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Monday, Feb 11, 2002

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Delicensing dilemmas

THE POLICY-MAKERS' ATTITUDE to sugar decontrol is best summed up thus: "Willing to strike, but afraid to wound". How else does one interpret the Government's hesitation to proceed in the matter of decontrolling the sector? True to its commitment for a phased decontrol, the Centre had the past three years moved with benign caution to remove restrictions progressively. This included abolition of industrial licensing, lifting export curbs, reduction of levy rate, relaxation in free-sale quota marketing norms and imposition of import tariffs. The in-principle decision of the Cabinet last week to completely decontrol the sugar sector in2002-03 meant the last vestige of control — 15 per cent levy and the monthly quota release mechanism — would be abolished and the industry allowed to pursue its growth objectives in a competitive environment without government intervention. For free-market supporters, it was too early to celebrate as subsequent events proved.

Firstcame the official announcement that the levy and release mechanism would be abolished next fiscal, but only after the introduction of futures trading, in October/ November 2002. The conditional decision itself was wholly exceptionable — nay, avoidable — for commercial prudence demands that futures trading follow, not precede, decontrol. Hedging by itself cannot prevent an apprehended price collapse in the context of the massive overhang of stocks unmatched by consumption demand. It is for the mills to work out a common strategy to mitigate the rigours of price fall. Indeed, the industry must realise that controls can do more harm to the market — both physical and futures — than a free-trade environment. Ironically, a day later, the Minister for Consumer Affairs, Mr. Shanta Kumar, announced that sugar decontrol would take place only after cane price rationalisation — a vexatious issue that can take years to resolve under normal work culture of government and administration. It is obvious that sections of the sugar sector that perceive a threat — unjustified, though — in decontrol have pressured the Government into announcing one more condition before complete decontrol.

Withoutdoubt, cane prices impact sugar economics, and the States have their own rationale for announcing State Advised Prices (SAP) that are higher than the Statutory Minimum Price (SMP) announced by the Centre. To address the industry's reservation about SAP, New Delhi must examine legal methods to stop States from announcing higher "prices" . It is common knowledge that the sugar industry's problems are not all due to the SAP, but because of long years growth-stunting restrictions. Acceptance of the need for decontrol is a recognition of the need to make the industry competitive. It would be unwise to postpone the D-day for complete decontrol.

The sugar industry, comprising nearly 480 units in private, public and cooperative sectors, must get its priorities right. Competition is the key to growth. Today, the industry suffers from diseconomies of scale, fragmentation of capacities and lack of modernisation, with the exception of some units. Industry leaders must recognise the virtues and challenges of the free-market and lay out a roadmap for the future, with focus on building global competitiveness.

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