Policy Analysis: Sugarcane

Pranay Kotasthane pointed out that sugarcane prices did not spike despite the sharp increase in demand due to all the harvest festivals recently. Being a policy analyst, he tried to find out why that is the case. He found that global sugar and sugarcane prices have barely increased over the last 25 years (adjusting for inflation) even though incomes have risen across the world.

 

First, countries subsidize sugarcane production. Combined with better yields, it has resulted in a huge increase in sugarcane production, even over-production in India and Brazil. Then he zooms into India.

 

The Indian government tries to juggle two contradictory aims – keeping the cost of sugar low for the consumer while also ensuring a fair price to sugarcane producers. To avoid sharp price increases that would hurt consumers, the government procures and sells via ration shops. It also proactively bans exporting sugar if it anticipates a rise in inflation.

 

But the sugarcane farmers and sugar mill owners are powerful politically. To handle their needs, the government sets a Fair and Remunerative Price (FRP) – that’s the price to be paid by the mill owners to the farmers. Now a hike in FRP would hit the profit of the mill owners, so the government also sets the minimum price at which sugar is sold by the mill owners – this is called the MSP (minimum selling price).

 

All of the above is set by the center. But states then set a State Advised Price (SAP) that is higher than the FRP, to please the farmers. To sum up things so far, the way the system is designed and works currently ensures that sugarcane farmers keep over-producing.

 

Unfortunately, sugarcane is a water-intensive crop with all the associated environmental consequences. That need for water also means farmers will drill more borewells. Remember how electricity is subsidized and/or free for farmers? That increases the usage of borewells by farmers and in turn further incentivizes the growth of sugarcane.

 

Given all of these costs and side-effects, plus the fact that Indians are more prone to diabetes anyway, shouldn’t the government change policy on sugarcane? Since poverty levels are falling, in turn meaning that more people can afford sugar (among other things), shouldn’t the government procure enough for the very poor at low prices, and leave the rest to be determined by market forces?

 

But given the large political implications – farmers and mill owners – it won’t be an easy change to make. Policy making is always very complicated.