India - Achieving economic gains in the Indian sugarcane sector : the place of Uttar Pradesh and Maharashtra

Document of The World Bank FOR OFFICIAL USE ONLY DRAFT CONFIDENTIAL Report No. 15678 - IN  CURRENCY EQUIVALENTS AND UNITS Currency Unit Rupee (Rs) US$1.00 Rs 34.00 Rs 1.00 US$0.029 I Lakh Rs 100,000 Rs I 0 Million Average Exchange Rates 1991 1992 1993 1994 1995 4/1996 22 .74 25.92 30.49 31.37 31.42 34.24 (Rs/US$) .WEIGHTS AND MEASURES The metric system is used throughout this report ABBREVIATIONS AND ACRONYMS CACP Commission on Agricultural Costs and Prices CIE Center for International Economics, Australia ewe Central Water Commission PAO Food and Agriculture Organization FCI Food Corporation oflndia GDP Gross Domestic Product GOI Government of India GOM Government of Maharashtra GOUP Government of Uttar Pradesh ICAR Indian Council of Agricultural Research ISIEC Indian Sugar and General Industries Export and Import Corporation lSMA Indian Sugar Mills Association LMC Landell Mills Commodities International, England NCAER National Council of Applied Economic Research NFC SF National Federation of Cooperative Sugar Factories PDS Public Distribution System SAP State Advised Price SMP Statutory Minimum Price STC State Trading Corporation USDA United States Department of Agriculture VSI Vasantdada Sugar Institute WTO World Trade Organization  TABLE OF CONTENTS EXECUTIVE SUMMARY .... ... ... .. .. ...... ......... ... ......... ............................................................. ! I. INTRODUCTION ....................................................................................................... I Sugarcane based industries are important to the Indian economy ....................... 1 About this study .. .. .... ............... .......... .................... ... .. .... ...... ........ .. .... . . .. ....... 2 2. MAIN ECONOMIC FEATURES OF THE SECTOR .................................................. 3 The essence of the sector is captured in an economic model ....... .... ... .... .. . ..... ... 4 3. STRUCTURAL FEATURES IN DETAIL. .................................................................. 7 Many small farms, hundreds of mills and millions of people produce 0.25 billion tons of sugarcane and over 20 million tons of sugar/gur ................. 7 Uttar Pradesh and Maharashtra are the dominant cane producing states ............ 7 Uttar Pradesh is the main producer of gur and khandsari ................................ 13 India is a big producer of byproducts ... ....... ..................................... .............. 13 India produces 20 percent more sugar than Brazil but has four times as many mills ....... ....... .... .... .................. ............... .............. ........................... 14 There are large differences in patterns of consumption across the country ....... 16 Sugar and gur are traded domestically more than khandsari ... .... .................... . 16 Growth in consumption is strongest for sugar ................................................. I 7 Increased area accounts for sixty percent of growth in sugarcane output ......... 17 India's pattern of production is highly unstable ............................................... 18 India's trade is highly unstable and is destabilizing to the world market .......... 19 4. ORGANIZATIONAL FEATURES: POLICIES ...... ...................... ....... .................. .... 20 Sugarcane policies date back to earlier problems ...... ...................................... 20 Policy objectives are not clear and are highly politicized ................................. 22 Implementation involves the use of many instruments ..................................... 24 Dual marketing aims to make some sugar affordable to all citizens ................. 25 Licensing of sugar mills creates barriers to competition .................................. 2 9 Cane pricing controls are an adjunct to licensing ............................................ 32 Subsidies and taxes further influence resource allocation ................................ 35 Several general policies influence the sugarcane industry ' s organization ......... 40 Policies establish a wide variety of interest groups .......................................... 41 This report is based on the findings of a World Bank mission that visited the states of Maharashtra and Uttar Pradesh in November-December, 1995. The mission was composed of Deepak Ahluwalia (World Bank, mission leader), Brent Borrell and Roger Mauldon (CIE, consultants), James Fry (LMC International, consultant), and Ashok Gulati (NCAER, consultant). The report was produced by the mission participants. Derek Quirke (CIE) contributed to the modelling exercise. Peer reviewers are R. Henry (IFC), A. Valdes and G. Feder (World Bank). 5. ECONOMIC CONSEQUENCES OF POLICY ... ................. ....... ................. ........ ...... 43 The dual marketing system: an inefficient way of providing cheap sugar .... ... .. 43 Licensing sugar mills constrains milling capital and raises costs ....... .. ... ......... 4 7 Cane pricing reduces commercial flexibility and adds cost .............................. 50 Subsidized inputs favor cane but are not a big stimulus to extra production .... 50 Taxes and imposts distort regional and product patterns of production ............ 53 Incentives to maintain and develop infrastructure could be stronger ........ ... ..... 54 Research and development seems to need a stronger extension focus ............... 54 Ownership and control slows technological uptake and productivity .... ..... .... ... 5 5 Labor laws may lock in existing technologies ................................................. 55 Good policy coordination between so many departments is impossible ... ........ . 56 6. WHAT OF Tiffi FUTURE ........................................................................................ 57 What are some of the key challenges facing the sector? ................................... 57 How big are the economic challenges facing the sugarcane industries? ........ ... . 57 Two options to meet sweetener demand growth: one is 30 per cent dearer ....... 65 The broad conclusions from the results are unambiguous ................................ 66 7. WHAT DO WE PROPOSE? .. ........ ...... .......... ..... .......................... .. .......... ................ 68 Vision: catch up to world best practice and work sugarcane resources harder .. 68 Marketing: allow markets to work .. ................. ..... ... .................. ..... ..... ..... ...... 68 Licensing of sugar mills: make mills more competitive and unconstrained ....... 71 Cane pricing: make millers compete more ............................. ... ....................... 75 Subsidies and taxes: review them and get on to a value added basis ................ 77 Research and development: current technology needs to be disseminated ......... 79 Infrastructure: ensure its maintenance and development ..... ..... ........ .. ........ ... ... 79 Administration: review with the aim of getting better coordination ................ .. 80 Actions need to be taken on a wider front than cane and sugar alone ... ..... .... ... 81 REFERENCES ........................... ,....... .. ... ....................................................... ....... ............... . 82 APPENDICES A Model of the Indian sugar industry B Detailed simulation results C The efficiency of the Indian sugar industry D Potential of productivity gains in cane cultivation in Maharashtra and Uttar Pradesh E Input subsidies to sugarcane cultivation in Maharashtra and Uttar Pradesh F Legal and regulatory provisions in the sugarcane sector BOXES 3 .1 Sugarcane is the most profitable crop but ..................... .... ...................... ........... ......... 10 4. 1 Essential Commodities Act needs a thorough review ... ... .. .. .................... ... ..... ......... .... 21 4.2 History of exports-imports policy for sugar and molasses ..... ... .... ... ..... ...... .......... .... ... 27 4. 3 A note on molasses in India ......... ... ....... .... .......... .... ..... ......... ................ ... .... .. .... ........ 38 5 .1 The dual market system may have perverse effects ...... ... ............................... ... .... ... .... 48 5 .2 Some competitive criteria for an efficient sugar mill ownership policy .. ................ ....... 49 5 .3 Drip irrigation in Maharashtra .................................................................................... 52 6. l Calculating economic gains ........................................................................................ 62 CHARTS 2. I Regional and sectoral representation of India sugar model .......... .. ........... ..... .... ........... 6 3.1 The sugarcane sector is large and diverse .......... .. .... ......... ... .... .. ..... ........... ... .... ......... .. 8 3 .2 Sugarcane appears to be considerably more profitable than other crops ......................... 9 3.3 Irrigated cane yields are low in India ....................... .... ...... ................................... ....... 12 3.4 Sucrose content(%) of cane is low in India ... ....... ............ ..... ..... ... ...... ........................ 13 3. 5 Average per mill capacity in India is low ..... ....... .......... .. .................... ........ ................ 14 3. 6 There are pronounced economies of scale in milling in India ........................................ 15 3. 7 Losses of sugar in cane are high in Indian mills .... .. ... .... ..... ................... ........ ... ......... .. 16 3. 8 Traditional uses of sugarcane are slowly making way for increased sugar production ................................................................................................................ l 7 3. 9 Increased area has been a more important determinant of growth than yield ........ ... .. .... 18 3. I 0 India appears to pursue a high level of self-sufficiency and an erratic pattern of trade .......................... .. ................. .. .................. ... ..................... ..... ...... ................ . 19 4 .1 Domestic retail prices of mill white sugar (real 1994 rupees) ....................................... 22 4 .2 Pricing policies favor the sugarcane sector over other important cropping sectors, increasing sugarcane's relative command of agricultural resources ... .. ........... . 23 4. 3 Policy rations subsidized sugar to all Indians ....... .. .................. ................................... 24 4. 4 Domestic prices are falling in real US dollars but are still higher than world prices ..... 26 4. 5 Growth in sugar mills has favored Maharashtra and cooperative ownership structures ................................................................................................. 30 4. 6 The average size of mills is increasing slowly but remains small... ........... ... ......... ... ..... 3 1 4. 7 Maharashtra is the biggest beneficiary of capital subsidies .......................................... 40 5 .1 Real Indian cane prices vary greatly between mills and years ......... ...... ...... ...... ... ... .. ... 5 I 5. 2 Real cane prices are fairly stable in Australia and vary little from mill to mill .............. 5 I TABLES 3. 1 Maharashtra is input intensive, Uttar Pradesh is less intensive and apparently more profitable per hectare ... ...... ..... ................... ... .................. .. ........... .. ................ ... . 11 4. 1 Actual cane price paid by sugar factories from 1988-89 to 1993-94 .................... .... ... . 33 4. 2 Adjusted price of sugarcane at 8.5 per cent recovery paid by Maharashtra and Uttar Pradesh ...................... ......... ................................................. .. ........... .. .... .. ........ 34 4.3 Input subsidies on cane cultivation in Maharashtra and Uttar Pradesh in 1995-96 ....... 36 5. 1 Effects of policy are pervasive .... ................ ........ ... ... .... ....... ....... ..... ... ... .... ............. .... 44 6. I Advantages to consumers and producers of policy reform by 2005 ........... ................... 66  INDIA ACHIEVING ECONOMIC GAINS IN THE INDIAN SUGARCANE SECTOR THE PLACE OF UTTAR PRADESH AND MAHARASHTRA EXECUTIVE SUMMARY The Indian sugarcane sector story is as follows . • The sugarcane sector accounts for nearly 2% of India's GDP and 16% of the world sweetener market. The states of Uttar Pradesh and Maharashtra, the primary focus of this study, together produce about 60% of India's sugarcane and sugar. • The sector is strongly influenced by a complex set of interventionist policies that include a dual marketing system, licencing of sugar mills, controls on production, processing, storage and marketing, cane price fixing, subsidized inputs, taxes/imposts, and frequent changes in trade policies. • If existing policy constraints continue over the next decade, simulations with an economic model constructed for the Indian sugarcane sector suggest that opportunities for economic gains of an estimated US$2 billion a year by 2005, or 30% of value added, will be missed. • Historically, growth in sugarcane production has been mostly through increased input usage. Productivity growth has been unremarkable. • Existing policies stifle productivity growth and have the potential to tax the domestic sugarcane and sugar industries relative to imports. If the dual marketing system remains in place while India opens up to imports, this could cost the economy an estimated US$0 .9 billion a year by 2005 , because the requirement to supply 35% of sugar at below market price to the Public Distribution System is equal to a 17% tax on domestic sugar. This favors imports over domestic production. Lack of competition between mills due to the licensing system, subsidies on water (particularly in Maharashtra), and other inputs, plus interventions such as the cane societies in Uttar Pradesh and government intervention in cane pricing reduce incentives for the uptake of better technology. • Changes now occurring in the Indian economy will raise costs of labor, land, capital and other inputs to the sugarcane industry significantly over the next decade. • If the Indian economy maintains economic growth of 5 % a year sweetener consumption will grow by an estimated 3% a year and sugar consumption by 5 % a year.  - 11 - • Maintaining historical rates of productivity growth will not allow production growth to keep pace with consumption growth in India. India will either need to import or to raise domestic prices . • To meet consumption growth through a liberal import policy, India could require an estimated 7 .3 million tons of sugar imports a year by 2005 if it continues to pursue its dual market policy. This would drive the world price of sugar up by an estimated 25%. • Meeting consumption growth from domestic sources (without policy changes) requires increasing estimated real sugar and cane prices by up to 35% to draw more land and other resources/inputs into the industry. It would also require import tariff protection of over 50%. • International benchmarking reveals that the scope for productivity catchup is large. By overcoming waterlogging problems, using water more economically, applying fertilizer more scientifically, allowing more freedom in the land market and using better seed, it appears yields of sugarcane per hectare could be increased considerably. Productivity gains of around 20% appear to be feasible . By achieving economies of scale in milling and using technology which allows for better recovery of sugar in cane, feasible productivity gains at mill appear to be around 25%. • Achieving this technologic~l catchup requires more market oriented policies . • With policy changes which encourage productivity growth, India could satisfy over 90% of its projected consumption growth over the next decade at world competitive prices and without tariff protection. • Production of sweeteners would expand by an estimated 50% and sugar production by 83 % at world competitive prices . This amounts to a US$2 billion a year payoff from better policies . • Given rapid income, population and sweetener demand growth and high internal transport costs, India is unlikely to become a sugar exporter over the next decade. A. What A Modern Indian Sugarcane Sector Might Look Like An appropriate vision for the sugarcane industries might be: • Internationally competitive, prosperous and ecologically sustainable sugarcane and sugar milling industries .  -m- • Providing an environment in which all participants are able to maXlffilze their opportunities and are rewarded for initiative and excellence. • Of benefit to Indian sugar consumers who are able to express their preferences and have them met for various amounts and qualities of sugar. • And for the ultimate benefit and welfare of all Indians. Characteristics of the industries and their markets which are implicit in this vision are: • International competitiveness with minimal restraints on interregional trade and on imports and exports. • A general set of commercial rules under which to operate rather than rules made specifically for cane and sugar. • Risks of producers and users being borne at least cost by those who incur them. • Rewards being able to be appropriated by those who take initiatives, and • Targeted assurance of sugar supplies at affordable prices to those in need as part of a government funded safety net. B. To Achieve Its Potential Several Key Policy Changes Are Required Allow Markets To Work This requires the following. • Complete removal of dual market distinctions between free market and levy/PDS sugar - over the next five years systematically lower the levy percentage of mill production so that by the year 2001 all production can be sold at free market prices. • Certainty of access to sugar imports without regulatory or tariff restraint - bind a commitment to unrestricted access to sugar imports by any importer with the World Trade Organization. • An ability to respond to any incentives to export sugar sold at free market prices without the obligation to pool benefits/costs with other exporters; any benefits from access to quota protected export markets to be put to general community use. • Regulation of marketers/traders be of a general nature driven solely by economy-wide commercial legislation with no special treatment of sugar as a commodity - all sugar specific commercial restrictions on stocks, finance, hedging and futures operations, forms of storage and packaging, and destinations of sales by merchants/traders be removed; licensing/registration requirements for merchants/traders be of a general prudential and/or health and safety nature and not discriminate commercially.  - lV - • Any assistance to consumers be focused on the poor and be a cost to the public purse, not a transfer from one group of sugar producers/consumers to another - over the five years during which the levy percentage is decreased, the levy price also be increased; any PDS purchases of sugar increasingly be a cost to the central government. To the extent that PDS requirements exceed levy purchases, state agencies buy sugar in the domestic free market or import, and the PDS itself be reviewed with a view to focusing on the needs of low income consumers. The costs of providing a targeted compensation to the truly needy (assumed at 20% of the population) may be around $160 million a year by the year 2005. Make Mills More Competitive And Unconstrained This requires the following . • Reduce commercial barriers to entry or to exit from milling; the only restrictions on the location and size of mills be those of general zoning or environmental protection laws - licensing be terminated as a central government responsibility; a set of objective criteria be established in each state for the licensing/registration of sugar mills which relate solely to factory zoning, environmental protection, public health and safety and general prudential requirements . • Increased contestability between mills for supplies of cane from growers and sales of sugar. New mills in new areas continue to have no obligation to deliver sugar to the PDS . New mills not hav_ e any grower delivery zoning imposed upon them and states give two years notice of termination of compulsory zoning of cane growers in existing mill areas, if it can be shown that adequate long term commercial contracting between mills and growers can be established. Terminate the mandated requirement to have mill based cooperative cane societies in Uttar Pradesh (and other northern states); encourage the devolvement of some of their functions to smaller district based bodies which can negotiate on behalf of growers ; refer other of their functions to central trade practices administrations to supervise mill pricing and payment activities . States prepare pro forma constitutions for voluntary district cane negotiating committees and pro forma contracts for relationships between growers and mills . Establish a flexible structure of grower organizations to negotiate on their behalf with mills, constrained only by general trade practices laws. If it can be shown that it is difficult to establish workable commercial contracts between growers and millers some form of zoning may need to be  -v- retained but improvements in zoning should be considered. The models used in the European Union, Brazil, South Africa and the United States which allow long term contestability between mills to occur should be examined. While delicensing is a critical step toward reform, there may be a place for zoning if successful contracting does not appear possible in the industry in the medium term. • No restrictions on takeovers or amalgamations between mills other than those of general trade practices laws; no restrictions on mill size (minimums or maximums) other than those of zoning or environmental protection laws. • Competitive neutrality of government policies between cooperative, private or public forms of mill ownership - Governments review the charter of mills in the public sector to ensure that financial targets are set and principles of competitive neutrality apply; states review the composition of boards of governors of cooperatives to ensure commercial excellence and a commercial orientation, with financial targets, of their activities; and 'sick' mills be allowed to 'die' by the removal of state tax deferments and debt underwriting. Ensure Cane Prices Reflect Canes' Contribution To Sugar Output This requires the following. • Growers allowed to obtain the price for their cane which reflects its value to sweetener production from mills which are free to compete for sugar sales. States terminate the requirement of mills to pay SAPs (state advised prices); central government retain the SMP (statutory minimum price) but it be set at no more than 70%, of expected market realizations, it rise by no more than the rate of consumer prices in any year, and it be a minimum first payment by mills on delivery of cane. Every effort be made by states to encourage payment for cane on the basis of the grower's cane sugar content. Growers be free to negotiate individually over pricing and payment conditions with individual mills, but states encourage the formation of district negotiating committees (groups of growers) and contracting arrangements between growers and mills to overcome the problems of too many small growers. This could be formalized to incorporate the ideas about payment of cane on sugar content and zoning mentioned above. A price transparency body in each state be given statutory authority to audit all sugar mills and publish information about the basis of payment and the average and range of returns paid by mills to growers; this preferably be a general price transparency body rather than one established solely for the sugar industry.  - Vl - • Growers required to face up to the risks of the marketplace and enabled to adopt risk management strategies which can most effectively be made at the farm level. • Minimal political direction and administered discretion in price formation. Get Subsidies And Taxes On To A Value Added Basis This requires the following. • Such interventions as occur through input or output prices be broadly uniform across competing activities but phased out as the Indian economy continues to be deregulated and opened to the rest of the world. • Any soft credit arrangements which operate be equally available to all agricultural or agriculturally based processing activities. • Water and electricity pricing mechanisms for agricultural users be based on usage and cover (at least) operating and maintenance costs. • Any taxation of sugar mills be based solely on value added and be levied at ad valorem rates . Ensure Current Technology Is Disseminated This requires the following. • Funding of research and extension be predictable. • Existing backlog of known technology be effectively extended to cane growers and sugar mills. • Research and development anticipate priorities for productivity improvement such as labor usage in mills and cane delivery and payment systems. Ensure Infrastructure Is Maintained And Developed This requires the following . • An improvement in the productivity of infrastructure use and an assurance that infrastructure is maintained. • Infrastructure be expanded only as seen to be economically justified and to have a greater payoff than using existing infrastructure more productively.  -VII- Review Administration With The Aim Of Getting Better Coordination This requires the following. • A reduction in the number of departments, commissions and agencies administering cane and sugar policies. • Incorporation of cane and sugar policies into broader agricultural and manufacturing sector policies which take economy-wide objectives and consequences into account. 1. Introduction 1. 