Karnataka to be first state to adopt Rangarajan model on cane pricing

More than six months after the Rangarajan panel recommended deregulating the R80,000-crore sugar sector, at least one state has initiated reforms in cane pricing. The Karnataka government has passed a Bill that seeks to link the price of cane with its byproducts, including sugar.

"Although a specific formula is yet to be worked out, we expect the cane pricing policy to be broadly in line with the Rangarajan panel recommendations," Mukesh Kumar, executive director of Karnataka-based Vishwaraj Sugar, told FE. The panel has suggested that 70% of ex-mill prices of sugar, bagasse, molasses and press mud be paid to farmers for cane supplies. "A reasonable and stable cane pricing regime will ensure timely payment to farmers and a steady margin for mills as they can plan their financial outgo on raw material purchases better," Kumar added.

Industry executives expect Karnataka to finalise the formula after Assembly elections. Implementing the linkage formula will be a symbolic victory for the sugar industry, which has been pushing for the next stage of reforms in the sector, although Karnataka does not have a state-advised price and cane rates are fixed through negotiations between farmers and mills. This could encourage other states, including largest cane producer Uttar Pradesh, to focus on reforms in cane pricing due to potential fears of mills shifting investments to other states. Reforms in cane pricing are crucial as the raw material accounts for around 65-70% of mills' costs.

Earlier this month, the Centre decided to partially deregulate the sector by freeing mills from supplying subsidised sugar for state-run welfare programmes and scrapping the release order mechanism through which it controls market sales. Since cane pricing is in the state's domain, the Centre can't go ahead with reforms unilaterally, although it has the power to fix the floor rate of cane.

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