It’s not just sugar that tastes bitter: Financial Express: 21st November 2009

The current imbroglio on sugarcane pricing needs deeper thought. The issue basically is that the minimum price to be paid to the farmer was increased by the Central government through the fair & remunerative price (FRP). However, the state governments would like to have a higher statutory price, which they would not like to pay for. They would have the mills pay this difference as was the case earlier. The farmers evidently want a price higher than the FRP that has been offered (Rs 130/ quintal). All this has led to harsh words over these actions being anti-farmer and pro-sugar mills. The view here is that we need to take a closer look at the broader issue of price determination by the government in agriculture. Prices are fixed to provide a basic minimum income to the farmer, which reduces volatility in his earnings, ensures that enough of the crop is cultivated and that the consumer pays a reasonable price. This ideology is fair enough as all governments support agriculture with subsidies and may be justified as being necessary. However, price intervention by the government in India comes in two forms. The first is the minimum support price (MSP) where the government assures the farmers of a minimum price that will be paid for a fair quality of produce. The scheme is open-ended and the cost is borne by the government in the form of the food subsidy Bill. There can be no quarrel here as it is a government prerogative. The second intervention is like that in sugarcane, where the Central government sets a minimum price that mills have to pay and could pay more depending on demand & supply conditions. Here there is no government purchase and the mills have to pay the cost. Similar prices are set for cotton and jute. There is an issue here because the government is fixing a floor for the mills. The SMP or FRP makes sense in terms of guaranteeing protection to the farmer, but anything beyond should be left to market forces. This is so because once the minimum threshold price is increased; it can never be lowered in future even if there is surplus production. Hence, while hiking rates at a time when sugarcane production is down, which sounds pragmatic to encourage sowing, this would lead to a disastrous situation in case there is surplus production when prices become unrealistic. A solution would simply.be to pay cash subsidies to farmers directly by the state or Central governments for producing a certain quantity of sugarcane. The price should be left open to the market. The other problem with these prices is that while they are meant to improve the cropping pattern, once they reach unrealistic levels, would tend to distort the same. Therefore, higher MSP, FRP, SMP or SAP would make farmers grow more of the crop, thus creating distortions in production of other crops. We have seen this happen for rice and wheat where farmers prefer to grow them because of the higher relative income to be earned. This has created two problems. The first is that pulses and oilseeds, where India is in the deficit territory, have tended to lag as the first choice is rice and wheat. The second is that these crops, including sugarcane, are more water-intensive, which has resulted in the water table levels dropping, which has serious implications in the future as rainfall has been inconsistent progressively. The final problem is inflation. The government has, in a way, indirectly sponsored inflation to a great extent by inflating these numbers. When the threshold price level is raised, there would be a tendency for it to become a benchmark, which increases the prices of other grades, too. Last year, the MSPs were increased by over 30% for rice, 35-40% for coarse grains, 30-50% for pulses etc. Now, if sugarcane prices are going to be doubled, then quite evidently we must be prepared for high sugar prices. A cash subsidy would take care of the inflation aspect and also keep the prices market oriented. The debate hence is quite myopic today, and we need to take a longer term view of such pricing given. We also need to gradually move towards a market pricing system, which is more efficient. The government should also move away from purchasing, storing and transporting products except for what is essential (PDS and buffers). In this context, futures trading in sugarcane should be seriously considered and can be supplemented by direct cash subsidies, in case prices move downwards. This market would be exciting as there would be large number of hedgers on both ends, which would make the price discovery process more transparent and efficient. There is hence an urgent need to downplay the current pressures on pricing, which are transient, and could change.