[Economy] Sugar Pricing and Decontrol, Rangarajan Committee, FRP vs SAP meaning, issues, explained

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  1. How does Government control Sugar industry?
  2. Stage #1: Crops and Farmer
  3. Stage #2: Sugar Mills:
  4. What is FRP and SAP?
  5. Rangarajan Committee:Recommendations
  6. Conclusion to all the UPSC aspirants

How does Government control Sugar Pricing in India?

  • There is a lot of control by the government both state and centre over the sugar industry.
  • To look at this one must look into the production lineup of sugar.
  • Let us understand the sugar producing process first.
  • This simple diagram will explain the process

Sugar control in india

Now the government control on the major aspects can be visualized easily. So the control by government at every stage is:

Stage #1: Crops and Farmer

The farmers must sell their produce to the nearest mill. And just the converse of this, the sugar mills have to purchase sugarcane from reserved areas.

Stage #2: Sugar Mills:
  1. Distance
Mills must have a distance of 15kms between them.
  1. Pricing of Sugar
The mill owners must compensate the farmers according to 2 different norms for giving them the sugarcane – FRP and SAP.(explained below).
  1. Pricing of Other products
The other products such as Molasses, Bagasse, Press Mud are very useful side products of sugar industry. Their remuneration to the farmer is not fixed and varies with the time.
  1. Levy of Sugar
The mill owners must give 10% of their production to the central government which they use to supply to the state governments for their state Public Distribution Systems (PDSs).
  1. Packaging
The sugar must be packaged in jute bags. (this is done to promote labour intensive jute industry.)
  1. Market
The market is also heavily government controlled. The export and import of sugar is decided by the government depending upon the domestic demand.

Before going into the recommendations of the committee let us look at the difference between FRP and SAP.

What is FRP and SAP?

  • The FRP and SAP are prices set by the different governments at which the mill owners will reimburse the farmers.
  • This is the minimum price that they pay to the farmers for the sugarcane.
Difference between two:
FRP SAP
Fair Remunerative Package State Administered Price
Central Government issues price.(Has no voice) State government issues price(Has most voice).
Generally lower. Generally higher.(To fulfill the votebank issues as sugarcane farmers form a large votebank).

When the state government issues its SAP then the mills in the state are bound to pay by that amount only. This was held valid in a Supreme Court judgment in 2009.

Rangarajan Committee:Recommendations

Remembering the earlier diagram of the sugar process and the government control, the Rangarajan committee report recommendations can be easily mapped.

Rangarajan’s recommends:
Government Control Recommendation Remarks

Sugar crop area

Do away with reserved area. Give farmer option to trade with any mill. Empowering the farmer to do better business.

Mill distance

Do away with minimum distance between mills. To enable competition.

Pricing of Sugar

1. Give the farmers FRP price at the 1st stage and do away with SAP.2. Share 70% of the sold value of sugar+molasses+bagasse+press mud at the 2nd stage. Double stage strategy to have better cash flow to mills.Putting proper system for remuneration.

Packaging

Do away with the jute packaging Can save about 1000 crores.

Levy of Sugar

Do away with the 10% sale to the central government. Instead, pass on the subsidy to state government, which can buy the sugar from the market and give it subsidized. Can ease central subsidy tension. The levy savings is about 2000 crores.

Market

Ease the market control of government on export and import. The move is to help India(17% of world production) to enable its exports(only 4% of world export), but leaving it all to the market is risky.

Conclusion to all the UPSC aspirants:

  • This is similar to many other committees formed by the government to recommend the sugar industry decontrol. Committees under Mahajan (1998), Tuteja (2004), Thorat (2009) and Nandakumar (2010) had similar recommendations.
  • So most probably these recommendations will also bite the dust like others.

This was a guest post by Mr.Shiva Ram

Indian History Freedom Struggle Pratik Nayak

54 Comments on “[Economy] Sugar Pricing and Decontrol, Rangarajan Committee, FRP vs SAP meaning, issues, explained”

  1. You have told that if recommendations approved the mill owners have to first give FRP rates ,then have to share 70% of product cost in second stage does’nt it hurt mill owners revenue and ofcourse profit margin. plz clarify

    1. IT IS ACTUALLY 70% OF PROFIT MARGIN THAT MILL OWNER HAS TO SHARE WITH FARMER AGAIN AFTER FRP, NOT THE SOLD VALUE . BETTER YOU CHECK IT ON GOOGLE AND CONFIRM

    2. Firstly, Sugarcane is a yearly crop. This means that the farmer spends a lot of time+money for a whole year.

      Secondly, the mill owner does the job of just extracting the sugar from the sugarcane. If you would consider the case of paddy, rice is extracted by the farmer himself with the help of some workers. The cost incurred on the farmer is much more to develop the sugarcane crop than by the sugar mill. Hence the 70% amount has been arrived at for the farmer.

      Thirdly, the report suggests that 70% of the “value” of sugar and its by-products sold must be given to the farmer. Hence I had quoted that it is “sold value” of the products. The final selling price is arrived at after including the costs incurred by both the parties + profit. So sharing just the profit with the farmer would not be the correct way. This “value” is called “ex-mill” price which is released by the government from time to time.

    3. @shivaram: sir i have read two of your articles you have told that you have done your B.Tech in 2012 can you plz guide us how to approach prelims and what are your mains subjects?have you prepared in Btech itself?

  2. Mrunal, I have subscribed to receive updates or new posts on this site. Why then did I not get an email for this post?

    1. Email-updates are sent on around 6AM every morning.
      Since this article was published today around 10AM, you’ll receive its email-notification tomorrow morning @6.

