commodity, domestic prices should also
reflect international prices. The recent conflict following the
announcement of the FRP is an example of the adverse effects
of high political intervention in price fixing, which has little
economic reasoning. Different types of subsidies/incentives are
practiced in different states and such distortions interfere with
free competitive forces. There is a need for the centre to evolve
uniform price policy for the industry across the country. In
the long run, cane prices should be remunerative for farmers
and also within the capacity of sugar mills to pay for, and the
long run sugar prices should give normal profits to mills and
within the reach of consumers. Governments should allow sugar
sector to evolve with limited controls and along with appropriate
regulatory framework. Keeping this in mind, the paper developed
a modified fair and remunerative price (FRP*) formula which
reflects both domestic cost structure of cane and world prices of
sugar.
Major regulatory reforms needed, include (i) the cane payment
system that is fair to both millers and growers, (ii) millers able to
purchase cane from farms up 25 km away, (iii) discontinuation of
levy sugar and the requirements of the PDS should be purchased
from the free market.

Endnotes

1 Gur: a crude non-centrifugal sugar in lump form produced using
the open pan evaporation method.
2 Khandsari sugar: a low recovery centrifugal sugar
prepared using the open-pan evaporation method.

References

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Public Distribution, Government Of India.
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http://www.indiansugar.com/briefings/wsm.htm.
KPMG (2007) Indian Sugar Industry Sector Roadmap 2017.
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