1 India's sugarcane based industries have been among the cropping sector's fastest growing industries over the past four and half decades. As well as having a suitable tropical and sub- tropical climate, good soils, cheap labor, fairly reliable water supplies, a big domestic market and a long history, India's long held agricultural policy stance has been particularly favorable for the growth of the sugarcane industries: • As an intensive user of fertilizer and power, subsidized agricultural inputs may have been an impetus for growth. • As an intensive user of water, big public investments and subsidies to private investments in irrigation have been favorable. • As a highly capital dependent agroprocessing sector the sugarcane crushing sector has done well from the state and central governments' capital subsidies favoring cooperatives. • As a supplier of food items - sugar and gur - with relatively faster consumption growth than many other major food items, government's strong preference to avoid food shortages has led to relatively higher levels of price protection for sugarcane based industries than for most other important crops. This has been done to encourage growth in supply to match strong growth in demand. 1.2 On the face of it government policy has had a big influence on the size, growth, location, structure and behavior of India's sugarcane based industries. Moreover, because of the particular characteristics of the sugarcane based industries, policy interventions may have had a more dramatic effect on these industries than on most other rural industries. Knowing how policy interventions have affected the sugarcane based industries is critically important in assessing the efficiency and suitability of current policy. But given the rapid policy and economic changes now occurring in India, it becomes all the more crucial to know how policy intervention affects the efficiency of these industries and their ability to operate and compete in a fast changing economic environment. 1.3 The aim of this study is to analyze how policy interventions affect the current and future economic efficiency and competitiveness of the sugarcane based industries in India's two most important producing states: Uttar Pradesh and Maharashtra, and from this, to identify policy changes which might increase the efficiency and competitiveness of the sector. A. Sugarcane Based Industries Are Important To The Indian Economy 1.4 Internationally, India's sugarcane based industries are impressive. India produces nearly a quarter of the world's sugarcane. But of more importance than the size of Indian sugarcane and its derived products in a world context is their role within India itself. In meeting India's requirements for sweeteners, with occasional exports and occasional imports, the sugarcane based industries account for nearly 2% of India's GDP and employ over 20 million people. Sixty percent of India's  -2- sugarcane production is concentrated in Uttar Pradesh and Maharashtra, g1vmg these states particular incentives to see that sugarcane based policies guarantee efficient resource use. 1.5 India's economy is growing rapidly, creating new demands for sweeteners and changing patterns of sweetener use. It is also creating new demands on resources, changing their relative prices and creating pressures for changed patterns of resource use and for productivity increases. 1. 6 Much of India's current economic dynamism is arising from its preparedness to cut through old patterns of regulation and allow its industries to respond to world market forces rather than protect them from changes occurring in the outside world. As part of this reorientation, regulatory barriers to imports of sugar (and to a lesser extent to exports of sugar) have recently been liberalized. Yet a complex mix of internal taxes, subsidies, licenses and regulations which has grown with time continues to shape the production and market environment of cane and sugar. Many institutional, regulatory and infrastructural restraints prevent the industry from adjusting and innovating in ways which international benchmarking studies suggest could greatly improve its productivity. Government pricing and taxing policies are also causing resources to be used inefficiently within the industry. I .7 If these issues are not addressed the industry may not be able to achieve the productivity gains needed to meet the rapidly expanding and changing sweetener needs of Indian consumers, or be able to source supplies within India at least cost. Also, unless the industry is permitted to adjust more freely, it may find that the international competitiveness deteriorates as the real costs of labor mcrease. This has occurred in other developing countries experiencing rapid growth. B. About this study I .8 This study focuses on the industry in the two main producing states of Uttar Pradesh and Maharashtra. Uttar Pradesh is by far the largest cane producer in India, while Maharashtra is the largest producer of sugar. Apart from the significance of their size, these two states offer useful contrasts of production environments as well as of policy constraints. Maharashtra is a south- western state which enjoys higher cane yields and extraction rates, but may be more restricted in its access to water supplies for future expansion. Uttar Pradesh in the north suffers from a shorter growing season but has more potential sources of water. 1. 9 Cane pricing and sugar taxing policies also differ between these states, though both operate within the central government's common policy on mill licensing and control of sugar to the public distribution and ' free market' systems. The states of Uttar Pradesh and Maharashtra thus present a rich set of environmental and policy similarities and contrasts with which to assess the efficiency and sustainability of cane and sugar production and of their potential development. l. l 0 Focusing on these two states, this report sets out to clarify the effects which various government policies, institutional arrangements and technological and infrastructural constraints are having on the sugarcane industry and its derived products. It is based on extensive discussions with government and industry participants, and has integrated the ways in which various state and union government policies relate to each other through the use of a detailed economic model. This model takes into account the production and market characteristics of the various regions of India and of transport linkages between them and with the rest of the world. From the lessons learned, a number of reform priorities have been identified and proposals made which are designed to build on the industry's current international competitiveness and better meet the social and economic objectives of both states and of India as a whole.  -3- 2. Main Economic Features of this Sector 2. 1 Fram an international perspective the distinguishing structural and organizational features of the sugarcane based industries are as follows . Structurally: • Their remarkable size and strong growth in production and consumption; • The high proportion of cane used for the production of rudimentary forms of sugar: gur and khandsari, and the ability to switch cane between the output of sugar and these two alternative products; • Specialization in producing mill white grades of sugar instead of raw and refined sugar; and • Import and export swings which are big enough to affect the world market price. Organizationally: • Different policies applying across states; • The high reliance upon cooperative ownership of sugar mills ; • Government's role in: Controlling the supply of sugar milling capital and in sustaining ' sick mills '; Creating a dual priced market for sugar to guarantee the supply of a minimum level of consumption to all consumers ; Almost completely restricting competition between mills, regions, states and product outputs over others and directly favoring some mills, regions, states and product outputs over others; • Administration of sugar policy by a large number of state and central government departments; • The nature of government intervention in affecting the terms and conditions of cane purchased by the sugar industry; and • The concentration of intervention on the sugar industry and almost complete lack of intervention over the gur and khandsari industries . 2.2 Domestically and within Indian agriculture, the distinguishing structural and organizational features are as follows . Structurally: • High profitability of sugarcane over other crops; • High dependence on irrigation and electricity to pump water; • High dependence on fertilizer, especially nitrogenous fertilizers; • Dependence on capital for agroprocessing; and  -4- • Strong growth in sugar and, to a lesser extent, gur consumption. Organizationally: • Relatively high levels of effective insulation from international market forces compared with most other crops; • Reliable, guaranteed and protected (and therefore relatively risk free) marketing channels compared with other crops; • Big barriers to entry in sugar milling and cane growing for sugar milling; • Government subsidies for sugar milling capital; and • High political sensitivity. The Essence Of The Sector Is Captured In An Economic Model 2.3 The economic features listed above are those we concentrate on in this report. They are the features which may critically affect how the industry might respond to changes in future economic conditions . And mostly it is these elements which we have combined in an economic representation (model) of the sector to assess how various economic and policy changes could affect its future. Further details of these important structural and organizational features of the industry follow in the next two chapters . 2.4 Like all economic models the Indian sugarcane sector model used here is a simplification of the workings of a highly complex and interrelated system. Those factors believed to be of little importance are excluded. A modeling framework helps us identify and illustrate the important economic links and interactions . 2.5 The main regional and subsectoral links and interactions likely to impact on the future of the sugarcane sector and which we h~ve represented in our model are represented in Chart 2.1 . The main inputs used, the main growing states, the uses of sugarcane, the outputs, marketing and trade are represented. 2.6 The model takes account of: • Sugarcane production by the five main producing regions - each region differs in size of production and productivity in terms of how intensively it uses resources per unit of output; • Sugarcane's demand for land, labor, capital and other purchased inputs and the nature of supply for each of these inputs by five regions; • Production of sugar, molasses, gur and khandsari by the five regions, - regions differ in their pattern of sugarcane use ; • The derived demands of each product output above for labor, capital, sugarcane and other purchased inputs and the nature of supply for each of these inputs by region; • The final demands for sugar, molasses, gur and khandsari by five regions and the costs of transport and marketing, regions differ in their pattern of sugarcane use and their consumption of sucrose sweetener outputs ; • Interregional trade links between the five regions of India;  -5- • Each regions ' links to the world market and India's ability to influence the world price of sugar; and • Policy mechanisms such as : The dual marketing system represented by fixed quantities and the fixed levy price to consumers and mills and a market determined price for sugar, gur and khandsari; Mill licensing represented as intervention in the supply of milling capital to the sugar industry and the nature of productivity increases permitted; Cane pricing, represented as fixed, non-market determined pnces to canegrowers and the nature of productivity increases; Subsidized inputs, represented as below market prices for inputs; Taxes and imposts, represented as price wedges along the value adding chain and captured in the nature of the supply of land; Infrastructure development, captured in the nature of the supply of land and the nature of productivity increases permitted; and Restrictions in land ownership and labor laws, represented by the nature of productivity improvements permitted. 2. 7 The model has two important components: • The main market relationships described by industry output, cost data, input use structures and policy interventions; and • The behavior of producers and consumers described by well accepted econorruc theory. 2.8 The model is used to organiz~ a great deal of available information in a systematic way and to provide a consistent framework for analyzing economic and policy changes . In appendix A, Table A. I, much of this information is set out. A summary of data is given in Table B. l in appendix B. Much of this information is discussed in chapters 3 and 4. The economic theory underlying the model and details of the model 's structure and parameters are discussed and set out mathematically in appendix A. 2.9 We can use the model to trace how events and policies affecting one economic activity or product of the sector affect other activities or products because all parts of the industry - cane growing, milling, gur making, trade and consumption, etc . - are linked. This gives us the capacity to address (in a consistent way) a wide number of ' what if issues such as: • What are the impacts of rising wages costs? • What are the effects of increasing income and expenditure on sweeteners? • What will happen if subsidies or taxes are removed? • What will happen if the dual marketing system is dismantled? • What will happen if licensing is removed? • What will happen if changes in infrastructure or extension lead to productivity growth in various parts of the sector? Chart 2.1 Regional and sectoral representation of India sugar model Sector Input Inputs - land labour-capital-other Inputs use Cane Uttar Pradesh Maharashtra Tamil Nadu Karnataka Other growing Direct consum- ption Sugar Kha- Seed, Sugar Khand- Seed, . Sugar Khand- Seed, Sugar Khand- Seed, mo!- dsari Gur juice mola- sari Gur Juice mola- sari Gur Juice mola- sari Gur Juice & feed sscs & feed sses & feed sses &feed Processing : ~ .---.. - ... --------.-.-.. - ----·1 ---- ·--- ------ .-- -.. ----.------------ .--------.. ----- ·1 .-------- ·----- -- .-.. - .-... - .--... ---·1 ·.--.------------ .-- ~ Outputs Sugar and molasses Gur Khandsari & molasses I I Marketing Levy Free Exports Sugar PDS markets imports 1 Rest of world Trade production/ consumption ~ •r ,. ,. ' p l ' l v / ' / ' / "\ / ' / " Households and Industry I Utt~r Pradesh '.._ I I '- Maharashtra I l Tamil Nadu I .) '\.. K.;rnataka I I '- Other  -7- 3. Structural Features in Detail 3 .I The main structural features of the sugarcane based sector are summarized in Chart 3. I . Chart 3 .1 is derived from the model data in Table A. I. It shows how much sugarcane is produced by important states, how sugarcane is disposed of between sugar, gur and khandsari, the proportions of products consumed for all India and various states, in which states these products are produced and in which proportions, the implied trade between main states and a breakdown of value added. A. Many Small Farms, Hundreds Of Mills And Millions Of People Produce 0.25 Billion Tons Of Sugarcane And Over 20 Million Tons Of Sugar/Gur. 3 .2 Sugarcane is an important component of Indian agriculture. Its 5 million growers, together with their 30 million dependents, account for about 7% of the country's rural population. Sugarcane occupies some 3. 7 million hectares or about 2% of agricultural land. 3.3 Typically areas under cane are less than one hectare in size. However, because sugarcane uses fertilizer and water more intensively per hectare than many other crops it generates proportionately more farm income than it uses land. Moreover, because it must be processed quickly after harvest and close to where it is grown, it attracts significant agroprocessing activity to rural areas and so plays an important role in rural development. 3.4 . Sugarcane also appears to be a highly profitable crop relative to all others . Chart 3.2 shows sugarcane profits per hectare have been many multiples of other crops . Although this may be misleading due to the longer time period taken to grow cane relative to some other crops and its high dependence on irrigation water (see box 3.1) ~ it is consistent with information given to us repeatedly in the field. Moreover, because the costs of irrigation water is highly subsidized and therefore sugarcane may not be such an attractive crop from the community' s point of view, it does appear to be profitable from a private or individual grower point of view. 3.5. With a value added of around Rs 135 billion (in 1993-94) the sugarcane sector contributes about 5% of India's total rural value added. The sugarcane based industries account for about 6% of Uttar Pradesh 's Gross State Product and about 3% of Maharashtra's. These industries are fairly capital and land intensive - Chart 3. 1, panel 3. B. Uttar Pradesh And Maharashtra Are The Dominant Cane Producing States. 3.6. Sugarcane is grown in most states, but is concentrated in two principal regions - Chart 3. I , panel I . The largest area is in the semi-tropical Inda-Ganges plain in the north which stretches from Punjab to Bihar. The area grown in the tropical belt to the south, which stretches from Maharashtra to Tamil Nadu, is not as extensive but has significantly higher average yields. 3 .7 Uttar Pradesh in the north accounts for about half the area of sugarcane grown in India. The crop is typically grown over a period of ten months, with a different crop raised over a four month period between successive cane crops . Some 70 kilograms of fertilizers per hectare and 40 to 60 cm of irrigation water in 3 to I 0 waterings are typically applied ·to the crop, to yield some 58 tons cane per hectare per year in 1994-95 (Table A. l ).  8 Chart 3. l The sugarcane sector is large and diverse Based on 1994-95 data Producfton by atate and product Utter Prodeah producea the most sugar but uwa even more llUgOl'COl"l9 fOt Qlf ahatashtra PfOduC8S sugol'. 248 mllllon tonnes of sugar cone Tamil Utfar Pradesh Mct\otashtro t<anatakc Other Nadu 'C 0 Sugar Gur ~ Othe1 s IC s GI~ s 0 s G 0 g 0 ' I ' .. I I 100 ' ' I 1&0 -. -. l 200 Conunplon bV product and state and lmpled trade: Utter Pradesh and Maharosntro ~ ocout hat thei sugar to other 1tate1 a'ld Ufta·Pradesh •JCPOrts two thlrd5 ot Its BJt to other states. -c:: Sugar Gur ~0 Other 2 UP M TN K 0 UP 0 UP UE 0 ~ uttor Maharashtra ~ 0 other UP M 0 UP UF 0 Pradesh ~ ~ 0 B. ¥ ' ' I ' ' ' ' I I ' 5 10 15 20 Value added by aub-Mctor and facton of production: 70 per cent of voue adding Is In cane growng md 1he ndust1y ts tatrtv land and capttol lntens!Ye Vaue added at domestic prices of Rs 135 billloo f? °C 0 g u 3' Growing Sugar MIUlng :; 6 <.D ~ ...... ...... Labour Capitol and land ~ ~ lbr C&L L u u Alb 0 I ' . I 20 I ' . I 40 I 60 ' I 80 I . ' 1 100 I I 120 Note Dato on proportions of cane to gur end khandsOrl Is based on FAO and extensive Interviews. Mahatoshtro 's shore of totol sugar production ls larger than It's shore of total sugarcane production used for sugar production becat..M It's yields ore higher. Data source: Tobie A. l (see model data In appendix A.  -9- Chart 3.2 Sugarcane appears to be considerably more profitable than other crops Relative profitability per hectare of different crops in India during 1980s (Sugarcane = 100) Net profit/ha II ~fri:i;F~~i~fg;i}~•111;~s11i!ar~#~ and ii .. . . ·• . . . .. . ' . . ' ~I 21 I 0 c 0 E ~ ...... . .. . ...... ;::.... ~ E ;::.... 0 ... rJ) • .. .. E c c ~ 0 N c ~ .... ...... 0 .• cc .... c ~ ..... ._., ...... ~ ..... cc •t; • ~ ..... ~ 0 ~ ~ u ~ ...... .... ~ Ci3 ::l ... ~ ~ 0 ..... 'i: • ~ ..... u c ::l ;::.... ~ ~ 0 u ~ • i:;::: c ::i • ~ • ...... ~ • ::s V'1 ~ ~ • • ...... 0 V'1 a Relative profitability of major crops in Maharashtra during 1980s (Sugarcane = 100) Sugarcane ;:::::}\/i?:P:.":i Sugarcane ... ,_::·'.':.:-::: : : .::9-cF ·.·. ::·_·:-:::::::=-:::.;::-:-:·::::: ········ ioo>: ,, = :.(e.~\ ·::::::::- :::,zo :· :·:~HHf /t :-_.: .· aoo ,:: ··· .60 :-: :··.:=: : Sunflower :::50:.:· : ~-­ .:.:.cm.:: ::.:40 ::· :::·30·:: Sunflower ::20''.' .. {<r=::.:· : -· _ :1· :- - - .'Jnd&X: ""' ··:::::index: , .· ·.. : ru~l~iv., ·pr9fib/~o : :.: :.: .. : ,:.:R.~t*Y:': ~r~~~~/tt~lf!lO"tn:.:, Relative profitability of major crops in Uttar Pradesh during 1980s (Sugarcane= 100) d" :::-e.: :100:..,, ::i-·· ...·......~-------------....... ... : _._...._~--------------- . l:OO :.,, Sugarcane .. ·:9o· · .... ···>·9t{ Mustord :,:,ao · .... ·ao:. :: t20::: . :-=70: ur .~cl" .sq • :40: . :ao·· .10: .. J: .-:. ,:Index ·~-~~ ·'· ·•)~~fcaji~e :p:r~fit.S/hc : Remarks : During 1990s. oilseeds hove somewhat improved their relative ranking. but still ore way below sugarcane due to differences in duration of crops. Source: Mission Estimates using CACP data ..  - 10 - Box 3.1 Sugarcane is the most profitable crop but ••• Although sugarcane appears to be the most profitable crop on a per hectare basis (Chart 3.2, a and d), it is worth noting a few caveats. First, sugarcane is a longer duration crop and so needs to be compared to at least two crops in Uttar Pradesh and three in Maharashtra. This we have done by estimating relative profits per hectare per month in band e in Chart 3.2. Still sugarcane remains the most profitable crop. Second, sugarcane relies much more on irrigation than other crops and so profitability needs to be compared relative to how much irrigation water each crop uses as well. When we do this in c and f the relative ranking of crops changes dramatically. Crops such as sunflower and jowar turn out to be far more profitable. These results perhaps help to answer the question we raise in Chart 3. 2: why more resources do not flow into sugarcane production. The constraints to expansion of sugarcane come from restrictions on milling capacity on the one hand and may be from scarcity of water on the other. 3.8 Maharashtra in the south has India's second largest state area of cane. With significantly higher yields per hectare than in the north (87 tons in 1994-95 - Table A. l), it accounts for about 15% of India's cane production. Maharashtra has typically has a longer growing season than Uttar Pradesh with some cane grown over a 15 to 18 month period (adsali crop). With a longer growing season and warmer conditions throughout the season than in Uttar Pradesh, Maharashtra cane receives significantly more fertilizer and irrigation, typically above 5 00 kilograms of fertilizers per hectare and 200 to 300 cm of water in 20 to 25 waterings. Maharashtra Pays High Input Costs, Uttar Pradesh Profits From Low Input use 3. 9 Although Maharashtra achieves much higher yields per hectare than Uttar Pradesh, its profitability per hectare is around 15 % less than in Uttar Pradesh due to its high reliance on other purchased inputs and labor - Table 3 .1 and for model data see Table A. l . Uttar Pradesh's input structure reveals its greater resilience and flexibility as a sugarcane supplier than Maharashtra. The profitability of sugarcane production is more highly dependent on the continuing supply of labor and other purchased inputs at current prices than in Uttar Pradesh. A 70% increase in these costs would totally erode profits in Maharashtra, whereas it would take a 160% increase in these costs to do the same in Uttar Pradesh. Moreover, while labor costs are likely to rise with increasing national income in both states, the possibility of increases in the costs of other purchased inputs appears much greater in Maharashtra than Uttar Pradesh. For instance, the continued development and increased supply of cheap subsidized water for the Maharashtra industry seems unlikely to continue at the pace experienced historically . The price of water could rise substantially in Maharashtra in the future and greatly reduce the attractiveness of sugarcane production. Such factors influencing the nature of supply are built into the modeling framework. And Yields Appear To Be Slipping In Maharashtra 3. 10 Although Maharashtra has a higher yield per hectare than Uttar Pradesh, it does not receive a higher yield per kilogram of fertilizer or per megalitre of irrigation water, which are probably scarcer resources than land in the state. However, there has been a tendency in Maharashtra during recent years for less adsali cane to be grown and more cane to be grown as a strictly annual crop . This reflects the increasing scarcity of water in the state. Adsali crops must face two dry seasons rather than one. The incremental benefit in yield of adsali over annual crops reduces sharply in terms of per unit of water. This has been leading to a reduction in average water use and yield per hectare of crop harvested.  - 11 - Table 3 .1 Maharashtra is input intensive, Uttar Pradesh is less intensive and apparently more profitable per hectare Break up of gross revenue per hectare into components of costs and profit (1990/91) Returns to Maharashtra Uttar Pradesh Percent Percent & Percent Percent & (Rs/ha) (Rs/ha) Land and Management 37.77 56.12 (8871) (10147) Land 16.67 18.42 Management 7.89 6.23 Profit 13.21 31.47 Labor 25.66 20.78 (6027) (3757) Human 22.93 18.14 Bullock 2.73 2.64 Capital 8.50 9.17 (Machinery, working capital) (1996) (1658) Others 28.07 13.93 (Fertilizer, seed, irrigation, (6593) (2519) manure, miscellaneous) 100.00 100.00 Gross Revenue (23488.04) (18081.03) Source:: Mission Estimates based on Report of CACP on Price Policy for Sugarcane for 1994/95 season .. Seed Costs Are High Because Only One Ratoon Crop Is Produced 3. 