Political Populism Hurts, And It Shows

In an election year, nothing comes as a surprise when it comes from those in power. Most of the policies are directed towards appeasing voters, no matter what the costs and the implications are. Some of these initiatives go beyond even the generally expected norms. The result is a complete breakdown of systems. The best example of this is what is currently happening in Uttar Pradesh (UP). The state is among the largest sugar producers in the country, contributing to almost a third of the entire production, and any breakdown of production in UP is sure to have an adverse impact on the supply position of the commodity.

In fact, a supply disruption is nearly a surety, with most of the sugar manufacturers deciding to suspend operations for the crushing season of 2013-14 at their mills. The reason for doing so is fairly simple. According to companies, the state government has fixed an ‘unreasonable, unaffordable and irrational State Advised Price (SAP)’ for sugarcane. This has gone up from Rs 165 in 2009-10 to Rs 280 for the last sugar season of 2012-13. This means that the manufacturers have to pay almost 70% more for the sugarcane they procure than what they did four years ago. The problem is not the increase in the price of the SAP, but the stagnant sugar price, which has led to sugar mills incurring huge losses over the past few years.

The companies have been making representations to the state government in this regard, but have not been getting a favourable response. The request is not about increasing sugar prices, but about bringing down sugarcane prices for the 2013-14 season in accordance with the recommendations of the committee set up by the Prime Minister under the Chairmanship of Dr C Rangarajan (Chairman, Prime Minister’s Economic Advisory Council). There is a two point recommendation agenda, which says that the prices can be fixed according to either of the following:

(a) At the rate of 70% of the revenue realised from sugar, bagasse, molasses and press mud; or
(b) At the rate of 75% of the revenue realised from sugar only (giving 5% weightage to the revenue from the first stage by-products), so that the sugarcane price should have linkage with the sugar price on the basis of established and recognised formula.

With the government failing to come to a compromise with the producers, the state today faces a threat from almost all principal sugar producers. Among these, Simbhaoli Sugars, Upper Ganges Sugar Industries, Triveni Engineering and Industries, DCM Shriram Consolidated, Uttam Sugar Mills and Dwarikesh Sugar Industries that have already announced the suspension of their cane crushing activities for the 2013-14 season unless a solution to the problem is worked out.

The reasons for such a drastic step on their part are quite natural. Every business enterprise has its own profit and loss dynamics, and no business can operate and absorb losses till eternity. This is even more acute in the case of sugar manufacturers in UP, as this is a government-inflicted damage to their bottomlines.

The stocks of sugar companies have been performing well on the bourses today, following talks of a settlement being chalked out. How far and how soon these talks will end the deadlock is anybody’s guess. To go back to where we started, this is an election year and the government is surely not in a position to do away with its populist measures. Reduce SAP and farmers will be at unease, and hike sugar prices and risk the electorate going against you for hiking prices of essential commodities. It would surely be worth watching what transpires in this matter in the state, which sends the highest number of members to the Parliament.