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G. Chandrashekhar

After the proposed abolition of levy and monthly release system, sugar mills will have full freedom to market their production. Operational freedom should ordinarily have brought cheer to the producers; but the industry is worried that a captive market - Government purchase for public distribution system - may be lost and the overhang of stocks will depress prices in the open market.

MUMBAI, Feb. 7

AFTER operating for years in a strict regime of controls and restrictions on production, marketing and exports the sugar industry is set to be unshackled. The Union Cabinet approval in-principle for doing away with the system of levy and allocation of quota - perhaps the last vestiges of the control Raj - is in keeping with the assurance given a couple of years ago to effect a phased removal of controls.

In fact, the process of partial decontrol started some three years ago when the sugar industry was de-licensed. Also, over time, import tariffs were raised to protect domestic industry from competition, export curbs were removed, levy rate was brought down to 15 per cent and marketing restrictions eased.

After the proposed abolition of levy and monthly release system, sugar mills will have full freedom to market their production. Operational freedom should ordinarily have brought cheer to the producers; but the industry is worried that a captive market - Government purchase for public distribution system - may be lost and the overhang of stocks will depress prices in the open market.

Per se, the apprehension is not unjustified. It is for this reason that some sections of the sugar industry had in the recent past been attempting to delay the scrapping of monthly release quota. The Centre should be complimented for resisting such pressures.

Reports suggest that complete decontrol of the sugar sector will take place during fiscal 2002-03 after futures trading in the commodity is introduced later this year by October when the new sugar season starts. Decontrol after start of futures trading would be like putting the cart before the horse, and hence inadvisable. Decontrol of the sugar industry should not wait for the commencement of futures trading.

In fact, a decontrolled and free trade regime is a pre-condition for the healthy development of the futures market. Controls can and will distort the futures market; and speculators with insider information relating Government decision (say, monthly release volume) can play havoc with prices.

Futures trading are an extension of the physical market. It not only reflects current realities of the physical market, but also the perception of players about what's in store for the future. Futures trading by itself cannot arrest or prevent a fall in sugar prices as and when the commodity is decontrolled. It is not a panacea for all the ills of the sugar sector.

Obviously, decontrol must precede (and not succeed) introduction of sugar futures. New Delhi must decide now the specific date when it wants to effect complete decontrol. A decision now will ensure some lead time for the mills to enable them plan to face free-market conditions.

Once a specific date of decontrol is announced, the Government must keep off and allow the industry to fend for itself. The industry will have to prove its mettle. Instead of panicking about a price collapse after decontrol, the sugar industry must get together now and devise ways and means to address the emerging situation.

It is well known that the sugar industry is fragmented; and on several issues there is no unanimity of view among different segments - private, public and co-operative sectors. Here is an opportunity for all of them to unite under one platform and evolve some self-discipline or code of ethics, particularly in the matter of calibrated marketing of sugar after decontrol; without, of course, compromising consumer welfare.

It is also time for the industry to seriously examine mergers and acquisitions possibilities. Consolidation of capacities is the key to benefiting from scale economies. State Administered Price for cane is no doubt a vexatious issue. The industry must intensify its lobbying efforts or learn to live with the vice until some alternative is found.

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