11 It is common practice for a single ratoon crop to be grown following a seed crop in both Uttar Pradesh and Maharashtra. Generally, the ratoon crop does not yield as highly as the seed crop. In regard to the number of rato~n crops obtained from them, India does not seem to perform as well as other major producing countries. In Australia for instance it is common to have four or five ratoons crops with some producers having many more. In Australia where seeding needs to take place only once every five or six years and yields are considerably higher, seed costs per unit of output are very low. In India seeding is taking place about every second year and yielding less. Seed costs as a proportion of production are high at around 6%. Further there was some suggestion from regions we visited that very little of the seed cane was treated compared to in other countries. The productivity of seed is also possibly low. Internationally Irrigated Cane Crops Typically Give Higher Yields 3 .12 Compared to other major cane producing nations, average Indian yields appear favorable (Chart C. l in Appendix C). However, these data may overstate India's performance. First, because of the importance of adsali in some parts of the country, Indian sugarcane crops grow for longer periods than in other countries. Second, a higher proportion of the Indian crop is irrigated than in the other countries in the chart. Tropical irrigated regions such as the Burdekin in Australia has yields averaging 125 tons per hectare (even with a high proportion of ratoon cane), while irrigated crops in Southern Africa in Zimbabwe, Swaziland and Malawi typically achieve yields of over 100 tons per hectare. By comparison, Maharashtra is achieving yields of between 80 to 90 tons only and which are grown over a longer period (Chart 3.3). More details on yields in India are given in appendix C and D. The differential state yields are captured within the model data.  - 12 - Chart 3.3: Irrigated cane yields are low in India Note: Annual yields for Maharashtra are derived using an average growing period of 14 months (see Appendix D). Source: Australian Yearbook, FAO, ISMA. Internationally, India's Cane Quality Does Not Compare Well 3. 13 Chart 3. 4 shows that the sugar content of cane is generally low by world standards except for Maharashtra - see Appendix C. But even Maharashtra may not be good compared to a world best practice benchmark. In Australia sucrose content ranges between 13 and 15% compared to Maharashtra's less than 13 %. The maximum average sugar content for any country is indicated in Chart 3 .4 to be 14 .44 %. Chart 3. 4 Sucrose content (%) of cane is low in India Maximum average 14.44 ~ -12.5 0 ti ::i . VI .. ,.2 '#. 11.5 ·11 . .. . . .. .... . . ··· ·· . ::~e0di9Q : s~~ :wp?:tJP.eis . ;, :::; j:J:9.t91)tj~i.q : ;./:;:: :... "M.:ohfaqs.htr~ .: .. · :: :<• .,, .J~n~on: -::: a: ::::~1:t.~~~~M: , : .::<:·1 L:s61Ho11: , .. ,,',.n ·:., 9:1.12~93/4 , ,,, __ ,,,,,,,,,,, Source: : Mission Estimates and LMC International.  - 13 - C. Uttar Pradesh Is The Main Producer Of Gur And Khandsari 3 .14 Uttar Pradesh and Maharashtra represent the extremes among the Indian states in the ways in which sugarcane is utilized. In Uttar Pradesh, more than half of the cane supplies are typically processed into gur and khandsari (mostly gur, although there is some suspicion that estimates of khandsari are underestimated to avoid taxes) . In Maharashtra, on the other hand, by far the largest proportion of the cane is processed into sugar - Chart 3 .1, panel 1. 3 . 15 Uttar Pradesh accounts for some two-thirds of all the gur and khandsari production in the country. Because the scale of gur and khandsari production units typically is small, and gur producers can operate without license and are largely free from taxes or other regulations on their supplies of cane or their output of product, they are able to maintain steady quantities of cane use by altering prices and purchase scheduling in ways which are not available to sugar producers. Consequently, uptake of cane by sugar factories in Uttar Pradesh may be more variable than uptake by gur or khandsari producers. 3. 16 Because of their less sophisticated means of extracting sucrose from cane, gur and khandsari manufactures recover less overall sweetener per ton of cane than do sugar mills. This is captured in the model data - see Table A. I. D. India Is A Big Producer Of Byproducts 3 .17 Sugar factories produce not only white sugar, but also earn revenue from the sale or further processing of byproducts, the principal of which are molasses and bagasse. Khandsari producers also produce molasses . 3 .18 India is the largest world producer of molasses, partly because not as much sugar is extracted in the milling/refining process in India as is the case of other major sugar producing countries . It is primarily used in the production of industrial alcohol and alcohol based chemicals and for animal feed. 3. I 9 Molasses prices and sales have had a long history of central government control which. directed supplies to the chemical industries. This had the effects of retaining a molasses base for many organic chemicals when other countries were transferring to oil-based feedstocks and of minimizing exports of molasses. However, molasses from khandsari manufacture and the molasses in gur were largely exempt from these controls . All central government controls on molasses were lifted in I 993 though Uttar Pradesh and possibly some other states subsequently reintroduced them to a limited degree. 3 .20 Many factories also have integrated distilleries, and some have further downstream chemical manufacturing plants which add considerably to factory revenue. Alcohol production is closely monitored in all states for excise collection purposes . 3 .21 The other important byproduct of sugar manufacturing is bagasse, which is used partly for the manufacture of paper pulp. India uses bagasse as a source of paper pulp to a greater extent than any other country in the world. However most bagasse is used as a source of power generation within the factories themselves. Interest is being expressed in increasing the efficiency of bagasse use by cogenerating power to be fed into regional electricity grids. 3.22 Press mud, which is prepared from precipitate at the time of boiling and clarifying cane juice, is also sold by factories as a fertilizer.  - 14 - E. India Produces 20 Percent More Sugar Than Brazil But Has Four Times As Many Mills 3.23 There are around 400 licensed sugar factories in operation in India - see Chart 4.5 . Sugar produced in all factories is ' mill white ', which is a stage beyond the common 'raw' sugar output of many sugar mills world wide, but not taken as far as ' refined' sugar which is the usual form of consumption in high income countries . There is virtually no sugar refined in India. Chart 3.5 Average per mill capacity in India is low ..·...·........ ·.····.······.··.···.··········.··.···· ..... . ······ · ···· ···· :: ~ :aodti :·:;.;;.;,;;::·:::::::::::::.: : :<:.:.::·::=::::;::·:·::·::= : :::.:::.: :;::::::::·:·.·:: :-:.···:·:;.- .. . .. .. ... : . : !-:-H n~-~-~ ~.;:~.::~ ~ :-:·:.: :.: ::.: :: . .. -· Maximum average 10368 - :700Q{ :. ~ : ~btib!! . J~!! .: ~ :2~q::. :iooo:.- :: o.· ::.:::. lea:dir1g: ca~:: P.~9Gil/:9$rs ::=: • : : jq+a(india:,;' >N.\ar.i9f$shtf:(:t(/t.Y:+:-:::>'tiP. -.:- ......... ::::;:>::rn ft·.:~:i:!ql.~~1:6 L( : :><iii ::s6f7-90!L: ... ::;.u~'{-!:ti:: /~1J.~-·9~)4L: . Source : M ission Estimates and LMC International. 3.24 Most Indian sugar factories are cooperatives (60%), followed by privately owned (25%) and a smaller number which are publicly owned (15%) . Partly because of poor rural transport infrastructure but also due to licensing restrictions, the average size of sugar factory is small by world standards, installed capacities averaging less than 2300 tons per day. In other major cane producing nations (Australia, Brazil, Cuba, Mexico, South Africa, Thailand and the United States) the average daily milling capacity is nearly three and half times this - Chart 3 .5. The average size of sugar factories is about the same in Maharashtra and Uttar Pradesh . In all states, growers are zoned to deliver cane to particular factories . In any state, a factory may receive cane from up to 35 000 growers . 3.2 S Despite these similarities, Uttar Pradesh and Maharashtra also represent the extremes among states in the ways in which sugar factories are owned and operated. Virtually all (95%) of the factories in Maharashtra are cooperatively owned by cane growers . The small number which arc not cooperatives are privately owned. In Uttar Pradesh, on the other hand, the state' s factories are far more evenly spread among the various forms of ownership, 29% being cooperatives, 39% private and 32% publicly owned.  - 15 - Chart 3.6 There are pronounced economies of scale in milling in India US$/ton ··-·.··· •.• .. ... . ..... . ··.······ .. ·····. ::::-:-:-: ····::::::- Since the mid- l 980s milling costs in Australia have been reduced 30 percent by expanding throughput 40 percent beyond this point :::9. :: ... \8 .:7 .:= Size of Average Indian Mill Note Allowance has been made for increasing costs of cane transportation as mills get bigger and must gather cane from further afield. Mil/size Processing costs Net saving in processing Extra cone freight, etc. Overall net reduction in costs tcd US$/ton of sugar US$ US$ US$ 2150 125.00 2500 117.50 7.50 2.50 5.00 4000 97.50 27.50 9.50 18.00 5000 87.50 37.50 11.50 26.00 10000 75.00 50.00 18.00 32.00 Doto source : Derived from LMC International accounting/engineering data. Internationally Indian Mills Do Not Compare Well 3 .26 The smaller size of Indian mills relative to those in other countries prevents India from capturing the economic gains from economies of scale. In Chart 3.6, the relationship between unit costs of production and daily throughput is shown. There is no evidence that there are diseconomies of scale in milling. In Thailand and Brazil there are mills with daily capacities up to 40,000 tons, which is four times greater than the maximum size considered in Chart 3.6. There may well be further economies of scale beyond the 10 000 tons a day indicated. In Australia, milling costs have been reduced by around 30% since the 1980s by increasing mill throughput by an average of around 40%. 3 .2 7 As well as being smaller than their foreign counterparts, Indian mills have substantially lower rates of sugar extraction. In Appendix C we show that about 22% of sugar in cane is lost in processing in India compared to an average international benchmark of around 17% - also see Cchart 3 7. This is even worse when compared to international best practice, taken to be Australia, where losses are around 10.5% or less - shown as the maximum average extraction of sugar of 8 9. 5 % in Chart 3. 7. The low extraction rate or high losses in India represent serious losses of productivity. As seen in Chart 3. 7, the losses in Maharashtra are not as serious as elsewhere in the country but remain high compared to, say, Australia. 3 .28 The high cost of milling in India and relatively low recovery rates are captured in the modelling framework - see Table A. l.  - l6 - Chart 3. 7 Losses of sugar in cane are high in Indian mills -· - ·- ·········· :. 90,:":. . . . .·.·.·-;. · · '[ stf Maximum average 89.5 Source: Mission Estimates and LMC International. F. There Are Large Differences In Patterns Of Consumption Across The Country 3. 2 9 India's consumption of sweeteners is about 22 kilograms per person. This is made up of 14 kg of mill white sugar and 8 kg of gur/khandsari. Although overall per capita consumption of sugar is low by international standards (average for the world is 20 kg, rOllghly comparable with India 's consumption of all sweeteners), it has been rising steadily. But there are large regional differences within India - Chart 3 .1, panel 2 and Table A. I . In Uttar Pradesh, which has a largely rural population, sugar consumption and gur/khandsari consumption are both about I 2 kg per person . In more highly urbanized Maharashtra, sugar consumption is about 24 kg per person while gur/khandsari consumption is only 4 kg. G. Sugar And Gur Are Traded Domestically More Than Khandsari 3 .30 Well over four million tons (about a third) of sugar is traded across state borders each year. Uttar Pradesh and Maharashtra together export most of the sugar to other states - Chart 3 .1 panel 2 and Table A. I . Gur and khandsari are typically produced to service more regionally limited markets reflecting considerable regional/state differences in tastes . Although Uttar Pradesh appears to export nearly two thirds of its gur to surrounding states Maharashtra however neither produces nor consumes much gur. In relatively unprocessed form as much as 12% of sugarcane appears to be used for seed, feed, chewing . H. Growth In Consumption Is Strongest For Sugar 3 .31 Sugarcane and sugar production grew strongly in India from independence to the early 1990s - Chart 3.8. Although carryovers from the large 1991 crop and failure of the monsoon in 1993 caused production to decline sharply in the 1992 and 1993 seasons, growth returned to trend in 1994-95 . Much of the growth which has been occurring in sugarcane production has been reflected in a more than proportionate growth in the production of sugar, since, with rising incomes and urbanization, consumer preferences have shifted towards sugar. 3 .32 Since the late 1970s production of cane for sugar milling has grown more strongly in Uttar Pradesh than Maharashtra. Production has approximately doubled in Maharashtra and increased  - 17 - by 150% in Uttar Pradesh (ISMA data). These comparative rates of growth perhaps reflect the less severe resource constraints faced in Uttar Pradesh compared with Maharashtra. Chart 3. 8 Traditional uses of sugarcane are slowly making way for increased sugar production . ::4o-O + ;· ;.; . ---...;.,;;;,;....;.......;...._ _ _ _ _ _ _- - - - - - - - - - - - - - - - - - - - - - - - - - - - :::,;,...; / 350/ :,~)/ '!: : l.-OP: ( ·'' so::: ... ·.·::o;: '" M:, '·' ~ ::: : ~ , ,. ;~:'_,,,:t9.· :;' ~ : ·=' ~ :=. As::;.'::~ U)$''.: .: ; :, · · ···· ·.·.... . ·.· ·.= ,:.' ,·: .': : ~ ·: ,'.· : · ~ : . .•, ~ ::2 ~ ··" · · :. : ,·.',:.,•.,·•.,:~ .·,;.','.,:·.,'.. . .· ;. ,;·':·_. ~ .....':'·':' ,· •. :.. ·· .. :·.'.': :.·=·~ ·. ,~ , ,~· : •·:~1r. · ~ . ·: g: ... :;:-:::::~_:-, , ,~ •,: ·~ , .. : '~· ,..: ~.=- ::~, .::~f ">~::;:.: ~ < ~ t-.:~: :::: ~ :·wy~':::: ~ ''· . .. ' .. .. ... .. .·: : : :_:.;.~ :·: . . ....·. . .. . .. . ' ' . . . .. .. Data source: ISMA I. Increased Area Accounts For Sixty Percent Of Growth In Sugarcane Output 3.33 Chart 3. 9 shows the strong growth in sugarcane production, especially since the early 1970s. The high reliance of growth on increased areas being sown to sugarcane partly reflects the high relative profitability of sugarcane. and the switching from other crops to sugarcane, but it also reflects the development of water resources in India especially since the early 1970s and especially in Maharashtra. Chart 3. 9 Increased area has been a more important determinant of growth than yield 700,.------------------------------------------------------------------- lnde.x: i-------------------...-_.,.----.. . ---...--------1'.:' : 1930-3.1 .· .. 1939~40' . :i9:48~49.·; .. · 1957.;~ff :· .. 1 9:66~7 . '.: j 975"i.6. :. .WB4-'85. / Source: ISMA and USDA  - 18 - 3.34 Chart 3.9 also reveals steady but unremarkable growth in sugarcane yields over a very long time . Part of this increase comes from using more fertilizer and water and part from productivity growth internal to the sugarcane sector such as higher yielding varieties and better management. J. India's Pattern Of Production Is Highly Unstable 3.35 Chart 3.9 and 3.10 reveal considerable year to year instability in sugarcane and sugar production. From Chart 3.9, it can be seen that fluctuations in area are a more important source of instability than fluctuations in yield. Work by Ray (1990) suggests the average yearly variation in sugar production is 11 % and in some years it has reached as high as 25 %. He confirms that mostly this is caused by fluctuations in area sown to sugarcane. Ray's analysis suggests climatic factors play a small part only in the production fluctuations observed. Mostly the fluctuations are due to growers' responses to prices and payment of cane. There is some suggestion that growers responses lead to cyclical behavior. From Chart 3.9 and 3.10 there is some hint of a five or six year cycle - this is explained further in chapter 5.  - 19 - Chart 3.10 India appears to pursue a high level of self-sufficiency and an erratic pattern of trade ., 5 .. _ .......__________................____________________________......._ _......,,.________;,;, ;;,;,;: :l3 .j .,__ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __,""\'-----1::::> ·-···. 11: ;.,__ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _7'-..,.--zt.-_L.-f :·.::.;.; .·. . :: 9_'..~ 1.------------------------------_,+--------f ~ ::(:·~:: : ::i :=.1.----------------------1--~---..~----------1 Consumption · · :-: ····.·.· .. :-:.:5·~·: 1----~--------......--~---..~-~~io-----------------t . _-.:.:;:.: ....... ·-· :. M1t1ton~>. ::.> :l)f tonnei :<>: · ·. ': t96o~6:t:.:t9.63~64 :: i! ~~6~67 : :i :9~9;~7q : [i: 97~~z~ :: t91sti6 : t97~~!?: : f98, ,:;~~r_i:9~4~5 -:·f~?743~ i;1?~~?f: f9?~µ?~ !:i;'"f!:!i ··-···· . . . .. . .- ....·...... .. ..::.;.: . . . ·::·· . .. .. . . . . .. . . . . .. . :-: ;:: ~ ·•· :: Data source : ISMA and USDA. India's Trade Is Highly Unstable And Is Destabilizing To The World Market 3.36 With sugar consumption now running at over 14 million tons per year and productive capacity in excess of this, India produces and consumes about 12% of the world's sugar. Its unstable production pattern causes it to be an erratic trader on the world market - see Chart 3. I 0. At times it becomes a significant influence on the world market as either an importer or exporter. At times its exports may have depressed world prices by over 10% in the short term (within that year) and its imports may have increased world price by 20% (Borrell and Duncan, 1990). But over the long term imports and exports tend to balance out revealing India's largely self-sufficient stance on sugar production. However, were India to become a consistent importer or exporter (trading say a quarter of consumption or production), given its size it could change world prices of sugar by plus or minus 15 % over the long term.  - 20 - 4. Organizational Features: Policies 4.1 Organization of the sector is strongly influenced by interventionist policies. A. Sugarcane Policies Date Back To Earlier Problems 4.2 The policies of India's sugarcane based industries have their origins in the general economic policies and problems of the Indian economy around the period of independence - 194 7. Despite enormous change in the Indian economy and the sugarcane industries in particular, much of the original policy framework remains. Sugar Is Tightly Regulated Under The Essential Commodities Act 4.3 Food security through planning and control was an important objective around the time of India's independence. Shortages and hoarding of food, especially during World War II, led to the tight regulation of production, consumption and trade of many products deemed to be essential commodities. Sugar, but not other sugarcane derivatives, was declared an essential commodity. Despite massive increases in sugar production since independence and the greatly increased availability of other foods, sugar remains an essential commodity. Tight regulation of all facets of its production, marketing and consumption remain intact. 4 .4 The Essential Commodities Act of 1955 further formalized its essential status - see box 4 .1. This Act enables the government to intervene through licensing, price controls and other trading prohibitions to ensure supplies of necessities of daily life at reasonable prices for the common man . This has driven a great deal of sugar policy and its accumulating layers of regulation since World War II . 4.5 Some interventions have been ·introduced to bolster previous interventions as producers, marketers and consumers have positioned themselves to take advantage of the benefits offered. Some result from pressures from administrators. Administrative arrangements for cane and sugar involve a plethora of government departments and agencies, some of which are specific to the sugar industries and have developed a life of their own. Central Planning, Infrastructure And Subsidies Also Invited Tight Regulation 4.6 Under central planning policies which commenced in the 1950s tight regulation and control continued, especially through licensing of the milling sector. Big public investments in irrigation also attracted central planning and control by the sales because sugarcane is an intensive user of water. Sugarcane' s intensive use of other subsidized inputs, namely fertilizer, private investment in water, electricity for pumping water and soft loans to agroprocessing cooperatives also attracted government planning and controls .  - 21 - Box 4.1 Essential Commodities Act needs a thorough review The Essential Commodities Act (ECA) has its roots in the Defence oflndia Act of 1939, which was enacted at the outbreak of second World War to ensure regular supplies of several essential commodities to consumers. The prime objective was to curb hoarding and speculative activities of traders. The Bengal famine of 1942 claiming 2 to 3 million lives provided it further legitimacy, and the need to continue. Thv ; Act remained in force in one form or the other even after independence. Finally, in 1955 it was forrnalizec. into the .Essential Commodities Act by the Central Government. The ECA .1955 gave wide ranging powers to Central government to impose restrictions .on prices, movement, ·stocking, and trading of these essential commodities. The Act authorizes the Central Government to confer powers and impose duties on State Governments (or their officers/authorities) to carry out specific orders issued from time to time. Sugar/sugarcane is one of the several essential commodities covered under the ECA. Under this, the Central Government and State Governments have passed several Control Orders specific to sugar/sugarcane (see Appendix F for further details). For example, the Central Government's Sugarcane Control Order of 1966 authorizes it to fix the sugarcane price to be sold by the farmers or their agents. The payment for that cane must be made by the buyer within 14 days from the date of delivery. Similarly, the Sugar {Control) Order of 1966 stipulates that sugar from sugarcane can be produced only under licence; that no producer shall sell or dispose of or deliver sugar except in accordance with the written direction of the Central Government. Besides the Central Government, there are State Control Orders issued by states for relevant commodities within the ECA For example, the Uttar Pradesh Sugarcane Supply and Purchase Order, 1954 restricts the area of operation of a sugar mill to a specified zone. Millers can not operate outside their zone for buying cane, which restricts their choice of buying the best cane from anywhere. Similarly, there is a restriction on the cane grower to supply cane to a mill in the specified zone, thus restricting his choice to supply any mill that he feels like. The Uttar Pradesh Khandsari Sugar Manufacturers Licensing Order, 1967 specifies the need to obtain a licence for manufacturing khandsari sugar through crusher, bel or centrifugal. It also specifies that the price to be paid by the manufacturer for the purchase of cane will not be less than the price fixed by the Government under the Sugarcane Control Order, 1966. In case of default, the officers under the Order have been empowered with entry, s'earch and seizure of the raw materials and sealing of the machinery used for the manufacture. Further, the Uttar Pradesh Vacuum Pan Sugar Factories Licensing Order, 1969 prohibits any manufacture of sugar through vacuum pan method without obtaining a licence from the State Government. This indicates that to set up a sugar factory in Uttar Pradesh, the manufacturer has to obtain licenses from the Center as well as State Government. Thus, all the controls within the sugar sector have a legal sanction that dates back to mid-l 950s, although its foundation lies in the war days of late 1930s, and famines of early 1940s. These controls multiplied during 1950s and 1960s both at the Central and State Government levels, so much so that today they appear to be everywhere, ranging from production activity to trading, bagging, moving, and pricing. The creation and carrying on of dual markets in sugar, imposition of levy on manufacturers and monthly release system for their free sale sugar, imposing stock limits, licensing of manufactures for establishing new and expanding the existing production facilities, etc. are all off shoots of ECA. While the Indian sugar scene has dramatically changed since then, the controls continue. With the onset of economic reforms in the country, there is a need to have a fresh look at these with a view to quantify the economic cost of these controls, and whether there is an alternative model that can obtain the same policy objectives at a lower economic cost. To the best of our knowledge, there is no systematic and comprehensive study in India on this issue. Our model, in this study, makes a humble beginning in this direction for the sugar sector. The results presented in chapter 6 are startling in terms of potential gain that the Indian sugar sector can bring to the Indian economy by following a more liberal approach (see chapter 6 for details). If policy makers feel convinced by the potential gains awaiting this sector, and like to undertake the alternative path, sugar would have to be taken out of the purview ofECA.  - 22 - B. Policy Objectives Are Not Clear And Are Highly Politicized 4 .7 It appears policy has been used to: • Pursue high levels of self-sufficiency (see chart 3 .1O); • Maintain fairly stable prices in real terms (chart 4.1); • Favor sugarcane production relative to other crops by providing relatively higher effective rates of assistance than for other crops (chart 4.2); and • Achieve some sense of equitable distribution of sugar to consumers (chart 4.3). Chart 4.1 Domestic retail prices of mill white sugar (real 1994 rupees) : ·.:~~~~i\ ·: J:aooo,:'i: ':::::::::.::::: .