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Sugar subsidy plan is sweet news

This article was posted on Sep 14, 2010 and is filed under Market News

In what could lead to an overhaul of policy, the Union government is looking at a new sugar subsidy mechanism as part of its decontrol proposal. It plans to rope in state governments for the purchase and distribution of sugar to below-poverty-line (BPL) consumers at market prices. To compensate state governments for the cost of buying sugar at market prices, the Centre plans to levy a cess of Rs 100 on the sale of every quintal of sugar.

In a presentation on sugar decontrol to Prime Minister Manmohan Singh, Union Food Minister Sharad Power proposed that mills share revenues from sugar and by-products like bagasse and molasses with farmers, which will be over and above the government-fixed sugarcane price. The presentation was made earlier this month.

Currently, the government has a levy mechanism under which mills are required to sell 20 per cent of the sugar they produce every year to the Union government at a price of Rs 1,800 a quintal (against an open market price of Rs 2,600-2,700 a quintal). This sugar is distributed to BPL families. The central government bears the Rs 5 a kg difference between levy price and issue price.

The government’s new subsidy plan will provide huge relief to the sugar industry, which currently incurs heavy losses on levy sugar. Take the current October-September season. The industry produced 18.8 million tonnes of sugar and will be required to sell 3.76 million tonnes as levy sugar. Considering a difference of Rs 9,000 a tonne between market and levy prices, the industry will lose around Rs 3,384 crore.

Under the proposed system, the government will collect money in the form of a cess and subsidise the sugar for BPL families through state governments. Based on next year’s projected sugar output of around 25 million tonnes, the government will be able to raise Rs 2,500 crore.

The Union government already collects Rs 24 a quintal sugar as development fee from companies to finance the Sugar Development Fund. The industry will pass on the proposed additional cess to consumers, along with the existing fee.

Current subsidy 1,589
Projected subsidy 3,821
Proposed cess collection* 2,500
Net subsidy 1,321
*At Rs 1/kg for 25 million tonne (in Rs crore)
Based on current levy price and allotment

Lobbying for decontrol, the food ministry said in its presentation that controls in the form of levy sugar and release mechanism have not arrested the “sugar cycle” and that the country continues to have “low sugarcane yields and fluctuating sugar prices”.

The ministry has also suggested scrapping the monthly release mechanism and abolition of mill-wise sugarcane area reservation. The decontrol, according to the food ministry, will attract foreign investment, ensure timely payment to farmers and reduce the cyclical nature of the industry.

source: Business Standard

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