  3. Why did the committee recommended for doing away with jute packing? what abt the rationale of aiding the labour intensive jute industry? Is it not a viable option?

    1. because plastic bags are much cheaper. so sugar mill owners want plastic packaging instead of jute bags.

        1. mill owners don’t pay for jute bags out of their own pockets. ultimately the cost is borne by customers.

        2. Rangarajan is a central Govt Agent … Hence he will recommend things which will help govt to check its FISCAL DEFICIT…….which is a cause of concern for the govt…..

      1. Its always a zero sum game for GoI… Win-win chances so meager. If one wins, other has to always loose…mostly the downtrodden… shame..

  4. 1. How will sharing of 70% of sold value at 2nd stage result in better cash flow to mills. What will be refunded its implication on framer?
    2. How the recommendation related to levy of sugar can ease central subsidy?

  5. 1. How will sharing of 70% of sold value at 2nd stage result in better cash flow to mills. What will be its implication on framer?
    2. How the recommendation related to levy of sugar can ease central subsidy?

    1. 1) Paying the farmer all at once will reduce the cash flow to mills. So they pay in 2-stage mode.
      2) Since the centre will not buy the sugar now, the subsidy on it is reduced. It is just taking money from one point to another. It is now given as fund to the state. Thats all.

  6. Sir,
    I have a doubt on
    “Do away with the 10% sale to the central government. Instead, pass on the subsidy to state government, which can buy the sugar from the market and give it subsidized.


    above recommendation.Consider a scenario,if sugar production goes down automatically price increases.If price increases then central subsidy wont be enough to purchase the sugar.Then additional money needed for purchasing subsidized sugar.If so ,is there any chance to reduce sap. Whether it will affect the farmer or not.

    I don’t have an exact idea.You may please clarify my doubt

    1. The scenario is quite possible. The amount 2000 crores is the amount spent by the centre till now. If not spent, the committee recommends that it be passed on to the states. The amount given by centre to the state can vary. This is all hypothetical we are talking here.

      In any case SAP is not recommended by the committee.

      If you are talking about FRP, there is a good chance(economically speaking) that sugar price may increase due to lower production. But I dont see a reason as to why, the government will reduce the FRP. Since, if it reduces the FRP -> lower prices of sugar(which in itself is contradictory since low supply leads to price rise)-> lower taxes to government from sales -> farmer already low output and finally lower income.

    1. Levy sugar means the percentage of quota i.e 10% reserved for PDS. so Central govt has to pay the amount for 10%, in addition to that Cost of inventory will also be incurred by central govt.
      So, these reserved 10% is allowed to get sold through open market operation, the burden of central govt will be less.
      Please correct me if I am wrong in analysis.

    1. hii sam,,

      i m sorry …….but plz dont compare anybody’s genuine effort to help the masses….

      if u dont like it better not read or simply ignore it if u feel u wasted ur time…..

      but its mrunal who had posted this article….. may be u thought its NOT GOOD AS MRUNAL’s…. but dear friend mrunal might hv thought otherwise….

      learn to appreciate persons who help others……bcz still we are no where near to them…..as a few among us are contributing to this site…WE KNOW HOW TO TAKE BUT NOT HOW TO GIVE……SO PLEASE BE HUMBLE TO THANK OTHERS WHO GIVE THEIR TIME AND EFFORT….

      KINDLY FORGIVE ME IF MY WORDS HURT YOU

    2. Dude kindly don’t dissappoint others effort as he have done amazing… and dont ever never compare with others.. i heartfully support our friend CHENAB by his humble comment.

      Please try to learn something what ever required if you think its waste of time just ignore but never discourage another person..

      Shivam u have done great job mate.. keep it up and if you have more information on any topic please share with us we will be greatful to you.

      no offence SAM.. i dont want to hurt you mate but please dont try to repeat this again.
      Thank you

  7. very nice article this very topic was troubling me thanks again for coming up with such nice articles thanks a ton

  8. Thank you Shiva Ram sir for clarifying my doubt.But I think I couldn’t able to convey it properly.
    Sir I know that SAP is not a part of recommendation.But I asked as general that whether there is a chance to reduce SAP by the state if state spend more money to purchase sugar in the above mentioned
    scenario.

  9. Hi, mrunal can you guide me for IBPS interview ,it’s on 14th of jan 2013.what questions are asked.what topics from economics should be prepared.please help.thanks

  10. dear sir,

    iam upsc aspirant can you send me the important notes of g.s.or can u guide me how should i prepare for civil services….my mains sub-philoshophy and pub ad..medium is hindi..

  11. Dear Shiva,
    You have mentioned here that the recommendation will reduce the subsidy burden. But as per the I&B minister it will further increase the subsidy burden. Plz clarify. Also, in the light of recent partial decontrol by the government, it would be helpful if you could publish an update to this article. Plz also share something about the regulated release.

    http://www.sarkaritel.com/india-decontrols-15-5-bn-sugar-industry/

    Thnx for the short n SWEET article. :)

  12. Sir,

    Thanks for the quick recap.
    I have come across multiple reports by Rangarajan committee, such as Report for Global prices on domestic gas, Report on management of Public Expenditure, etc. Please help to provide a gist of all the relevant Rangarajan reports.

  13. Now that the regulated release mechanism is dispensed with can the mills sell the sugar in market at market determined price or any restrictions by the Govt regarding price(NOT QUANTITY)?

  14. SAP—-i think is state advised price….are state advised price and state adminstered price the same ???

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