>: HOOCflt-_...,-----------------------------------t: ;':!.~'~bb()~'i' ______________________________·: :i,i:~ )~bciti':l· .--,~;;::--~===::::~---.;;;;:::a,-====;;;?..c;______~:::::::-------::::_,.,.~::::::t ·+i~61 .. j. rr-----2==-~~-::=-=--:...:::::::--:=-:===:::::=::=---=::::-...-====:;-~~-:-:-t: .·:-:::; '.. ·.·· ::t~OO.Q:; .........-..-...."'"""'""'-----------------------"""C'"--==-==-=----;;._..----t "·>6000: .· ·= - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -·· :·· ...: :.4Qoo: . . T------------------------------------- ... . •:2000>t - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -...... ... Data Source : ISMA 4 .8 But by no means are the objectives of policy clear. The aims above often conflict. For instance, following periods of high production, prices may be fixed too low leading to shortages and a need for large volumes of sugar to be imported. There is no stated hierarchy between these aims, leaving the objective open to interpretation. Rapid rates of economic development and quickly changing economic, social and political circumstances are creating new conflicts and making the direction of policy even more open to interpretation. 4.9 Without clear direction policy tends to be ad hoc in nature. It also tends to be responsive to social and political demands placed upon it. The historical development of policies for India's sugarcane based industries has left policy makers with virtually the full gamut of instruments to intervene and control the markets for sugarcane based products. They are well equipped to respond to various economic, social and political pressures as they emerge. Interest groups know this and seek to influence policy makers in ways which deliver favorable outcomes for them.  - 23 - Chart 4.2 Pricing policies favor the sugarcane sector over other important cropping sectors, increasing sugarcane's relative command of agricultural resources 2 .--~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ..... 1980s 1.8 I~ II i 1.6 Sector receives 1.4 subsidy equivalent 1.2 1 0.8 Sector irTcurs tax equivalent I II I I II 0.6 0.4 0.2 NPC (over 19BO's) Sugarcane Mustard seed Cotton Wheat Rice Relative rates of nominal protection (effective assistance) for major crops in India during 1990s (1990-91 to 1994-95) - sugarcane =100 160 --------------------------------------------------------~ 1990s 150 140 Sugarcane receives nominal protection 43 per cent above 130 that for the main crops (wheat and paddy) which make up 50 per cent of the cropping section. 120 110 100 90 80 70 Index Oilseeds Sorghum Maize Sugarcane Gram Cotton Rice Wheat NPC =Nominal Protection Coefficient. Note Absolute protection has been reduced in the 1990s compared to the 1980s for sugarcane. however the relativities still place sugarcane ahead of other main crops . Source : Gulati and Sharma (1991) and Mission Estimates. 4. I 0 The net result of these influences is that sugarcane policies tend to be reactionary, slow to respond, and highly political rather than strategic and tightly focused on economic criteria. They tend to be used to minimize political pressures relating to sugar price inflation, big shortfalls in sugar production and regional development rather than on maximizing the returns from rural resources. One result of this is that production tends to be unstable and cyclical - see Chart 3. I 0. The ad hoc nature of policy also leaves room for state government intervention. Regional political pressures and objectives therefore form an important part of the Indian sugar policy picture. Pressures and objectives of the state and central government can conflict.  - 24 - Chart 4.3 Policy rations subsidized sugar to all Indians :'°s .:· J.9 704 1· ... :.: .::.<;:: · .: ·1 9.so-B I· .. Doto source : ISMA. C. Implementation Involves The Use Of Many Instruments 4. 11 Under the powers of the Essential Commodities Act and other regulations, periodic quantitative controls on imports, periodic export controls, varying stockholding arrangements, and variable allocations of output to separately priced markets have all been used to manipulate price. Import controls have been used to protect the domestic market from foreign competition. Stocking and subsidized exports have been arranged to prop up price when large domestic surpluses have appeared. Destocking and relaxing of import controls can occur if sugar prices rapidly inflate . Manipulation of sales between differently priced markets, price controls and input subsidies can all be used to encourage or discourage production. A major inconsistency of policy is that the government has no similar instruments to control gur and khandsari. 4. 12 The main elements of policy, discussed in greater detail below, are: • A dual marketing system; • Licensing of sugar mills; • Cane price fixing; • Subsidized inputs; • Taxes/imposts; • Infrastructure developments ; • Research and development; • Restrictions in land ownership; • Labor laws; and • Administration .  - 25 - D. Dual Marketing Aims To Make Some Sugar Affordable To All Citizens 4. 13 The essential commodity status of sugar is the foundation of the dual domestic marketing system which itself is the basis of other policies. This marketing system is designed to force the sales of sugar to one class of consumers to be used to cross-subsidize sales of sugar to another class of consumers. Ostensibly, the objective is to ensure some availability of sugar to all consumers at reasonable prices in fulfillment of food security goals. Presently, the central government targets to supply 425 grams of sugar per person per month to all citizens of India at a fixed price of Rs 9. 05 per kilogram. Sugar Is Split Into Levy And Free Market Sugar 4.14 A portion of each mill's production ('levy' sugar) has to be delivered to the Food Corporation of India (FCI) and other government agencies for sale through the Public Distribution System 's (PDS) fair price shops at a current administered price of Rs 9.05 a kilogram. The government directs the amount which must be delivered by mills for levy sales on a monthly basis and manages flows to and from the PDS through the operation of a buffer stock held at mills. The FCI may also import sugar if domestic supplies are low, but since this requires the payment of world prices it may involve a subsidy from the central government. Keeping Each Market's Price Separate Requires A Great Deal Of Control 4.15 Other sugar (including imports) can be sold domestically at market determined prices ('free market' sugar). Currently the ex-mill free market price is more than half as much again as the ex-mill levy price - over time this price difference has been held fairly constant in real terms (Chart 4. I). For this reason the government imposes a degree of control over the whole system by authorizing the amounts of sugar which can be released to the free market (and also for exports) . This has also been on a month by month basis but is currently being shifted to a three monthly system . Supplying Levy Sugar Is A Tax On Most Sugar Mills, But Some Are Exempt 4.16 The proportion of any mill's production which has to be delivered for levy sales is generally 40%. However, any new mill or mill expansion is relieved of the obligation to deliver all or some of what would otherwise be its levy quota for from 5 to I 0 years . This is ostensibly to encourage the viability of new investment, but the incentives it provides shore up pressure to maintain the licensing of new mills and the expansion of old ones . Mills can also be relieved of part of their levy sugar obligations by accepting cane early or late in the crushing season when extraction rates are lower. An outcome of these exemptions is that total levy sales amount to 33 % of all sales rather than the 40% which is the formal mill delivery quota. The dual marketing system is modeled as a series of revenue neutral taxes on producers and subsidies for consumers . Marketing ls Tightly Controlled, Export Dumping Formalized And Imports Are Generally Unattractive Due To Policy Uncertainties And High Port Charges. 4. I 7 The manner in which sugar is sold in the free market is also controlled, giving sugar mills little choice in their marketing options. Mills can only sell free market sugar to licensed wholesale merchants or industrial users . There are also limits to the size of transactions and stocks which can be held by merchants, and on the number of on-sales and periods of credit sales . All domestic sales must be in 100 kg bags . Forward trading in white sugar is prohibited (but not in gur).  - 26 - 4.18 Merchants are licensed by the states . The only requirement to obtain a merchant ' s licence appears to be access to a godown, though access by merchants to credit is essential since mills normally require full payment before sugar is dispatched. Merchants may purchase on an ex-mill or into store basis, using agents who operate in major buying centers. Many licensed merchants operate in each of the states, but limits which are placed by the central government on the size of transactions and stocks held by any licensee, and prohibitions on licensed merchants on-selling into other states, create incentives for merchants to hold multiple licenses. 4. 19 Exports can only be made through tender purchases by an industry controlled monopoly corporation (the Indian Sugar and General Industry Export Import Corporation) which must share the profits or losses of its sales among all mills in proportion to their production. Exports are usually made when surplus production threatens to undermine domestic free market prices or impose inordinately high stocking costs . The sharing of losses between mills amounts to dumping. But because individual mills do not receive the actual price at which exports take place, they do not face the marginal cost of their export decision. 4.20 Currently there are no regulatory barriers to importation though importation - see box 4.2 for a history of India's sugar import policy. The possibility of imports being commandeered for levy market sales and the lack of a clearly enunciated policy, which seems to be subject to change at short notice, imposes considerable uncertainty on importing. Port and transport infrastructural bottlenecks also appear to raise cif (cost, insurance, freight) import prices, considerably reducing the attractiveness of importing. These costs also dull possibilities of profitable export sales being made. That said, devaluation of the rupee in recent years has started to bring domestic prices more closely in line with import equivalent prices - Chart 4 .4. Domestic prices, nonetheless, remain above export parity, and until about 1991 imposed very high costs on consumers to cross-subsidize producers . Current price comparisons between the cif world and free market domestic prices suggest that the uncertainty surrounding imports or unexplained transport and handling charges are equivalent to a tariff of around 10% on imports . Chart 4.4 Domestic prices are falling in real US dollars but are still higher than world prices so~ ' : ~------...-------------------------------------------------------------------1: ::.:.:1 .... ' ,, , Weighted average of free market and levy sugar - 40 : 1-------"°'---'~....,...~--...c.......;;:::..__._....-------=:......:i-=~,,c_------------------------------------t:;:::: .,...,.., - .... I us <:/U{ price ... ·-1:982- - +985:\:uwe.6:: ::: ..il 9~r : ·::: l 988: :. ::'l983:.. ::·l9.84.- ::: = : :?~?:: ::::4990. 1 :1 :?:~ :~ w:::j-.:::.:~:?t?~L:·.~r:~;~. ~:.:.;_:.::._:1_:~r.~.:i, . . . .. ..........::··:· ·~::: ... ···:.::::·~==\~n.:>:::: ... .... ... :··.·· . ·.::::.·· ....... .. . .. ·:" .. ::::::.:-::·:.·:.:·:::<~;.~::~::::::.:/yr::::: Do to source : ISMA; Cooperative Sugar: International Sugar Organization: CIE.  - 27 - Box 4.2 History of exports-imports policy for sugar and molasses Exports and imports of sugar and molasses have generally remained Wlder control through India,s canalil.ation policy. STC was the designated parastatal through which exports were channeled prior to the onset of economic reforms in 1991. But in 1991 their exports were decanalised as a part of the reform package. Exports of sugar, however, were regulated through Indian Sugar and general Industries Export and Import Corporation, a body promoted by Indian Sugar mills. This was primarily to formalize the distribution of profits/losses incurred in exports of sugar. Imports of sugar have generally been controlled through STC or FCI with high import duties before 1991. This system continued till March 1994 when, in the face of domestic shortage, imports were suddenly opened to the private sector with zero import duty. As imports mounted, it caused .ripples in the Indian sugar circles ·raising doubts regarding the intentions of the government. At present, imports are decanalised, but the depreciating-rupee and the improvement in world sugar prices (from below 10 US cents/ lbs to ·above 12 US cents/lbs) is not leading to any significant imports into the coWltry. The domestic prices are marginally higher than import parity levels. In fact, if one deducts excise duty, cess, and domestic transportation cost from the domestic wholesale prices to obtain ex-factory realization, it turns out to be lower than the import parity price. This gives some :indication that Indian sugar can compete with imported sugar provided there is countervailing duty on imported sugar to the tune of domestic excise and cess at least. Exports of molasses were also decanalised in the 1991 reform package. But there was lot of resistance from the domestic distilleries, and exports of molasses were again brought Wlder control in February 1994. These controls are administered through the All India Distilleries Association, approved and supported by GO! . hnports of molasses, however, were not restricted but attracted high tariff duties. In March 1994, when sugar imports were opened up at zero import duty, duty on molasses was reduced from 50 to 10 per cent. The above changes in export-import policies of sugar and molasses indicate at least two things. One, it is not yet certain whether these changes would stay or undergo change very quickly with minor changes in the domestic or international sugar scene. This is because they have been annoWlced more as ad-hoc measures to deal with temporary problems facing the sugar sector rather than as a part of any comprehensive strategy towards this sector. But a proper understanding of the Indian sugar sector against the backdrop of changing global markets of sugar can render reasonable confidence, and may contribute towards continuing of more liberal policies facing this sector. Two, there are strong vested interests influencing these policies that go beyond sugar industry, such as the distilleries, that are being cross subsidized through sugar policies. GATT Uruguay Round Outcome Will Not Affect Import Behavior Yet 4 .21 The outcome of the GATT Uruguay round seems to hold few immediate implications for India's sugar import behavior because state trading activities are still permitted and tariffs were bound at very high levels. Under the Uruguay Agreement a World Trade Organization review process was set up to examine the implications of state trading operations, but the current conditions applying directly toward the activities of state traders do not appear to be enforceable, so the uncertainty which currently surrounds India sugar imports will remain. The WTO review is being undertaken with a view to greater liberalization. However, any outcome of the review is unlikely to hold implication for India until the new century. The current provisions relating to state trading organizations are that their activities should be nondiscriminatory and in accordance with commercial practices using open tendering and giving adequate opportunities for commercial activity. Use of such agencies should also be reported to the WTO. However, there does not appear to be anything concrete to prevent state trading agencies' restrictive practices should they choose to exercise them. 4 .22 On tariffs, these were bound under the Uruguay Agreement at 150% for sugar and between 100 and 150% for all other sweeteners and sweetener containing products entering India. For developing countries there is no necessity to phase these down by a minimum of 15 per cent  - 28 - over the life of the Agreement as applies for other countries. Given the current low tariff equivalent, India can if it wishes put tariffs up by a factor of 10 to 15 before becoming GA TT illegal. This gives government considerable flexibility to control imports should it choose to do so. There are also provisions under GATT which allow developing countries in conjunction with the IMF to impose quantitative controls against imports if a balance of payments crisis emerges. Uruguay Outcome May Make Import Prices More Predictable 4 .23 What the Uruguay round will deliver for the world market is guarantees on existing access, provisions to curb further deterioration in corrupted trading practices and more transparent trade policy instruments . The benefits of transparent instruments are that they will be easier to monitor and to reform. In particular, tariffication has opened the way for removing quantitative restrictions on trade and for phased reductions in tariffs and therefore reductions in protection over time. 4 .24 Reductions in protection over time will shift production away from the world's high cost producers to low cost producers. lowering the world sugar price and reducing its instability (Borrell et al 1994). Perhaps the best indicator of the long term trend world sugar India will face for importing is the range of costs of the most efficient large producers - Brazil, Thailand and Australia. Their costs lie in the range US7-12c/lb . Prolonged periods of price below USIOc/lb would mean production could be sustained only with massive and continued subsidies to many producers around the world. But there are pressures on so many countries to curb such support - partly because of the Uruguay round process. Periods with prices much above this level are likely to spark off new investment in productive capacity - not only in sugar but in alternative sweeteners. So, over the long-term it seems the sugar price needs to average about US8-13c/lb to keep world demand and supply roughly in balance. Reflecting this, as a starting point in the model we assume the world price for raw sugar averages around US l lc/lb and the landed Indian mill white price around US 15c/lb. Despite Controls Sugar Leaks From The Levy To The Free Market 4.25 The supplies for PDS are bought direct from mills through ' nominee ' wholesale agents. Nominees purchase at mill gate and pay the full levy price upon purchase, though they may have to arrange short term credit in order to make prompt payments . Margins are fixed throughout the marketing chain from mill to retailer. Margins may differ between nominees, but are designed to yield equal returns net of costs. Minimum standards are set for levy sugar sales, though better quality grades inevitably find their way into the free market. Leakage And Black Marketeering May Help To Keep The Levy Price Low 4 .2 6 Nominees' marketing margins are low compared with those of merchants who deal in free market sugar. This disparity, together with the disparity between retail prices of levy and free market sugar (the PDS price currently being about 60% of the free market price) provides a large incentive to divert sugar illegally from the PDS to the free market. For this reason nominees in the PD S are not permitted also to be merchants of free market sugar. A great deal of the other regulation of the distribution system is designed to prevent leakage from the PDS to the free market. Despite this, it has been estimated that about 40% of all levy sugar does not reach the actual users of the PDS (Ahluwalia, 1993). However, much of the profiteering from black market sales would seem to be needed simply to offset low fixed marketing margins. One interpretation of this is that black market activities are an essential part of operating the PDS system to ensure sales to the free market are used to cross-subsidize high PDS distribution costs to allow at least some levy sales at Rs 9.05 per kilogram.  - 29 - Unlike Other PDS Products, Budgetary Costs To Government Are Small 4.27 From a government perspective, PDS sugar is convenient because it is cross-subsidised by sales of free market sugar. By comparison, PDS wheat and rice require direct subsidies paid from the central government budget. Only in years when the PDS must top up supplies with imports and the import price is above the PDS sugar price are direct government subsidies involved. E. Licensing Of Sugar Mills Creates Barriers To Competition 4.28 Licensing by the Government of India, both of new sugar mills and the expansion of existing mills, has been a feature of the industry since the introduction of central planning in 1951. Although licensing has also been a feature of much of India's industrial development generally, in 1991 a large number of other industries were freed from its requirements in an effort to encourage greater industrial competition. However, under its essential commodity status, this did not occur for sugar. Licensing Limits Access To The Free Market Which Underpins Price 4.29 The retention of licensing for the sugar industry is ostensibly to ensure that new and expanding mills have sufficient quantities of cane for viable processing. But an important consequence of licensing is also to protect existing mills and suppliers by restricting the downward pressure which expansion would have on free market prices. Presently there are applications submitted for 70 licenses for new mills. It appears that the demand for licenses far exceeds the supply, and therefore licensing is restricting the supply of milling capital to the sugar industry. Licensing Influences Mill Size And Therefore Efficiency 4. 30 Current policy is to license new mills only for a minimum rated capacity of 25 00 tons of cane crushed per day (tcd) . However, an initial capacity of 1750 tcd can be licensed in 'industrially backward areas' assessed to be suitable but not yet developed for cane, provided that the mill plans to expand to a 2500 tcd capacity within 5 years. Priority is also given to sugar mills with less than 2500 tcd capacity to achieve that level when granting licenses for mill expansions. 4.31 No maximum capacities are stated for licensing either new mills or mill expansions. Nonetheless, biases in the issuing of licenses toward backward areas, toward rural development and generous capital subsidies to new mills of 2500 tcd capacity (discussed later) tend to favor a pattern of many mills of around this capacity rather than fewer mills of larger capacity. We were told by established mills that it is easier to get a licence for a new mill of minimum capacity than to get a licence for either a bigger new mill or to expand an existing one. If these biases exist in the administering of licensing, the expansion of new areas will be favored over the expansion and upgrading of established areas. This situation may help explain the data presented in chart 4.5 .  - 30 - Chart 4.5 Growth in sugar mills has favored Maharashtra and cooperative ownership structures Number of sugar mills in operation 100: ... : ··:· .. :75 ' :.::::::::.50 · /; ><.~§. : ·:.:· .:.::o: ::n:t:,:' <i : <<Mdhara~f.ltra + :tsp,: .. . . . .'·.> +-:.: :' ::.: ''' :.:. .:::: '·:' ·::,, :: T:::·rL::=:':: .,:· ···:· ·: · ... :. ::·.· .. ..... . . ....... .. · .... ;·: ····· ·....·.·.. ·. ·. ·· ··. . ··········· · ,,,., . ·. ::::::-:::\):\::::{'(:··· ······ ... .. . ····· './· . 0 >ii2S: ... . . . . .. .-.... ·: ::n• +1'i)Q. '::so-: :25. : ::,o :.__._______.._......_______...___._______...._..._._______________________ l .95 :F·· :f9.5:S::5is. ::: · · ·· : 9c:)Q:;~ LJ9~~(l6.. Vt.7;3~:7~f :i 978c:79 , 1W~W-:9p : J 9.90 ::9J:,,.J:??h~f:HJ~?~7~3= : 'J9?3:C94i> ,_, ... -· .. -.. ::. :::.: :-:·: ~ ~·i ·>~ ~r;: :·:·: ::: :·:·=·: · · -.· · ·. .. . . .. : . . .... " ·.. :_: ::::·:·:·; : :. :: ::~ :.. .:.- . :: . ' . .. '350 .'300 · .. :250 .200 . 150. 100 50 ·o :1~~1 ... : .195-5:-:56:·) 9~o~t /t9.A5.~P.6: :.,.:y9n;,14 .J:.9 7a;;7~tJ: 9,8~._:9p : :J ?:90;<9J : +9=?)Hi~;:.:I1:[:2._93 :J9,~)t04. '.:. ::<:::: .... .. .. . •. ... . ·.·· ....·......_.-: ....·.· ..·.·- :::-:.:: ;.;::.~ \/{:: ~):·-:-:-:·::: Data source: ISMA  - 31 - Zoning May Also Limit Mill Size 4.32 Competition is also restricted by a requirement that no new mill can be licensed within 25 km of an existing mill, though this can be reduced to 15 km in special circumstances. This restriction on competition between mills is strengthened by a policy operated by the states to zone growers to supply particular mills; an obligation on mills being that they receive all cane supplied from zoned growers. Though these policies ostensibly underwrite the viability of mills and ensure that cane is sourced at minimal transport cost, they act to limit the ability of mills to expand to optimum size and source from efficient growers and thereby inhibit competition and processing at least cost. As seen in Chart 4.6, the average size of mill is increasing through time but only slowly, and we saw in the previous chapter the average size of mills is small by international standards. Licensing Favors Cooperative Mills And States Which Favor Cooperatives 4.33 New or expanding cooperative, public and private mills all enjoy equal access to incentives to free market sugar. However, it is the Government of India's policy to favor proposals coming first from the cooperative sector, second from the public sector and only finally from the private sector. Favorable financial incentives are also made available by the central government to new or expanding cooperative mills - GOI's preference for cooperatives is clearly visible in chart 4.5. But these licensing priorities of the central government do not necessarily correspond with those of some of its financing agencies . Nor do they necessarily correspond with priorities of all state governments, from which licensing proposals are sent to the central government and to which they are subsequently referred before decisions are made by the central government. Chart 4.6 The average size of mills is increasing slowly but remains small :500 .. ._...,----------------------------------.l·..... tonnes .. : cane/day · ----~--.