Enough of Sweet Nothings

RBI should discipline states to end high cane prices that cause recurrent crises

Farm distress in India currently flows mainly from excess production of one crop after another. This has depressed agricultural prices, yet left them too high to permit exports. The answer is to rationalise prices and discourage crops that look the least exportable.

The worst agricultural policy of all is for sugarcane. The Commission for Agricultural Costs and Prices (CACP) recommends a fair price for all major crops, including cane, based on demand, supply, stocks, international price and other relevant factors. However, state governments arbitrarily decree much higher state-advised prices (SAPs), driven entirely by opportunistic politicking, and not by economic sense. This overpricing induces overproduction and recurrent crises for the sugar industry.

Need Cane-Do Attitude

Short-term fixes are being considered for the current sugar glut, such as a cess on sugar to compensate bankrupt sugarmills, or forcing oil companies to buy ethanol (made from sugarcane and molasses), at ludicrously high prices for blending with petrol. These supposed solutions only compound the original folly of mispricing cane.

In 2017-18, India produced 32 million tonnes of sugar, in addition to carry-overstocks of three million tonnes. Domestic demand is only 25 million tonnes. So, the resulting glut has sent sugar prices crashing and mills going deep into the red. World prices are even lower, so sugar exports are impractical.

Bankrupt mills are unable to pay farmers their dues. Farmers are naturally angry. But politicians seek to mollify farmers with more rescues, instead of firmly ending excess pricing.

Sugarcane is a water-guzzling crop, and, hence, undesirable as water stress in India keeps rising. Most states decree free or ultra-cheap electricity for farming, encouraging farmers to shift to water-guzzling crops like sugarcane. Excessive pumping for irrigation has caused a ruinous collapse of water tables.

So, drinking water wells and shallow tubewells of small farmers are drying up, leading some farmers to commit suicide. Only the biggest farmers with the deepest, most expensive tubewells are able to exploit (and virtually monopolise) a dwindling groundwater reserve. This is environmentally ruinous and morally indefensible. Yet, competition between political parties keeps driving down the price of farm electricity to zero.

In Maharashtra, economist V M Dandekar showed long ago that switching irrigation from cane to food grain would triple the area irrigated. But cane farmers and sugar cooperatives have great political clout, and continue to get the lion’s share of scarce water. At the very least, ultra-cheap electricity to farmers should be made conditional on their adoption of drip irrigation or sprinkler irrigation, to conserve water and cut electricity subsidies.

The only areas in India truly suitable for sugarcane cultivation are Bihar and eastern Uttar Pradesh, where the water table is still high and rainfall is copious enough to sustain cultivation at international prices. Yet, subsidised electricity and sky-high SAPs make cane so profitable that farmers everywhere want to switch to this crop.

Cane, and Able

The underlying political problem is that farmers have tightened their political clout. So, we now see more farm agitations than ever before. This does not reflect greater distress. Indeed, a recent Brookings Institution paper suggests a sharp fall in poverty, with 44 Indians rising above the poverty line every minute. Economist Surjit Bhalla thinks the decline is closer to 100 Indians a minute. Whatever the correct number, the farm crisis is driven not by poverty but excess production. The solution is produce less, but more competitively.

An essential reform is to tell state governments that if they decree SAPs higher than the CACP price, the excess must be paid by the states (and not the mills) to farmers. That fiscal penalty is the only way to check political competition to overprice cane, creating recurrent crises for sugar mills, and for the banks lending to these mills. However, the central government has no power (or inclination) to oblige state governments to price cane responsibly. On the contrary, political competition between parties threatens to drive SAPs to even crazier heights.

The only politically feasible solution is for an independent authority like the RBI to intervene. In many countries, banks would refuse to lend to sugar mills told by states to pay sky-high cane prices that spell financial ruin for the borrowing mills. But Indian public sector banks are politically forced to keep lending to loss-making sugar mills.

Solution: the RBI should declare that, to ensure a healthy banking system, banks must stop lending to mills in states declaring SAPs significantly higher than the CACP price. This will threaten the closure of mills for want of bank finance. The relevant states will fear the anger of cane farmers who cannot get their cane crushed because nearby mills have shut down. These states will, reluctantly, have to either cut their SAP to CACP levels as demanded by the banks, or pay farmers from State coffers for the SAP premium above the CACP price. This will keep sugar mills solvent.

Such a radical reform is impractical in an election year. But in the medium term, it seems the only way forward.

What do you think?