The sugar industry is one of the most over-regulated industries in India. It is also prone to cyclicality due to repeated government interventions. The sugar industry has always been heavily politicized. That's because sugar is consumed by every household and a large number of farmers draw their livelihood from sugarcane cultivation. While the central government always wanted to control prices in the open market, the states want to ensure higher prices for the sugarcane farmer.
This has led to crisis in the sugar industry. Prices for refined sugar are now set largely by market forces and have edged up about 3% over the past three years. But cane prices, set by state governments at levels favorable to farmers, have increased by 14% during the same period. As a result major Indian sugar mills have refused to buy cane from farmers at state-mandated prices because it would cause them to lose money. On top of this, most sugar mills are already making huge losses.
Top sugar producing states like Uttar Pradesh and Maharashtra have not yet started crushing sugarcane in the new crop year, which started in October. This is because they have huge unsold stocks and are unable to pay high price to farmers. If the dispute over sugar-cane prices significantly delays production, it could mean more missed export opportunities as Indian mills won't be able to commit December delivery dates to foreign buyers.
The sugar industry needs urgent reforms. Although the government has undertaken partial deregulation, much more needs to be done. The government might consider giving interest free loans to mills to get over the cash crush. We believe this is a form of bail out as cash is doled out for free! In India, states increase sugarcane prices for purely political reasons. However, the government has to find political courage and will to link cane prices to sugar prices, which is the global trend. This may bring rationale to pricing mechanics.