--------------.-.-.----~------"!'!'.._,._ __, · .. 1?32-33 · l~~2;.4.3 · :}95~f53:_. . :962-~J: : .. . : 1912-1~t , .: .. :: .. ,::r>rn-~~~e.3· : ... :::.::: q:992.;.93 : ..·.... :·:·:::: .. : ... : .... ·: . . .. :: : '.:·:·:::::):::;:::::=;::·· . .. . . ' .. : : .,: : ·.: ; : : : : :::~:-:-: : ::: .. . Data source : ISMA. Maharashtra Has Responded Strongly To Policies Favoring Cooperatives 4.34 In Maharashtra it is state policy that only cooperative mills receive new licenses. State policy in Uttar Pradesh has been to favor private mills, with cooperatives to be established only in exceptional circumstances. On the face of it the central government's policy of favoring cooperative appears to have underpinned greater development in Maharashtra than Uttar Pradesh - Chart 4.5. It is also Uttar Pradesh state policy not to establish new mills in the public sector,  - 32 - and the state' s Sugar Corporation, which owns its public mills , has issued tenders for the sale of its mills. Pressure from unions and recent political changes appear, however, to have slowed the privatization of mills in Uttar Pradesh during the last year. State Preferences For Cooperatives Influence Mill/Grower Organization 4.35 Because of Maharashtra's policy that all new sugar mills be cooperatively owned by cane growers, there are close relationships between mills and their supplying growers. The cooperatives are typically heavily involved in scheduling the planting and harvesting of cane and in organizing the financing of the crop. The cost of harvesting and transporting cane to the mill is borne by the cooperatives. Strictly speaking, cane is not purchased by cooperative mills: farmers receive the difference between the gross receipts from sales of sugar and by-products, less mill costs . Incentives for coordinating growing, harvesting, transporting and crushing are internalized. In Uttar Pradesh, Cane Societies Drive A Wedge Between Growers And Millers 4.36 There is not as strong a tradition of cooperatives in Uttar Pradesh as in Maharashtra. Even those mills which are owned cooperatively have their chairman and managing director appointed by the government. However, it is state policy that a Cane Cooperative Society acts as an intermediary between each mill and its supplying growers, irrespective of the type of ownership of the mill. These societies organize the scheduling of cane from growers to the mills, the costs of harvesting and transporting cane being borne by growers . Furthermore all mills, even those which are cooperatives, purchase cane from growers, the societies acting as intermediaries in remitting payments . Standing between growers and millers , the societies add another layer to the problems and incentives involved in coordinating growing, harvesting, transporting and crushing. F. Cane pricing controls are an adjunct to licensing 4. 3 7 The licensing of sugar mills and associated zoning give the mills potential economic power in their dealings with growers and also to appropriate many of the benefits which can flow from other regulations of the industry. For. this reason it has been the policies of both the central and state governments to regulate cane pricing and the manner in which payments are made to growers . Minimum Prices Are Fixed Based Mostly On Costs Of Production And Recovery 4. 3 8 At the beginning of each crushing season the Government of India announces a Statutory Minimum Price (SMP) which must be adhered to by all sugar mills (but not by producers of gur and khandsari). The SMP is fixed after advice from the Commission for Agricultural Costs and Prices. The price which each mill pays is currently set on the basis of a sugar recovery rate from cane of 8.5 % with a fixed premium for each 0 . I% increase above this to a I 0% recovery, beyond which the rate of premium is increased - state differences in the SMP are shown in Table A. I. The SMP Is Also The Basis To Vary The Levy Price Received By Mills 4.39 The SMP not only sets a minimum payment for growers but is also the basis for the subsequent payment which mills receive for their levy sugar sales. Although the PDS price is the same for consumers across the country and the SMP recovery structure is the same irrespective of mill size or location, the payments which mills receive for levy sugar are adjusted for regional differences, including average mill size and capacity utilization within each region. This is another device which reduces competition between mills, regions and states - in the model average regional differences in the levy price for mills are represented while the consumer price for levy sugar is constant across all regions (see Table A. I).  - 33 - Table 4.1 Actual cane price paid by sugar factories from 1988-89 to 1993-94 State 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 Rs . Qt Rs. Qt Rs. Qt Rs. Qt Rs . Qt Rs. Qt North Bihar 30.00/34.00 39.00/42.00 41.50/44.50 43.25/46.25 46.00/49.00 53.50/56.50 South Bihar 30.00/34.00 39.00/42 .00 41.50/44.00 43 .25/46.25 46.00/49.00 53.50/56.50 Eastern U.P 30.00/34.00 38.00/41.00 41.00/44.00 45.00/48.00 46.00/49.00 58.00/61.00 Central U.P 30.00/34.00 38.00/41 .00 41 .00/44.00 45.00/48.00 46.00/49.00 58.00/61.00 Western U.P 30.00/34.00 38.00/41.00 41.00/44.00 45.00/48.00 46.00/49.00 58.00/61.00 Punjab 31.00/35.00 36.00/40.00 42 .00/46.00 45.00/49.00 46.00150.00 58 i J0/62.00 Haryana 31 .00/35 .00 36.00/40.00 42.00/46.00 45.00/49.00 46.00/50.00 56.00/60.00 Rajasthan na na 40.00 40.50/42 .50 40.50 50.00 Madhya Pradesh 27.50 39.00 33.00 41.00/43 .00 41.00/43.00 53.00/56.00 Gujarat 3 18.00/34.20 30.54/31.84 22.00/33.00 22.50/28.00 26.00/32.50 31.00/50.00 Maharashtraa 24.00/30.20 24.00/38.00 26.00/39.50 29.00/46.68 27.77/48.95 36.00/61.00 Karnataka 3 24.00/30.00 27.50/36.00 36.00/39.300 30.89/45 .00 29.36/50.00 45 .00/65 .00 Andhra Pradesh b 22.50/28 .00 23.55/34.21 27 .50/36.53 31.52/40.59 35.56/48.65 39.37/56.33 T.N. and Pondyb 20.50/28.50 27.75/34.12 30.10/36.25 29.06/35 .00 31.00/44.40 36.35/55.11 Others na na na 37.00/52.00 na na 3 In Maharashtra, Gujarat and part of Karnataka the prices generally ex-field. b Limited to 8.5% recovery. Data source: ISMA 1995. State Governments Also Intervene In Cane Pricing 4.40 The SMP is a minimum which must be paid by all mills in India soon after receiving cane. But it does not establish a uniform price actually received for cane across the nation. Each state announces a higher State Advised Price (SAP) which is meant to be the actual or minimum price paid . All SAPs are based on the weight of a grower·s cane, not on its recovery rate, though in Uttar Pradesh a premium is paid on higher yielding varieties . In Uttar Pradesh It Costs 3% Of Cane Prices To Run Cane Societies 4 .41 In Uttar Pradesh the SAP is . the price which all mills are required to pay to the Cane Cooperative Societies. The societies retain 3 % of the SMP and, in some cases, do not pay growers for several weeks after delivery (this is accounted for in the model as other taxes under cane prices in Table A. l) . In Maharashtra the mills are required to pay the SMP as an initial advance within 15 days of delivery ~ a second payment is made when the mill's balance sheet permits (having cleared the financing of the first payment)~ and a small final payment is made some months later following a state audit of the mill. Since most mills in Maharashtra are cooperative, they typically do not purchase cane from growers but rather remit to them the difference between mill receipts from sales and mill costs . 4.42 The range of actual cane prices received for the six years to 1993-94 are set out in Table 4.1 . It is difficult to discern any regional differences from these data. However, an attempt to reconcile average cane prices to compare them on a sugar equivalent basis for Uttar Pradesh and Maharashtra for the 1980s is set out in Table 4.2. It shows very little difference in price, with Uttar Pradesh having a narrow five per cent advantage over the whole period. This is, however, offset by the cost incurred by farmers in transporting the cane from the field to the factory . In the model cane prices differ by state according to their varying sugar content. Maharashtra with the highest sugar content has the highest price - see Table A. I .  - 34 - Table 4 .2 Adjusted price of sugarcane at 8.5% recovery paid by Maharashtra and Uttar Pradesh Year 3 M aharashtrab Uttar Pradeshc Percentage difference Rs. Qt. Rs. Qt. 1980-81 20.41 20 .28 0.64 1981-82 17.08 19.51 -14.23 1982-83 15.79 18.52 -17.29 1983-84 16.38 19.13 -16 .79 1984-85 21.49 19.14 10.93 1985-86 23.36 20 .87 10.66 1986-87 23 .19 22 .04 4.96 1987-88 26.07 25 .49 2.22 1988-89 26 .46 28 .66 -8.31 1989-90 30.89 37.06 -19.97 Average -4. 72 a Maharashtra prices are weighted averages prices of all coop factories, adjusted at 8.5% recovery, ex-field. b Maharashtra has paid, on an average, 4.72% lower price than U.P for the same recovery of cane. c U.P prices are average prices at 8.5% recovery, ex-factory. Source: VSI, ISMA and mission estimates .. State Advised Prices Appear To Make Production Unstable 4.43 It is difficult to known exactly what prices growers are receiving because there are often delays in payments . With high levels of inflation and high interest rates, delays mean discounts on posted prices. These discounts appear to be fairly significant at times indicated by the 15% discounts we were told growers are prepared to accept to receive cash when they supply their cane to gur manufacturers instead of sugar mills . According to Ray ( 1990) these delays in payments by mills occur because mills can often not honor the state advised prices particularly in years of high supply. He argues that this creates a great deal of volatility in the sugar sector and may explain the apparent price production cycle discussed earlier. As arrears accumulate, growers reduce the area sown to cane. Due to ratooning practices this may take some time. The subsequent decline in production may occur with a two to three year lag. This, Ray argues, sets in motion an eventual shortage of sugarcane and speculative price increase of sugar with gur producers wanting to grab as much of the limited cane as possible and having the greater flexibility to do so. He goes on to argue that the combined policies of the state and central government merely accentuate the instability of the sugar economy . Government Underwrites The Smp By Subsidizing 'Sick Mills' 4. 44 A consequence of the SAP system, which frequently is driven more by politics than market assessment, is that some mills may not be able to make the required payments without incurring unsustainable debts - that is, they become ' sick'. In these circumstances, which may also be caused by lack of throughput in a poor season, mills may be forced to close and deli_veries of cane are allocated to other mills. But no sick mill in Uttar Pradesh or Maharashtra has ever been permanently closed, with state governments deferring taxes or ultimately underwriting debts . Mills acquired by the public sector in Uttar Pradesh in the 1960s had all been sick at that time. 4.45 One mechanism for rehabilitating financially weak mills is through concessional finance provided from the industry generally via the Government of India' s Sugar Development Fund (SDF) . This is funded from a tax (or cess), currently Rs . 14 per quintal, on the mill sales of all  - 35 - sugar. Thus, sick mills can be shielded from competition by enforced cross subsidies from healthy mills. Moreover, healthy mills which might otherwise be able to absorb the weaker mills and gain from economies of scale are precluded from taking over less competitive mills . Subsidies and taxes therefore can play an important role in determining the competitiveness of the industry. G. Subsidies And Taxes Further Influence Resource Allocation 4.46 The post-independence Indian economy has developed in response to a complex mix of subsidies and taxes on goods and services. These have severely modified the basic role of prices in signaling relative wants and scarcities. 4.4 7 Some pricing interventions are of a general nature designed to promote agriculture as a whole, such as fertilizer subsidies. Others, such as water storage with associated irrigation promote regional development. Some focus specifically on sugar, such as the cess which finances the Sugar Development Fund, but are highly discriminatory in their impact on various sectors within the industry. Others, such as financial packages for cooperatives, are intended to promote particular types of economic organization which may favor overall levels of production but also discriminate against other types of organization within the industry. 4.48 Some taxes, such as cane purchase taxes and sugar excise duties, are imposed to provide general revenue to state or central governments, while others such as finance policies are designed to promote sectors of the industry (the central government cess to finance the SDF). The state cesses, which finance R&D to a limited extent, promote general industry objectives . Some subsidies are a charge against general government revenue while others are financed from within the industry or are a direct impost on a supplying industry - for instance, electricity used to pump irrigation water. As is true of all interventions through prices, the benefits and costs of subsidies and taxes do not fall only on the group which directly receives or pays them, but are shared with other market participants. Some of the subsidies paid on fertilizer purchases are appropriated by fertilizer manufacturers, for instance. Sugarcane Appears To Be Particularly Favored By Subsidies 4 .49 Cane production is assisted by general input subsidies on fertilizers, water (and electricity to pump it) and finance. Fertilizers and water subsidies in particular are critical to the development of Indian agriculture, and are heavily subsidized. Fertilizer subsidies are borne by the Central government while those on canal waters and electricity are borne by state governments . Water subsidies which are sourced from state governments, result from substantial capital investments made in water storage and irrigation transmission channels which are not amortized as a ·cost to users, and also from water pricing regimes which do not cover recurring costs. 4.50 Other subsidies are paid by supplying industries. Electricity use is highly subsidized, particularly in Maharashtra where growers pay a flat fee which does not cover costs . No charges are made on the basis of metered use. This is a direct cost to the various electricity boards which must be met in the first instance by cross subsidies from other users or ultimately from state governments meeting accumulated losses. Financial subsidies come from a variety of commercial banks, cooperative credit societies and specialized rural banks which provide loans to growers at lower interest rates and under terms and conditions bearing higher risks of default than characterize loans to fully commercial borrowers . 4.51 These subsidies have benefited different regions and crops in varying degrees, especially over the last two decades, raising serious issues of equity, efficiency and sustainability. On the whole, developed states, irrigated areas and irrigated crops have got a disproportionately high share  - 36 - of these subsidies (Gulati 1989; Gulati and Sharma 1991). Sugarcane being the most irrigated and most fertilized of all the major crops in India has gained maximum input subsidies on per hectare basis. From society's point of view, this casts a shadow on the degree of efficiency in cultivating cane under irrigated conditions in water scarce regions. Heavy irrigation and lack of crop rotation in certain parts of Maharashtra is leading to increasing water-logging and salinization raising doubts regarding sustainability of cane cultivation under existing regime of subsidies and technological environment. 4.52 There are several conceptual and data problems in defining and estimating the exact amount of input subsidies going to different crops in different regions. Problems are specifically more in estimating subsidy flowing through cheap canal waters. Nonetheless, an attempt is made in this study to measure these subsidies to cane growers in Maharashtra and Uttar Pradesh (See Appendix E for details). Calculations done on a rather conservative note reveal that cane cultivation in Maharashtra and Uttar Pradesh receives at least Rs 5590 and Rs 1370 respectively on per hectare basis as subsidy. The broad break-up between subsidies on canal waters, electricity and diesel, and fertilizers, is set out in Table 4.3 . Table 4.3 Input subsidies on cane cultivation in Maharashtra and Uttar Pradesh in 1995-96 Inputs Maharashtra Uttar Pradesh Rs/ha Rs/ha Canal waters 1227 309 Electricity 1363 192 Diesel 69 Fertilizers 3000 800 Total 5590 1370 Notes: Canals irrigate only 32% of cane area in Maharashtra and 22% in Uttar Pradesh. Their subsidies have been adjusted accordingly. In Maharashtra, most of the pumpsets are electrically operated while in Uttar Pradesh only half are so, the other half are diesel operated. These subsidy calculations have taken note of these factors (For details see Appendix E). Source: Mission Estimates. 4. 5 3. It may be noted that we have not taken into account credit subsidies in these calculations, and therefore they represent, in a way, lower bound of the scale. If one divides these subsidies by the average yield in the respective states, one obtains a subsidy level of about Rs 70/ton in Maharashtra and Rs 25/ton in Uttar Pradesh, which would amount to 8-10% of cane price in Maharashtra and 3-4% in Uttar Pradesh. These subsidies are included explicitly within the underlying cost structure of the model and can be removed, increased or decreased. 4.54. A major qualification about these subsidies is that the subsidy on canal water accounts for all operations and maintenance costs but only one per cent of the capital costs of canals. Were the full costs of capital included, the subsidy would go up by about three times on average for Maharashtra. Were the 32% of areas in Maharashtra relying on canal irrigation charged the full cost of their water, it would virtually eliminate profits in these areas. Our estimates of subsidies for Maharashtra by one view could be considered to be very conservative. 4.55. Offsetting the subsidies to some extent are a number of taxes paid by growers designed principally to finance mill based cane development programs and, in the case of Uttar Pradesh, the activities of the Cane Cooperative Societies.  - 37 - Specific Sugarcane Based Taxes Offset Subsidies To Some Extent, But The Incidence Of Tax Is Not Immediately Obvious - It May Pass To Consumers 4.56 Sugar mills are taxed in a number of ways. They are required to pay state purchase taxes on their intake of cane, averaging some 7% of the total cost of purchasing cane (a little less in Maharashtra) . However, some of these imposts may be passed back to growers in the form of lower earnings in the case of cooperatives or reduced services in the case of private or public mills. They also pay central government taxes on sugar sales . Excise duties are payable at different rates on each of levy and free market sugar sales . In addition, the cess is payable on all sugar sales to finance the SDF. These also amount to some 7% of the average ex-mill price of both levy and free market sugar. Some of these imposts may be passed forward to free market consumers in the form of higher purchase prices depending on the extent of restrictions on imports. Currently, no equivalent excise applies to exports . These taxes are included explicitly in the model - see Table A.l. 4.57 A major impost on sugar mills is, of course, the requirement to deliver a percentage of their production for sale through the PDS . But, as with all taxes and subsidies, this is not unequivocally a cost to mills . By diverting supplies to a (highly price elastic) low price market, many of whose consumers would severely cut back their consumption if they were required to pay a higher free market price, supplies are diverted from the (less price elastic) free market which serves to raise the free market price. Th.is possibility is captured within the modeling framework. The Incidence Of Tax Is Further Complicated By Molasses And Alcohol Taxes 4.5 8 There are some other state and central government imposts on sugar mills through taxation and other market the restrictions on molasses, which is a byproduct of sugar production, and on alcohol which is produced from molasses in many sugar mills . Until June 1993 the central government regulated the price and distribution of molasses, which had the effect of keeping molasses available as a feedstock for the chemical industry and its prices low. Since central decontrol, the government of Maharashtra has not intervened in molasses pricing or distribution, though it strictly monitors usage . In Uttar Pradesh , however, the government has introduced its own price and distribution requirements for molasses . These requirements appear to be equivalent to a tax on mills of about 2% (Rs 200 per ton) of the value of sugar sales - see box 4.3. The central government imposes excise duties on molasses and alcohol, with a complex system of drawbacks if these products are used as inputs to further production. State governments impose excise duties on potable alcohol. 4.59 The high costs of transport appear to be another factor taxing molasses. Indian molasses prices are well below the export parity price of the product due to the high costs of transporting molasses to ports . As pointed out in box 4.3 , excessive transport costs may be equivalent to a tax of around 3% on sugar sales (Rs 300 per ton) . This is additional to the tax applying in Uttar Pradesh.  - 38 - Box 4.3 A note on molasses in India Sugar molasses production in India averaged 4.4% of cane output in recent years. This is equivalent to 45 per cent by volume of total sugar output. This proportion is higher than in many other leading cane sugar producing countries due to high losses of sucrose to molasses. In India, there is also a sizable supply of khandsari molasses. Low grade gur is also used as an alternative to molasses. These products are not governed by price controls and are traded more or less entirely outside the tax .net. Decontrol of the molasses sub-sector in June 1993 was resisted in three states: Uttar Pradesh, Bihar and Haryana. In Uttar Pradesh, the State Government continues to control 65 per cent of that state 's output. In Maharashtra, the State Government still controls the lifting and end-use of molasses through different rates of taxation applied to different end-uses. Whereas the use of molasses in distillation attracts a .20% Central Excise Duty, the sale of molasses for animal feed or for export attracts no tax. When there is a low level of sugar production or when supplies are tight at the start of the crop year, the price of molasses rises .above export parity. In mid-1995 , for example, the free market ·pricetemporarily reached Rs. 1,500 per ton in Uttar Pradesh and over Rs. 1,000 in neighboring Maharashtra. When supplies are plentiful, prices fall to export parity. At the end of 1995, they were typically.in the region of Rs. 500--{)00 (US$15-20) per ton, ex-mill. The controlled price at which 65% of the molasses output in Uttar Pradesh had to be sold was Rs. 400 (US$12) per ton. This is low compared to world prices. In the 1994/95 crop year (a fairly representative year) the f.o.b . value of Indian molasses should have been in the region of US$75 per ton (allowing a freight cost of US$35 to Rotterdam and a quality premium of US$10). Compared with the actual ex-mill price of less than US$20 in late-1995, one concludes that it cost, on average, US$55 to transport molasses to an export port and load it on board tankers from port- side storage tanks. With efficient domestic transportation and port facilities, the land freight and port costs should be able to be reduced by at least US$20 per ton. This corresponds to a saving ofUS$9 (300 Rs) per ton of sugar. or around 3 per cent of the sugar price. The controlled price of molasses of Rs. 400 per ton on 65% of sales in the state of Uttar Pradesh represents a loss of potential revenue to the sugar industry of US$6 (200 Rs) per ton of sugar (2 per cent) by being prevented from taking advantage of the free market molasses price. The beneficiaries from the 65% of price controlled sales of molasses in Uttar Pradesh are threefold : the alcohol chemical industry, which receives roughly 35% of all molasses produced in the state; the country liquor industry, which receives 25% of the state 's molasses output; and the animal feed sector, with the remaining 5%. The Central Government applies substantial Excise Duties to potable alcohol, but these are applied in a uniform manner across all states, which leaves Uttar Pradesh distilleries enjoying the full benefit of molasses price controls. Non-potable alcohol does not pay an Excise Duty on its sales, but country liquor pays a duty of Rs. 50 per proof liter. Indian Made Foreign Liquor, which has to buy all of its molasses from the free market, pays Excise Duty of Rs. 100 per proofliter. State Governments impose additional State Sales taxes on sales of alcohol to other states: for example, Maharashtra State Government applies a tax of Rs. 10 per liter on sales of potable alcohol and of Rs. 1.50 on sales of denatured alcohol, as well as of a uniform Rs . 10 per liter on alcohol brought into the state, either from other states or in the form of imports. Potable alcohol production from free market molasses is currently very competitive with production from sorghum. Therefore, the country liquor manufacturers in Uttar Pradesh are currently enjoying a transfer of approximately 60 million rupees per annum from sugar producers on 300 000 tons of molasses supplied at controlled prices. Capital Costs Of Mills Are Subsidized 4.60 Some sugar mills are also subsidized. Highly subsidized loans can be made available from the SDF as part of a financial package for mill modernization or rehabilitation of sick mills.  - 39 - However, thus far the cess/SDF mechanism appears to have been a net tax on the industry (and particularly in Maharashtra) since significantly more funds have been paid to the central government through the cess than have been received by the industry through the SDF. 4.61 New, expanding or modernizing cooperative mills also receive subsidies through special financial arrangements sponsored by the state and central governments. The equity to debt ratio for new mills is fixed at 40:60. Of the 40% equity, growers were, until recently, required to subscribe 7.5% and the state government subscribed the remaining 32.5%. In 1995 these contributions were changed to 10 per cent for growers and 30% for the state. Half of the state's equity contribution is funded as a concessional loan to the state from the central government's National Cooperative Development Corporation (NCDC). The 60% of debt comes from financial institutions underwritten by state government guarantees . Similar financial packages, though with different percentage contributions, are available for expansion and modernization. 4.62 The subsidies provided via these packages come in part from the state governments not receiving any dividend from their equity contribution. However, they do receive extra revenue from cane purchase taxes and from allowing growers over time to acquire the whole of the equity by buying out the state's share at the initial cost, but not before inflation has eroded it by 50 per cent or more. That is, the state's contribution is treated as an interest free loan. Also, the initial debt from financial institutions is made available at a concessional rate of 1% because of the state government's guarantee. The willingness of the states to participate in these arrangements is facilitated by the NCDC's concessional loans. It can be seen from Chart 4.7 that Maharashtra has benefited particularly from these arrangements . Capital Costs In Maharashtra Subsidized 16% And Bad Debt Is Mounting 4.63 By one interpretation it appears as if the cost of milling capital has been subsidized by up to 16% in Maharashtra. The free government equity contribution and interest subsidy of about one per cent on loans lowers the effective cost of capital from 18% (the commercial interest rate) to 11 .55%. This is derived as follows : 7.5 % of capital @ 18. 00% commercial interest rate = 1.35% 60% of capital @ l 7.00% government soft loan = 10.20% 32 .5% of capital @ 0.00% government equity 0.00% Total cost of capital 11.55% 4.64 An interest rate of 11.55% instead of 18.00% represents a 35.8% capital subsidy for eligible mills . Since 1990, nearly 30% of Maharashtra's mills have been eligible for this subsidy. Therefore, the cost of capital to mills in Maharashtra in total has been reduced or subsidized by 10.74% (0 .3 x 35 .8% = 10.74%) . But it may be greater than this because of loans overdue and new high risk debt which is doubtful of being repaid. According to the figures of the Maharashtra Commissioner of Sugar, unpaid, overdue loans and other costs to the government arising from its support of the cooperative sector amount to around 45% of the government's contribution to share capital. If this debt is not repaid, the capital subsidy may turn out to be 45% higher than the 10.74% indicated. That is it would be around 16%. According to a representative of a major financial institution we spoke to the debt outstanding is high risk debt. Moreover, because of mounting bad debt coupled with governments not honoring their guarantees on loans, lending for the sugar industry as a whole is rapidly drying up .  - 40 - Chart 4. 7 Maharashtra is the biggest beneficiary of capital subsidies n Other NCDC assistance Assistance provided to cooperative sugar factories by NCDC up to 31 March 1995 • ;·.::\J5o0 . ····•.·.·.···· ....· ' ' .:-~ : ..... .:·: : :·:::: ~:~-:-:.: '. NCDC loans for state share capital :. :.:~.~::'?:+.::< in new mills Doto source : NCDC. H. Several General Policies Influence The Sugarcane Industry's Organization 4 .65 The sugar industries operate within a wider set of social and economic policies than those which are designed specifically for them. These include policy frameworks designed for agriculture and manufacturing generally, as well as for regional and community development, employment and social welfare, and fiscal and monetary stability. Land Law Affects Economies Of Scale In Growing 4.66 Some general policies limit the growth and international competitiveness of the sugarcane based industries . For example, land reform policies introduced after independence with a view to increasing agricultural production and reducing feudal exploitation place ceilings on the size of land which can be held by any individual (5 hectares in Uttar Pradesh, 20 hectares in Maharashtra) and prevent the leasing of land to other cultivators. Whereas in the past this may have provided incentives to increase production from underutilized land, it may limit economies of scale which can be achieved with current technology. Labor Law Affects Capitalization And Running Of Mills 4 .67 Similarly, Indian sugar mills, which are very labor intensive by world standards - employing on average some 1000 workers - must abide by stringent minimum wage requirements specified by a Central Wages Board for the sugar industry. It has been particularly difficult in Uttar Pradesh to negotiate labor force reductions in state owned mills . Where sales of state owned mills to the private sector have occurred, it has sometimes been possible to negotiate labor force reductions, subject to agreement with the government. But pressure from unions and political changes have recently slowed the privatization of mills in that state.  - 41 - Opening Up Of Economy Will Impose New Dilemmas For Sugarcane Industries 4.68 In other respects the special status of sugar as an 'essential commodity' is isolating the industry from dynamic changes occurring elsewhere in India. In 1991 a broad reorientation of economic policy was adopted in India to open the economy to trade and capital flows to and from the rest of the world, and to encourage adjustments in the internal structure of Indian industries to foster international competitiveness. Many agricultural and agriculturally based industries have now been fully exposed to these changes, but the sugarcane based industries have been sheltered from their impact. 4.69 Sugar's special status is, however, being questioned. India is basically self sufficient in sugar which is a radical change from the era of acute food shortages which characterized the period when the Essential Commodities Act was introduced in I 955. The rationale for sugar mill licensing is also being debated. With more critical community attitudes to the development of additional irrigation works, attention is now being directed towards using water far more effectively and for consequent productivity improvements in sugar mills through scale economies and more direct negotiations with growers who supply cane to them. I. Policies Establish A Wide Variety Of Interest Groups 4.70 India's large and diverse sugarcane based industries support a wide variety of interest groups and political constituencies. At various times, and depending on the issues at stake, they can conflict with each other or cooperate. At grass roots are some 35 million rural people engaged in or dependent on the production of sugarcane. Most are on very small farms. Those who grow cane within mill zones have little opportunity to sell their cane to alternative mills, though some can sell in an unrestricted way to gur and khandsari producers . 4.71 Though growers have little economic power individually to negotiate with sugar mills, they collectively own them in some states or cooperatively supply to them in others . Growers, by virtue of their numbers and regional distribut~on, carry enormous political power. Many of the chairmen of grower or cane supply cooperatives are members of state or central parliaments. 4.72 Sugar mills are relatively few in number and have a range of interests in common and others which clash. They have similar interests in seeking to maintain a continuity of cane supplies in the face of highly regulated cane acquisition and sugar marketing arrangements in competition with gur and khandsari producers who are more numerous and less regulated. Privately owned mills (organized nationally as the Indian Sugar Mills Association) clearly have different interests from those of the cooperatives (organized nationally as the National Federation of Cooperative Sugar Mills Ltd). New and expanding mills, because of their preferred access to free market sales, also have different interests from those of older established mills. 4.73 Some 360 000 workers are employed in Indian sugar mills under conditions and for wages which are highly regulated and more secure than for gur and khandsari manufacture and for most small scale organizations in India generally. Mill based unions are therefore another interest group . So too are the merchants to whom sugar mills sell free market sugar and the nominees who purchase levy sugar for the PDS. Distillers who acquire molasses from sugar mills are also an interest group, though many distilleries are themselves part of a sugar mill complex. 4.74 A plethora of government departments and agencies at both state and central levels also are involved in the regulation of the sugar industries or the provision of finance to them. Some of these have general responsibilities for agricultural, manufacturing, regional or financial management, while others specifically focus on sugar. Each of the principal producing states has a  - 42 - sugar or a cane commission which administers sugar issues separately from other commodities which could be competing for resources . 4.75 Finally, sugar has been given a special place in the consumption patterns of India's nearly 1 billion consumers through its status as an essential commodity in the PDS . This, of itself, ensures that sugar issues are highly politicized. It has been often said that elections in Maharashtra and Uttar Pradesh are won or lost on sugar policy.  - 43 - 5. Economic Consequences of Policy 5. I Policies designed to regulate the structure and organization of the sector have many direct and indirect economic consequences. A summary of the potential economic effects of the various policy instruments discussed in the previous chapter is set out in Table 5. I. A. The Dual Marketing System: An Inefficient Way Of Providing Cheap Sugar 5 .2 The intention of the dual marketing system is to create a highly distorted market outcome, with wealthier consumers being forced to pay higher prices for sugar to cross-subsidize low priced sales to less wealthy consumers. However it appears that the system has many undesirable and probably unintended side effects . The consequence of these is that the objective of the system is probably being achieved at very high costs to the economy (and partly to the industry) and that the objective is probably being ineffectively met. 5 .3 It appears that the system has the following economic effects: • The tight set of controls required to achieve two differently priced markets removes economic freedoms and incentives of millers and marketers to minimize costs to supply each market; • The average price received by producers is distorted which means patterns of production are altered such that resources are not allocated efficiently, including not being allocated efficiently between states; • The opportunities for gains from trade are missed because exports and imports must be strictly controlled to prevent the two separately priced domestic markets being undermined. Production, Stocking, Financing And Distribution Costs Are Inflated 5. 4 Costs are inflated in the following ways. • Some stock holdings become duplicated - one set for the free market and another for the PDS. • Mills are locked into fixed ratios of supplies to both markets, and supplies do not reach markets from least cost sources. This is wasteful . Levy sugar must be sourced from mills not corresponding with regional needs of fair price shops which adds to costs and encourages mills to be located in the wrong areas. • All mills must hold and finance stocks equally and as directed. Mills which are able to hold and finance stocks at least cost cannot specialize and exploit their advantage which could lower stockholding and finance charges . • The system encourages black marketeering. This involves extra costs of avoiding detection and it creates a barrier to entry for honest traders not prepared to break the law, yet these traders may be the most efficient marketers . Table 5.1 Effects of policy are pervasive Potential Economic Effects Policy Stated Objective Implications Efficiency Equity Dual marketing • Food security • Price discrimination • Consumption, production, stocking, financing and • National income lowered system • Sugar for all • Two separate markets trade of sugarcane, sugar, gur, khandsari • Food security aims not targeted on • Reasonable consumer • 1ncentives distorted distorted and costs not minimized. a needs basis. prices for basic levels • Black marketeering • Trade and other opportunities missed. • Very poor receive no benefit of consumption • Pressure for imporUexport control • Cost of risk not minimized and passed to rest of • Sugar industry average economy. price possibly raised. Licensing • Match cane supply/ • Mill capacity rationed • Cane not crushed by least costs mills • National income lowered demand by region • Competition between mills restricted • Cane grown in wrong areas • Socio/political activities supported • Control development • Industry structure open to • Sugar output restricted • Efficient mills bureaucratic/political interference • Gur/khandsari made more competitive discriminated against. • Cooperative & new mills favored • Opportunity to improve cane productivity missed • Sugar industry average price possibly raised Cane pricing • Producer price guarantees • Reduced flexibility to negotiated • Mix of cane between sugar and gur, etc. distorted • National income lowered • Supply stability tenns and conditions of cane • Sick mills created and maintained • Growers' incomes stabilized at delivery • Production destabilized expense of millers ' - short-term • Season length controlled • Cost of risk not minimized • Burden of risk shifted • Pressures to imporUexport controls • Innovation and productivity improvement to govenunent and rest • Bureaucratic/political interference discouraged of economy - short-tcnn in price setting • Long-tenn effect on • Risk shifted from growers to industry stability is unclear millers to govenunent, to rest of economy Subsidized inputs • Food security • Water, power, fertilizer and credit • Wrong mix of input usage and outputs • National income lowered • Rural development made available below their • Input wastage encouraged • Cane favored over other crops due economic costs • 1nefficient operators sustained to intensive input use • 1ntensive input using sectors favored • Regional pattern of production distorted • Some states favored over others • Encourages input usage • New and expanding mills favored • Bureaucratic/political interference • Inefficient mills protected against efficient mills Continued Table 5.1 Effects of policy are pervasive Continued Potential Economic Effects Policy Staled objectiv Implicatiorr.s Efficiency Equity Taxes/Imposts • Revenue collection • High taxes on other agriculture increases • Cane produced in preference to more • National income lowered • Development cane ' s competitiveness competitive crops • Cane producers given • Food security • Purchase tax, cess tax , etc., are not based • Variation in taxes by state distort pattern privileged positions on value added or income of production • Alcohol taxes distort incentives for molasses • Production of by-products may be use discouraged • Trade opportunities missed Infrastructure • Development • Availability of cheaper water and transport • Inefficient water and road use • Underpricing lowers national development • Need for utility pricing policies at least to • Poor water use leads to soil/environmental mcome cover operating and maintenance costs degradation • Cheap water favors particular growers • Subsidized infrastructure .• favors growers in short-term Research and • Enhance • Overall level of funding is low • Emphasis on R leaves D (extension) development productivity • Uncoordinated structure of funding neglected • Most output growth due to more resources • Productivity improvement has been lagging used, not to productivity improvement Restrictions in • Social justice • Farm size restricted • Economies of scale prevented • Distribution of land ownership • Development • Leasing prohibited • High administrative burden on mills due to land broadened • Food security • Exclusion of private ownership of mills large number of growers • Land prices • Prohibition and majority foreign ownership • Exclusion of competition form more profit possibly lowered of mills oriented forms of ownership • Efficient farmers cannot • Diminished access to overseas capital, know- expand how and technology • Inefficient farmers cannot sell to highest bidder • Equity kept in cooperative hands and hands of Indian nationals Labor laws • Protection for • Job security created • Substitution of capital for labor slowed • Many low paid labor • Minimum wages established • Ovennanning jobs maintained • Low labor productivity Administration • Compliance with • Proliferation of departments, commissions • High costs of policy and compliance • Interest groups catered for regulation and agencies • Loss of focus on economy-wide objectives • Employment of bureaucrats • Gathering of • Administrative discretion and direction • Inhibition of response to market incentives maintained information • Bureaucratic/political interference  - 46 - • The requirement to market sugar in I 00 kilo jute bags dulls incentives for innovation to reduce bagging, handling and transport costs . • Mills cannot develop strategic alliances with merchants which also dulls innovation and reduces incentives to raise quality. • Producers are shielded from price risks and have no incentive to use instruments to deal directly with such risk. The relative risklessness of sugar encourages production. Resources are diverted from other sectors of the economy shifting the costs of sugar price risk to other parts of the economy. But here it is invisible and there are no instruments to deal with it. Some Resources In Sugar May Cost More Than They Are Worth In Producing Sugar 5 .5 In Box 5 .1 it is explained how the dual price system is like a price discriminating monopolist which diverts sales from high priced markets to low priced, high absorption markets to raise the average price of sales . But in responding to this average price, sugar mills will produce sugar at costs that exceed what consumers are willing to pay for sugar and what it is worth to the economy. In this sense, resources which cost more than they are worth in producing sugar are drawn into the industry. 5.6 Although it would seem that the scenario presented in box 5 .1 is the most likely outcome of the dual marketing system, under some circumstances it can be shown that in fact the average price received by millers is lowered by the system. If so, the opposite would hold - that is, fewer resources would be attracted to the industry than consumers are willing to pay for. 5.7 The reality is that no one can be sure of the direction of resource misallocation caused by the system without a complex knowledge of consumer behavior across several markets . This is difficult to determine. Nonetheless, either way it can be shown that the system has the potential to impose significant costs on the Indian economy. But perhaps even more worrying is the almost intractable nature of the policy. Not knowing the extent of the consequences makes the policy a high risk one. And who knows what impact it might have in the future under different economic conditions? The consequences also flow well beyond just sugar because gur and khandsari prices are also distorted. 5.8 Further, the consequences of the policy may well vary by state. In this way, the policy has the potential to favor higher cost states over lower cost states, reducing the efficiency of sugar supply overall. 5.9 Distortions inherent in the system are moderated to some extent by the incentives it provides to sell levy sugar illegally into the free market. Despite a complex system of regulations and controls, some 40% of levy allocations are black marketed at higher prices. Some of this may cross-subsidize the lean marketing margins imposed on nominees in the PDS. This increases supplies of sugar and moderates prices in the free market. However, it does not obviate the costs of market duplication or bureaucratic regulation. Export And Import Controls Limit Prospects For Better Patterns Of Trade 5. 10 Although there are no formal restrictions on imports presently, the considerable stability of real levy and free market price over a long time - Chart 4.2 - suggests the dual market system is being roughly managed to deliver desired and politically acceptable price outcomes. This means controlling imports as well as exports .  - 47 - 5 .11 The current controls on exports are operated to reduce supplies to and support price on the free market even if this means making a loss on export sales . This has the potential to encourage over-production and favor foreign consumers at the expense of domestic consumers . Overall the Indian economy is made worse off. 5. 12 The removal of import controls has the potential to undermine export controls . If the import parity price is consistently below the free market price - as now - and imports start to enter the market, they will lower the free market price. However, any attempt to bolster the free market price through exports would be met by more imports and the potential exists for big losses to be incurred in exporting. This unlikely situation casts further doubt on long term manageability of the dual market system without controls on imports being reintroduced when circumstances make imports highly attractive. However, controlling exports and imports means some regions in India well positioned to cheaply source their supplies from abroad cannot do so, which raises their cost of supply, and those producers in India well located to profitably export are not free to pursue such opportunities . As Well As Being Costly, The System Is Of Doubtful Effectiveness 5. 13 Given the degree of leakage from the levy market to the free market, it appears that only about 20% of all sugar is being made available at the levy price. This is not targeted toward the poor but is available to all citizens . So only a very small proportion of sugar is being made available to the needy. Moreover, poorer consumers tend to eat gur and khandsari and there is no subsidized price on these items . Indeed, to the extent that the free market sugar price may be inflated by the system, gur and khandsari prices are also raised which taxes the poor. B. Licensing Sugar Mills Constrains Milling Capital And Raises Costs 5 . 14 The licensing system restricts the supply of milling capital to the sugar industry and limits competition between mills . Mills cannot compete by improving quality, developing strategic alliances with merchants and industrial users, through different types of storage and packaging, or through alternative financing (risk spreading) options . And because of zoning, which is an integral part of the licensing system, mills cannot compete for cane suppliers, and growers cannot compete for higher cane prices. Limiting competition between mills protects inefficient mill managers . Licensing Constrains Supply Of Sugar And Raises Price 5 .15 All this adds to costs. Constraining milling capital also limits production growth. Because takeovers and amalgamations are virtually excluded, licensing is a drag against achieving economies of scale in sugar milling which would help the industry to become more internationally competitive. International bench marking studies suggest that larger scale mill production in India could reduce costs of converting cane to sugar by as much as 40%. 5 .16 Since the licensing system does not apply to gur and khandsari producers, it gives them a competitive edge in the market for cane. This advantage is augmented by gur and khandsari producers being exempted from cane pricing policies which sugar mills are required to observe. 5. I 7 Restricting production growth, cost reducing innovations and competition between mills, raises the free market sugar price.  - 48 - Box 5. I The dual market system may have perverse effects In the accompanying diagram, DUR represents the demand for sugar in a completely unregulated market. The higher the price of sugar (P), the lower the quantity purchased (Q). The unregulated demand is considered to be price inelastic, that is, a relatively large increase in price ·results in a relatively small reduction in purchases. S represents the industry's supply response to prices it receives. The higher the price, the larger the quantity supplied. In a completely unregulated market the amounts demanded and supplied equate at point C, with OUR supplied and purchased at price PlJR. Under the dual marketing system a limited amount of levy sugar (QL) 'is made available to consumers at price PL. Demand for levy sugar (DL)) is considered to be perfectly elastic, i.e. all of the levy -allocation is purchased at this price, irrespective of the size of Qr,. However, taking up levy sugar through the PDS causes .demand in the free market Dp to shri~ i.e. the greater QL the further Dp shifts to the left of DuR. The ratio of the free market supplies (Qp) to levy supplies (QL) is fixed in the system. Free market supplies (Qp) are purchased at price Pp, levy supplies (QL) are sold through the PDS at price Pr.,, and -mills receive the weighted average of both prices, PA, in response to which they provide total supplies of QT to the combined markets. The diagram is drawn to correspond with current relativities of free and levy prices and quantities. If Pp and QT are both arbitrarily set at 100, PL equals 60, Qp formally equals 65 and QL formally equals 35 (though with black market leakage the actual ratio of Qp to QL may be close to 80:20). Given the demand and supply elasticities assumed in the diagram, price in a completely unregulated market would be 79, resulting in a supply of 93 . The dual marketing system increases the average price to 84 and total supply to 100. Thus, under the assumptions made in the diagram the dual marketing system transfers income to producers from consumers equal to the shaded area in the diagram. ln other words, in some respects the system acts like a price discriminating mop.opolist who limits sales to a high priced inelastic market. But because mills respond to an average price from both markets, more sugar is produced than a profit maximizing monopolist would seek. Price s PA~cllillll!limlflllJlll!llllJIJ!ll1!5ll!IJi1111!ifil11i~ Pu ,79 Pt ~t--~~~~~~~~~~~__...~...lp.~--+-___;:i~~~~Di.  - 49 - Licensing Encourages Political Interference Which Can Be Costly And Risky 5. 18 The licensing system is fertile ground for political and bureaucratic interference. The governments of Maharashtra and of India favor cooperatives; Uttar Pradesh favors private ownership. But competition between types of ownership would improve the structure of efficiency and management. Government officials exert considerable discretion in granting or withholding licenses and in directing where new investment takes place. New investment would be better left to the commercial judgments of investors and their financiers (box 5 .2). 5 .19 The development of new irrigation areas is politically and administratively sensitive in India. Any bias which favors the licensing of mills in subsidized new production areas rather than the more efficient use of land, water and mills in existing areas could raise the social costs of sugar production. 5 .20 The licensing system also augments the roles of political and bureaucratic activities in distributing income both among cane growers and between mills. It diminishes the role of market Box 5 .2 Some competitive criteria for an efficient sugar mill ownership policy • Many governments around the world are establishing competition policies to ensure that the most efficient producers are not competitively disadvantaged by government regulatory requirements and that governments' own business undertakings are not unduly favored. Some criteria of relevance to India's sugar mills are: • Remove legislated barriers to entry. India's licensing requirements for sugar mills compromise this criterion both in expansion and in scale of new mills. • Ensure competitive neutrality with respect to government incentives or disincentives in input and output markets. Cooperative sugar mills have preferential access to cheap capital and new mills have preferential access to higher priced free market sales. These polices compromise competitive neutrality. • SpecifY clear and non-conflicting commercial objectives for government's own business enterprises, or require them of any mandated organizations which operate commercially. This criterion is compromised by cooperatives which pursue broad social development objectives. • Ensure that boards of governors of government (or mandated) business enterprises are comprised of suitably qualified people to oversee commercial obligations and that they are given managerial autonomy and responsibility. Cooperative board members represent interests of growers, employees, financial institutions, community groups and governments, with a lot of direction from government. In Uttar Pradesh the government (not cooperative members) appoints the chairman of the board and the managing director. • Establish dividend requirements and performance benchmarks to ensure that any government (or mandated) business enterprises perform in accordance with normal business expectations. This criterion is compromised by cooperatives being able to avoid making profits by pushing untaxed surpluses back to growers, and governments not requiring a dividend on the equity they hold in new cooperative mills. This distorts investment decisions. prices. This inevitably discriminates against mills which are efficiently managed and areas in which cane is efficiently grown.  - 50 - C. Cane Pricing Reduces Commercial Flexibility And Adds Cost 5 .21 Cane pricing policies shift back to growers some of the market power granted to mills by the dual market and licensing systems. Price risks are passed from growers to mills, which in turn pass some of their augmented risks on to the rest of the community - although mills also get saddled with stockholding risks. But offsetting reduced price risks of growers (and possibly mills) is the reduction in flexibility which growers and mills have in negotiating terms and conditions of delivering cane. This raises costs and restricts opportunities for growers and millers to build strategic alliances and to innovate. Cane Pricing Arrangements Discourage Innovation And Productivity Growth 5.22 Minimum pricing requirements operate uniformly throughout the crushing season as part of an arrangement for scheduling cane deliveries and controlling the length of the crushing season. This may be reasonable if cane continues to be purchased solely on a basis of weight. But until cane is purchased on the basis of its sugar content, and mills are permitted greater flexibility in negotiating payments within seasons, opportunities will be missed to improve cane productivity. 5.23 Cane pricing policies differ between states. The Uttar Pradesh system imposes larger financing costs on mills by requiring them to make a full up-front payment. It also places a wedge between mills and growers by requiring cane cooperative societies to be involved in cane payment. This delays payments to growers and prevents growers and mills negotiating directly with each other. This imposes extra costs (3% of SMP is a significant impost) and can restrict the ability of mills to help the take-up of new technology. Without such intervention millers in Maharashtra succeed to some extent to provide a useful conduit for technology transfer. 5 .24 In Maharashtra the cooperative system equalizes cost of transport among growers, which means that cane may not be sourced from least cost locations within mill zones . The same is true in Uttar Pradesh with outstations. There is also a tax bias in India which encourages cooperative mills to minimize their own (taxable) profits by paying higher returns to (untaxed) growers. They Create Political Intervention And Costs On Efficient Mills 5 .25 State minimum pricing is subject to considerable political intervention. This increases the likelihood of prices being raised above competitive levels and weaker mills not being able to meet their obligations . When mills become ' sick', cane supplies have to be diverted at greater cost to other mills and further political interventions, government subventions and industry cross subsidies are required to ensure their longer term survival . 5 .26 The longer term effects of cane pricing policies on industry stability are unclear. But they probably are a cost to Indian national income since they push risks on to the rest of the economy and to governments, and discourage risks from being handled directly at least cost. Even so, the range and variability of cane prices is very high - see Chart 5 .1 - and, as discussed in Chapters 3 and 4, policies appear to destabilize prices and production. By comparison, cane prices in Australia - a country which exports over 80% of its output to the world market - appear to have been more stable (Chart 5.2) and vary little from mill to mill. D. Subsidized Inputs Favor Cane But Are Not A Big Stimulus To Extra Production 5 .27 Subsidized water, power, fertilizer and credit are made available generally to Indian agriculture. But because the sugar industries use these inputs more intensively than most other agricultural activities, they are particularly favored. This means that relatively more cane is produced compared with other crops . But most of the preferment is reflected in higher incomes of  - 51 - Chart 5 .1 Real Indian cane prices vary greatly between mills and years 90 .....------------------------------------------------------~ Upperl1mit :80 11-----------------,--4•;-:........;--~-----------t .. . . 70: h------,-/ _' ' --------t ,,-'--+-----........ ___,;:i ..... . . __ _ _ _ _ ..... . ' ....___./ : :1ao:·1----.;1 _____ "". . ;..___ _ , Range of cane ' ... : . ···:· s(f·- ------------ one year ',; prices within any --------~ - ...... ,/40: ._-------------+'---------_--4··.· ~:·:·: :· =0 :::. :. ):.3 . • -: .: : ~· Lowelrlrm1! :·}~·} ::'·<20: . ·:· : 1 ----------------------------_.. .·.:·:·: .. :10::" - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - t··>·:·· .... :- R~fqfr ·• 1 . . . 1 • . ..• • · . • .. . :-:::-: 199r,:19'?2. J99~::: 1994: J995:.: )wJ2· ws3 :·:r9a4 J:9as·,19a6 T~ai+9~ ::r9srv19D. = ...... .. . .. Data source : National Federation of Cooperative Sugar Factories, l 995a and i 995b: Indian Sugar Mills Association, 1994. growers rather than in greater production. This is because the gross margin from growing cane is much larger than the gross margins of alternative crops (Charts 3.2 and 4.2). It would require a large reduction in subsidies before land would be shifted to other crops, though inputs could be used less intensively on cane land if subsidies were reduced. ' Chart 5 .2 Real cane prices are fairly stable in Australia and vary little from mill to mill 1994 dollar terms · 10 1-------------------------------4 5 1-------------------------------f $/t · t---.--------------~-------------1 ·:199l = l9a2 ·1983 T984 :J9a5 ,-:1y86 :rns7 =· J9as :l989 :1 .990= 1nrl993· vn4= = :199,s: =· Data source : ABARE . 5 .28 Maharashtra and the southern and western states generally use water, power and fertilizer more intensively in their cane production than Uttar Pradesh and other northern states. Thus the pattern of cane production is distorted by subsidizing these inputs and some regions are favored more than others.  - 52 - Box 5.3 Drip irrigation in Maharashtra Sugarcane has been one of the fastest expanding crops in Maharashtra during the decade of 1970s and 1980s. From a mere 167 thousand hectares in 1970, it went up to 258 thousand hectares in 1980 to 444 thousand hectares in 1990. In 1994-95, Maharashtra harvested 518 thousand hectares of sugarcane area. This rapid expansion of sugarcane was obviously due to high profitability in cane cultivation relative to other crops, as also preferential treatment extended to establishing cooperative sugar factories in Maharashtra. Recently, however, concerns have been expressed about the sustainability ofthis water intensive crop in water scarce regions of Maharashtra. It is interesting to observe that quite a substantial portion of sugarcane cultivation has expanded to drought prone regions of Maharashtra, especially in the north-east, which often face scarcity of even drinking water. On the other hand, there are regions, especially in the canal commands of south and central Maharashtra, where sugarcane has begun experiencing increased waterlogging and salinity, threatening the viability of even existing cane cultivation. Drip irrigation is being viewed as a solution to the growing water scarcity in the state as well as to safeguard existing cane areas from potential threat of waterlogging and salinity. What is the economics of drip irrigation, and how far can Maharashtra go for it in sugarcane cultivation without causing widue pressure on the state exchequer? Drip irrigation costs about Rs 45,000/ha in Maharashtra for the laterals alone. 50% of this is subsidized by the state. The life of laterals in Indian conditions is likely to be about 5 years. Calculations by VSI show that drip can raise cane yields by up to 30% (this may be an overestimate though; evidence from elsewhere suggests gains of 10-15% are more likely) and save water by about 40% in comparison to furrow cultivation. Further, if soluble fertilizers are used, it can also save on fertilizer use significantly, as much as by 30%. If these savings, say even half of them, occur on farmers' fields, drip would still be a very attractive proposition and can easily pay for itself. The question then arises, why is it that cane farmers so far are reluctant to go for drip? Our field visits to Maharashtra revealed that they are certainly not interested without a subsidy, and reluctant even with a subsidy. The underlying reasons are many. They are not fully aware of the potential gains that drip can bring about in productivity. There is need for larger demonstrations by the government/VS! or even sugar factories to carry out these experiments on farmers' fields. Secondly, the alternative sources of irrigation - canals or electrically operated wells, are very cheap, and as long as water is easily available from them, farmers are not very interested in adopting the new technology. Thirdly, the problems involved in maintaining the laterals in a sugarcane field are much more than in other crops. This is because of the thick vegetation of the crop, not enough clean water flowing through laterals, and mishandling/damage caused by children, cattle and rodents on Indian fields . The holes in the laterals get clogged, and farmers keep looking for the clogged holes when cane is 6 to 8 feet tall in the field. This involves much extra care on the part of the farmer than he is prepared to take. Although there are electronic devices (VSI has one on its experimental station) that can track and convey to the farmer which holes are clogged, they demand extra investments. The uncertain supply of electricity further compounds difficulties in adopting drip. Thus, overall, it appears that although drip irrigation as a technique is perhaps superior to present practices, and can also lead to significant improvements in cane productivity by saving water, fertilizers, and raising land productivity, and therefore can be self- financing , yet in Indian conditions its adoption for sugarcane cultivation may not be as attractive as for other horticultural high value crops. Nevertheless, it is worth a trial especially in regions suffering from acute water scarcity and where cane yields are low. The subsidy element should be kept to the barest minimum, and emphasis should be on large scale demonstrations showing the benefits on farmers' fields, and also indigenising the technology to suit Indian field conditions. Australia has developed I.Tape TSX for drip, which has slits rather than holes. This minimizes the risk of hole clogging and may be an attractive technique for Indian conditions.  - 53 - Allocation Of Subsidized Inputs May Restrict Production And Productivity 5.29 Electricity and water subsidies impose particular costs because supplies of these inputs are restricted. The absence of metered charges for electricity to pump irrigation water is a direct cost to other power users who compete for limited supplies of power and pay higher prices in order to cross-subsidize extravagant use by growers. Water pricing regimes which do not cover costs discourage water conserving techniques, such as trickle irrigation, which would allow more land to be irrigated or water to be used in higher value non-agricultural activities - see Box 5.3. 5.30 As is true of all interventions through prices, the benefits (and costs) of subsidies (taxes) do not fall only on the group which directly receives (pays) them. Some of the subsidies paid on fertilizers are likely to be appropriated by fertilizer manufacturers. Subsidized Credit Protects Inefficient Parts Of The Industry And Raise Costs 5.31 New, expanding and modernizing cooperative mills receive financial packages which subsidize a higher equity to debt ratio than might otherwise be possible. This shifts risks to state governments and is a cost to established and efficient mills which do not receive favored access to free market sugar sales and whose returns are depressed by subsidized expansion. 5.32 The input subsidies undoubtedly raise income in the sugar industries, but they come at a costs to some sectors and are unevenly distributed between regions. They protect the continuance of some inefficient growers and possibly mills and this is an imposition on efficient parts of the industry. They encourage input waste and an inefficient mix of input use and output supplies. For these reasons they lower India's national income even though they increase production in those industries and regions which can make best use of them. E. Taxes And Imposts Distort Regional And Product Patterns Of Production 5 .33 Most explicit taxes on the sugar industries apply to the milling sector. Gur and khandsari are favored, since they are generally exempt. There are also some differences in rates of state taxes , which generally favor Maharashtra producers . Differences in the rates and bases for imposing excise taxes on sugar and molasses also may distort incentives to add value in sugar cane processmg. Big Disincentives Flow From Taxes Which Are Not Levied On Value Added 5.34 The bases on which taxes are imposed also create distortions. With the exception of the central government 's excise on molasses, all taxes are paid at specific rates (rupees per unit of weight) . Specific rate taxes may provide stable revenue flows to governments but impose greater relative costs on the industries when commodity prices are low. Ad valorem (percentage of value) taxes would cause less distortions to resource use. Most efficient of all would be taxes on 'value added ' (value of sales less costs of purchased materials and services) which would not distort the impact of changing prices on how resources are used. Imposts Relative To Other Industries Matter Most 5. 35 Some other interventions implicitly tax the industries or particular industry groups. The principal impost of this type is the requirement to sell a percentage of sugar output to the FCI and other state agencies . Although this is an impost on individual mills it probably increases overall  - 54 - industry revenue . Any remaining state requirements that molasses be diverted to industrial usage are also an impost on the industry. F. Incentives To Maintain And Develop Infrastructure Could Be Stronger 5.36 The provision of major transport infrastructure (roads, rail, ports) and major irrigation works (dams and canals) in India has been the preserve of the public sector. Congestion. of transport has provided considerable 'natural protection' for the sugar industry from imports, since it increases costs of imports into wholesalers' stores by from I 0% near ports to 20% further inland. But congestion also raises costs of transporting cane and lowers the quality of cane because of the deterioration which occurs due to delays between cutting and crushing. Road congestion is also a major reason for the short distances between sugar mills and the consequential small scale of sugar production in India. Congestion On Roads Is A Constraint 5. 37 Costs of road works are a charge against general revenue offset to only a limited extent by fuel and vehicle taxes . More could be raised from fuel taxes, since the price of diesel fuel in India is well below the OECD average. No special charges are made on cane growers or sugar mills for special road development or maintenance requirements within mill areas. There Is A Danger Water Resources Will Not Be Maintained If Not Paid For 5.38 Major dams and irrigation canals have been built throughout India at public expense without the using industries contributing to their amortization costs . Also, charges for water use have failed to cover operating and maintenance costs . This has led to a deterioration of irrigation facilities and encouraged overuse of water. Due to rising ground water it has also caused salination problems in many areas. 5.39 That gross margins for cane are much higher than for alternative crops suggests that if water charges were raised to cover . operating and maintenance costs there would not be a significant shift of land from cane to other crops. To increase water charges would not only enable irrigation facilities to be maintained more adequately but would encourage more efficient water use and more sustainable cane production. 5 .40 Cheap transport and water can help growers in the short term. However, over time they result in a run down of infrastructure, an increase in industry costs and a lowering of India's national income. G. Research And Development Seems To Need A Stronger Focus 5.41 Although cane and sugar production have grown consistently in India for several decades, this has largely been the result of the increased use of resources, not of productivity growth. As reviewed earlier in chapter 3 and in Appendices C and D there appears to be considerable scope for productivity increases through the uptake of new technology. 5 .42 Funding for R & D comes from a variety of sources. States contribute directly and require sugar mills and/or cooperative cane societies to contribute to cane development. There is some central government funding from the SDF (itself derived from a cess imposed on mills) though there is no coordinated central government policy on cane development.  - 55 - 5.43 Productivity growth can come from many sources, including reform of a wide range of economic and social policies. R&D is also an avenue for productivity growth. The overall level of R&D spending on cane and sugar in India is low- at most 0.25% of the industries' gross value of production. Many competitor national sugar industries spend closer to 1.0% and Australia spends 1. 5 %. Given the large numbers of cane producers in India, the considerable knowledge base that already exists in the nation 's research institutes, and the lag of productivity growth, the priority is for additional expenditur~ to be on development (including extension) rather than on basic research, at least in the immediate future . H. Ownership And Control Slows Technological Uptake And Productivity 5. 44 Restrictions on the size of land holdings and on leasing land raise costs and lower yields by inhibiting investment in newer technologies which require larger scale production. They prevent the more efficient farmers who have access to capital and have technical and managerial abilities from expanding their production from an expanded land base. They also limit those who cannot use their resources from leasing their land to those who can, and keep land prices lower than they otherwise would be which discourages others from selling. 5 .45 Ownership and leasing restrictions also maintain an inordinate number of growers in the industry. This raises administrative costs and frustrates efforts to rationalize deliveries to mills. Ownership Controls At Mills Have A Similar Effect 5 .46 Other ownership restrictions could also reduce the efficiency of mills. In Maharashtra only a cooperative form of ownership is permitted for new mills. Though there is nothing inherently inefficient about this form of ownership, where it is mandated there can be no competitive challenge from more profit oriented styles of private ownership which may have clearer commercial objectives and less constrained boards of governors . In Uttar Pradesh the government even controls the appointment of the chairman and managing director of those mills which are cooperative. 5.47 In India, even private mills cannot have more than 49% foreign ownership . This may have prevented major world sugar groups with access to capital, know-how and technology from taking an interest in developing the Indian industry. These groups have been a catalyst for change in some other national sugar industries. I. Labor Laws May Lock In Existing Technologies 5 .48 Indian sugar mills employ very large labor forces whose terms and conditions of employment are specified by a Central Wages Board for the sugar industry. Labor laws are designed to create job security and prevent wage exploitation. However, they appear to have led to privileged conditions in sugar mills, made possible by the protection of the dual marketing and licensing systems. 5.49 The result has been a reluctance by employees to leave and for employees' own family members to replace them on retirement. It has proved very difficult for mills to negotiate labor force reductions, as these benefits have to be incorporated into redundancy packages. Thus the substitution of capital for labor, which has been occurring in other national sugar industries, has been slowed in India.  - 56 - 5.50 This has resulted in the maintenance of many low paid jobs in Indian sugar mills (albeit for higher remuneration than employees could get elsewhere) and in very poor labor productivity. As real wages rise as a result of rapid economic growth in India, it will be imperative that sugar mills be able to increase their labor productivity if the industry is to retain its international competitiveness. J. Good Policy Coordination Between So Many Departments Is Impossible 5.51 The development, review and administration of policy is itself a major policy issue. A plethora of government departments, commissions and agencies in India have the carriage of policies for cane and sugar. Some are specialized for the sugarcane based industries while others relate more broadly to the agricultural and manufacturing sectors or to regional and social planning. While each of the ma3or sugar states has a department/ comnuss1on for agriculture they also have sugar/cane commissions to deal specifically with sugarcane issues. Cane and sugar policies are also driven by departments/commissions/agencies for cooperatives, irrigation, ground water, industrial development, food supplies, prices and costs and numerous finance agencies . 5.52 This structure has favored a proliferation of policy objectives and policy instruments for the industries with little attempt to coordinate them and set priorities. This has created fertile ground for political intervention in response to short term problems and pressures from interest groups. It has also substituted administrative directions in place of responses to market incentives. Not only does this inhibit efficient adjustment to changing economic environments, it also leads to high compliance and policy costs. Good Policies Should Be Designed In An Economy Wide Context 5 .53 Countries which have seriously tackled economic reform have found it necessary to start with their own policy setting and administrative procedures. Policy objectives and priorities need to be set in an economy-wide context to ensure that a country's most efficient industries won't be dragged down by preferment being given to politically sensitive but less efficient industries. This requires the minimization of the number of policy departments working in independence of each other. It also requires the quarantining of administrative departments and agencies, which have a vested interest in retaining and proliferating regulation, from having a role in the design of regulation. 5.54 A leaner and more focused set of policy objectives and instruments for the sugarcane based industries, which operate in a broader economic framework than those industries alone, would serve the Indian economy well .  - 57 - 6. What of the Future? 6.1 The previous chapter identifies the in principle sorts of impacts sugarcane sector policies are likely to be having now. But what effects are they likely to have in the future and what alternative policies could be adopted? Moreover, how much might it be worth to the Indian economy to change policies in the sugarcane sector? A. What Are Some Of The Key Challenges Facing The Sector? 6. 2 India's strong growth in sweetener consumption is likely to continue while economic growth and population growth continue at high levels . Whether growth in sweetener production can match consumption growth, as in the past, will depend importantly on sugarcane policies and developments elsewhere in the economy. 6. 3 Previous growth has been sustained by a set of policies which have greatly favored sugarcane, allowing it to command increasingly more resources. Not surprisingly growth has largely been linked to the use of more resources; inputs such as land, water, fertilizer and labor. To a lesser extent it has been linked to productivity increases such as yield increases. Yet economic and policy changes now occurring in the India suggest this pattern of growth will be more difficult to sustain. • Development of water resources will slow . • With rapid rates of economic development wage rates and therefore the cost of labor will increase strongly as it has done in other fast growing economies. • As the economy becomes more competitively based, increasing demands for land will force up its price. 6.4 Of the four main growth inputs, fertilizer is the only one which looks likely to be readily available at current prices, although even fertilizer prices may go up if remaining subsidies are removed. Without bigger increases in productivity growth, it appears sugar and sugarcane prices may have to rise sharply if production growth is to be sustained in line with consumption growth. B. How Big Are The Economic Challenges Facing The Sugarcane Industries? 6.5 To assess the main economic and policy factors likely to affect the future of India's sugarcane industries we use our (computable) economic model of the sector. What Will Happen If Main Subsidies Are Removed But Other Sugarcane Policies Retained By The Year 2005? 6.6 First we project the model out to the year 2005 allowing sweetener consumption to grow in line with income and population growth and in response to prices . We assume India continues to pursue targets of self-sufficiency and per person levy sales of 4.8 kilograms a year at current prices, and use the model to determine how much retail sugar prices will have to increase to attract sufficient resources to achieve this . 6.7 We assume India's economy continues to grow strongly at around 5.0% per year, that this causes rural wages to grow at around 4.0% per year and the costs of other inputs, such as water and power, increase in line with the removal of subsidies set out in Table 4.3 (tropical states are  - 58 - assumed to have the same rate of subsidy as Maharashtra and sub-tropical states are assumed to have the same rate of subsidy as Uttar Pradesh). The milling capital subsidy for Maharashtra of 16% discussed earlier is also removed. We assume productivity growth in sugarcane increases about its long term trend of 1.3%. We also assume mill licensing allows the supply of milling capital to expand at historical rates but that land will become increasingly expensive to purchase as policies which historically taxed the production of alternative crops are discontinued and the development of water resources slows . Historically, the development of water resources at low cost to the sugarcane industry and its favored position among other crops meant there was a ready and increasing supply of land available at constant or declining cost. 6.8 As discussed earlier, another assumption is that the long run world raw price will average about 11 c/lb to keep world demand and supply roughly in balance. But we further assume that if India upsets this balance and starts demanding additional imports, this will raise the long run world price by around 2.5% for each additional million tons of sugar demanded. This is consistent with estimates by Borrell and Duncan ( 1990) and with developments in the world market price. 6.9 The assumptions and the results provide a likely scenario of the sugarcane sector ten years from now if sugarcane sector policies remain largely unchanged. To Remain Self-Sufficient And Satisfy A 41 % T Increase In Sweetener Consumption Free Market Sugar Prices Have To Rise By 27% 6.10 Detailed results are given in Table B.2, Appendix B. Table B.l m Appendix B summarizes the base data for the model. All changes are relative to this base. 6.11 Sugar consumption increases 76% while gur consumption declines 24%. Levy sugar consumption increases in line with population growth. Considerable amounts of sugarcane are diverted from gur to sugar production. As a result of diversion and the higher sugar recovery rates of the sugar milling sector, the 76% increase in sugar production (from 12.7 million tons to 22.4 million tons) is achieved with only a 36% increase in sugarcane production. Sweetener consumption overall increases 41 % or .at an annualized rate of 3.4 %. This is in line with historical trends . 6. 12 Higher sugar recovery rates in the sugar milling sector mean the overall 41 % increase in sweetener consumption can be achieved from just a 36% increase in sugarcane. Still, productivity increases provide only a relatively small increase in output. Most of the increase comes from increased use of land, water, labor, capital and other purchased inputs . The scarcity of land and water in particular as well as rising wages, means cane prices have to increase by 38% to enable growers to pay for the rising costs of these resources and sugar prices have to rise by between 27 and 3 2% to accommodate this . Uttar Pradesh And The Sub-Tropical Regions Have More Scope To Increase Production Than Maharashtra And The Tropical Regions 6. 13 Uttar Pradesh increases sugar production at a greater rate than Maharashtra owing to its greater supply of sugarcane which it can divert from gur and because it is less affected by the loss of subsidies simulated. Cane prices have to increase more in Maharashtra (48%) than Uttar Pradesh (34%) owing to its tighter input constraints, such as on water. Overall, to increase its sugar output by 40% Maharashtra needs to increase its input usage by 35% compared with Uttar Pradesh where input usage needs only to increase by around 33% to produce nearly 100% more sugar. Maharashtra's need to raise cane price more than Uttar Pradesh reflects its greater dependence on scarce resources . Its need to do this reduces its relative competitiveness and its  - 59 - share of total Indian sugar production declines from around 33% now to 26% by the year 2005 . Uttar Pradesh which can expand production without increasing cane prices so much becomes more competitive and increases its share of production from 28% now to 32% by 2005 . The Indian Sugarcane Sector Is Fairly Responsive To Increases In Price 6.14 The results reveal the Indian sugarcane sector as we have modeled it to be fairly responsive to price changes. A 1% increase in the cane price tends to induce about an equal response in sugarcane production. However, a 1% increase in the price of sugar induces about a 1.5% increase in sweetener production and a 3% increase in sugar production. Uttar Pradesh is nearly two and half times more responsive than Maharashtra. While these results suggest India is among the world's more price responsive producers, this is hardly surprising given its flexible cropping sector and highly flexible/diverse processing sector. No other countries have such large gur and khandsari sectors to draw cane from . Subsidies Do Not Have A Big Overall Effect On Production While India Pursues Self- Sufficiency Goals 6 .15 Our results also reveal that while ever the government pursues a policy of self-sufficiency, removing subsidies from the industry will have little effect on its production. Full removal of subsidies lowers cane and sugar production by around one percent only. Because the government does not allow imports in this scenario, producers are mostly able to pass on the cost of the loss of subsidy to consumers . They are able to increase price to compensate for the loss of subsidy and so largely maintain their profitability. The loss of sugar cane production subsidy results in an increase in the free market sugar price of 2%. Loss Of Capital Subsidies On Water In Maharashtra Would Lower Production There By 20% And Increase It Elsewhere Given A Self-Sufficiency Goal 6 .16 The impact of the loss of subsidy has bigger regional effects and reveals Maharashtra to be much more sensitive to the loss of subsidy than other areas . Maharashtra's production of sugar is lowered by around 6% while other regions record increases in production of up to 1% due to the higher prices . Moreover, were Maharashtra forced to pay the full capital as well as maintenance costs of its water, its production would decline by an estimated 22%. Production would increase in Uttar Pradesh and other sub-tropical states by up to 7% to compensate and allow India to maintain self-sufficiency, although this would raise prices further (around 2.5%) . But Taxes Are Bigger Than Subsidies 6 .1 7 In assessing the net impact of subsidies on the sector it is only fair to also consider the impact of taxes on cane and sugar. Leaving aside the full capital subsidy on water in Maharashtra - since this is largely a sunk cost - if taxes are eliminated along with subsidies, the results reveal that overall the industry pays more in taxes than it receives in subsidies . But mostly the results reveal it is consumers who benefit from the joint elimination of taxes and subsidies . The industry would be better off by around 2 % of its value added, while consumers would be better off by 3.5%. Government meanwhile would loss net revenue equal to about 3.5% of industry value added. 6.18 We assume from here on that subsidies remain removed, but that taxes remain in place. Government must source its revenue from somewhere and its rate of tax on the sector, even without making compensatory subsidy payments is not excessive . Other sectors of the economy are also  - 60 - being taxed. The real issue is if the sugar industry is being taxed more heavily than other sectors of the economy. Based on the results above it is doubtful that it is. The Results Suggest Pressures Will Emerge For Policy Changes And Imports 6. 19 It can be summarized that for the whole Indian sugarcane sector to meet the 41 % increased demand for sweeteners and 76% increased demand for sugar over the next 10 years, its command of resources will need to rise by around 34 %. To attract these resources into the sector will require real ·sugar, gur and khandsari price rises by over 27% given current policy constraints. This implies a tariff of around 55% will be required on imports. 6.20 These are not pleasing results for politicians and policy makers concerned about the price of sugar. But perhaps more to the point, the projected price rises help to quantify the pressures which are starting to emerge for changes in policies so that the sugarcane sector can achieve productivity gains or imports can be used to hold sugar prices down. 6.21 With stronger productivity growth prices would not need to increase so much to achieve increased output. Indeed, the projected price from the model is closely related to the sugarcane sector's slower productivity growth relative to the productivity growth elsewhere in the economy. The alternative to productivity growth as a control on prices is to allow unrestricted imports to the domestic market. A 2.3% Additional Annual Productivity Growth Is Needed To Remain Self-Sufficient, Be Competitive With Imports And Keep Prices Stable 6.22 Next we use the model to determine what additional productivity growth is required by the year 2005 to satisfy increasing demands for sweeteners at stable prices and without drawing in imports. Detailed results are presented in Table B.3. 6.23 The estimated annual 2.3% additional productivity growth required (equal to 25% growth over the next decade) gives a fairly stark indication of the big challenge facing the sugarcane sector. Nonetheless, some comfort .· must also be drawn from the fact that international benchmarking suggests that this sort of productivity growth is within the realms of possibility - see Appendices C and D. Albeit policy changes would be required to achieve it. Economic Gains Of $2 Billion A Year May Be Within Reach 6.24 An important feature of the results presented in Table B.3 is that not only would sweetener demand growth be satisfied without price rises, representing a big increase in community welfare or income, but consumption of sweeteners would be about 14 % greater than in the previous simulation because of the lower price. In achieving such productivity gains, the Indian economy would be US$2 billion real dollars a year better off by the year 2005 than is projected in the first set of results. In box 6.1, an indication of how the economic gains of productivity increases are worked out is given. In the model the gains are worked out by region and products not in aggregate as shown in the box. If Imports Are Permitted Duty Free, India's Effect On World Price Raises Domestic Prices 6.25 Even without additional productivity growth, a liberal import policy could be used to meet increased demands for sweeteners. However, India' s import demand would be so great relative to available export supplies from other countries by 2005 that world price and Indian price would nse.  - 61 - 6.26 Detailed results of allowing liberal sugar imports are given in Table B.4. World price is raised 25% by Indian imports of 7.3 million tons which represent about 31 % of India' s sugar consumption by 2005. Still India's retail price is raised: 18% compared with the 27% in the first simulation where India was projected to achieve self-sufficiency. The rise in retail sugar prices, although not a lot less than in simulation 1, induces smaller increases in Indian sugarcane and sugar production than those reported in simulation 1. This reflects a major problem of the dual price system and the sort of economic constraints it is likely to impose in the future. The dual price system and levy sugar in particular discriminate against domestic production in favor of imports. 6.27 Producers are taxed by the 35% of their sales which must be made to the levy market at a 50% price discount. Imports are not similarly taxed. On average domestic sugar sales incur a tax of 17.5% which imports do not. This greatly discourages potential Indian production. 6 .28 Compared with simulation 1, Indian consumers are made better off by the cheaper supply of sugar coming from imports. Their economic gain is around US$1.0 billion a year by 2005. But at US$1.6 billion annually, producers ' economic loss outweighs this by US$0.6 billion a year. The Indian economy is made at least $0.6 billion worse off by the dual market system under a free trade situation. Removing The Dual Market System Increases Income By Nearly US$0. 9 Billion/Year 6. 29 Compared to the previous simulation removing the impost on producers of levy sugar greatly encourages domestic production, reducing imports, the import parity price and the Indian free retail price - see Table B.5. 6.30 Annual imports decline from 7.3 million tons to 4.9 million tons by 2005. Annual domestic production increases 1.4 million tons or 8%. In Uttar Pradesh production increases 11 % whereas in Maharashtra it increases by less than 3% only, demonstrating how the dual price system discriminates against some states more than others . 6.31 Overall sweetener consumption declines slightly from the equivalent of 30 .3 million tons of sugar to 29 .1 million by 2005 because cross-subsidized cheap sales are eliminated and therefore the price of levy sugar increases. However, because imports are reduced the world sugar market price is also reduced, resulting in India paying less for its sugar overall. The Indian retail price of sugar increases by about 6% only instead of 27% in the self-sufficiency simulation. 6.32 The reduction in the cost of sugar coupled with increased production at world prices makes the community an estimated US$278 million a year better off by 2005 than under the self- sufficiency scenario . But compared to the previous scenario with free trade and the dual market system operating, the community is around US$0 .9 billion a year better off. It has eliminated the US$0.6 billion annual cost of the dual market and achieved other gains of nearly US$0.3 billion by 2005. In other words, under liberal trading arrangements the dual marketing system has the potential to prevent gains from trade of nearly a billion dollars annually.  - 62 - Box 6.1 Calculating economic gains The chart below shows how a 25% productivity increase shifts the supply curve downward from S 1OO% to s75% by up to 25% of the price before the productivity increase occurred. This is not a parallel shift in the supply curve because the productivity of land improves by 25%t and therefore reduces the scarcity of fixed factors and increases the elasticity of supply of sugarcane - which is automatically taken account of in the model. The average sugar price from the first simulation is US$549/ton. However, productivity gains allow producers to sell more at a lower price. Consumers buy 14% more sweeteners and producers supply this much more at the new price of US$449/ton. So consumers' gain is A+ B + C and producers gain is D + E but lose A. A+B+C $100 (28:7 + 4.0 (0.5)) = $3 .070 billion B $100 (7.7 (0.5)) $0.385 billion c '$100 (4.0 (0.5)) $0.200 billion A $2.485 billion D [($549 (0.25).x 28.7) 0.5 -B $1.585 billion E [$549 (0.25) - 549 - 449] x 4 (0.5) $0.075 billion So: • Consumers are $3.07 billion better off due to lower prices. • Producers are $(1585 + 0.075 - 2.485) 0. 825 billion a year worse off because they drive down the price of land but the community is $(3 .070 - .825) 2.245 billion better off. • Model results which avoid aggregation errors and take account of more detailed interactions show the community is in fact $1.977 billion better off. 600 500 ~ 0 ·a400 6 O'l ~ 300 QJ O'l 0 at 200 ~ 100 $/t mt s 10 15 20 25 30 35 Quantity of sweeteners  - 63 - It May Cost $3.5 To Provide Each $1 Of Sugar Subsidy 6.33 Although levy consumers' welfare declines (US$0.8 billion) and black marketeers' welfare declines ($0.5 billion) due to higher prices, other consumers are better off (US$1.3 billion) due to lower prices and producers are better off (US$0.7 billion). On this basis, the dual market system appears to cost around the economy $1 .7 to transfer $1 of subsidy to consumers. This is expensive - 70 cents is lost for every dollar of subsidy delivered to consumers. Bearing in mind this subsidy is available to all consumers, not just the needy, the cross-subsidy is likely to be highly inefficient in reaching its target. If one person in five is truly needy, it would work out to cost the economy $3 .5 to provide $1 of sugar subsidy to a needy person. 6.34 The results of this simulation help to demonstrate the distortionary, costly and unpredictable nature of the dual market system. Although we suggested earlier that the costs of the dual marketing system are moderated by the leakage occurring, this simulation helps to demonstrate that under an alternative, futuristic (2005) scenario it could impose very high costs on the economy. 6.35 Dismantling the dual marketing system turns out to be virtually a win-win situation. Politicians and policy makers are winners because the price and imports fall . Producers are winners because their price and production rise. The only losers are the small number of poor people who truly benefit from the provision of levy sugar. Yet even this group need not be losers. If the loss of the levy is worth US$800 million by 2005 as estimated above and only 20% of people are truly needy, then to compensate these people for the loss of the levy subsidy would cost around US$ l 60 million a year only in 2005. The compensation could be targeted through a food subsidy program. Under Free Trade, The Sector Is More Sensitive To Subsidies 6.36 We can use the model to reassess the impact of loss of subsidies on the sector under free trade. The results show that under a free trade scenario, the loss of subsidies documented in Table 4.3 and the Maharashtra milling subs. idy are responsible for sugar production being about 3.5% less than if subsidies continued to apply . Because of free trade producers cannot simply pass the loss of subsidy on to consumers in the form of higher prices. Retail prices remain almost constant so the loss of subsidy reduces profitability of sugarcane and sugar production resulting in reduced output. Still, as before the impacts are not big. This reflects the relatively high profitability of sugarcane production relative to other crops and the fact that profits need to decline a lot before growers shift to other crops. Removing Licensing Could Create Another Win-Win Situation 6. 3 7 In the previous chapter we reviewed how licensing was restricting competition and the uptake of better technology at mills. Based on a comparison of international and Indian milling practices and costs, our judgment is that milling costs could feasibly be reduced by around 20% through achieving better economies of scale by the year 2005 and sugar recovery could be increased by at least 5% from better milling practices. Taken together, productivity gains in milling capital and labor of 25 % seem feasible. Other sugar industries have been able to achieve these sorts of productivity gains by removing policy constraints on milling. 6. 3 8 We showed earlier in Chart 3. 6 that there is scope to reduce per unit milling costs by over 40% through pursuing economies of scale in milling. We also indicated in chapter 3 and Appendix C that there is scope to increase sugar recovery by 10%. Although this might suggest productivity gains up to double what we have suggested, we have erred on the side of conservatism because  - 64 - adopting new practices is not costless and the uptake of new technology is usually not even across the whole industry. 6.39 Increasing capital and labor milling productivity in the model by 25 % increases international competitiveness to the extent of reducing imports 20% (from 4.9 to 3.9 million tons) by the year 2005 compared with the previous simulation. Sugar production increases 7.6% or about one million tons. The milling sector is made more competitive relative to gur and khandsari and commands a greater proportion of the available cane. The milling sub-sector's increased competitiveness allows it to bid up the price of cane which induces a 4. 3% increase in the supply of sugarcane. Detailed results are set out in Table B.6. 6.40 The increased supply of sugar lowers the world and domestic sugar prices by between 2% passing about half of the benefits to consumers (US$176 million a year). Nonetheless, producers capture annual gains worth $18 9 million, increasing profitability of the sector by about 4. 5%. Millers pass the benefits to growers because milling capital and capacity has become more scare relative to sugarcane which increases the competition for cane. Overall, the gains to the Indian economy are around US$365 million a year by the year 2005 . Although smaller than the apparent gains from eliminating the dual market system, in absolute terms these are very large economic gains which occur annually. There Are Potential Productivity Gains On Farm Too, Worth $1.3 Billion A Year 6.41 In the previous chapter we reviewed how cane pricing arrangements in Uttar Pradesh, water pricing arrangements and lack of competition in milling may be standing in the way of taking up better technology on-farm. In Appendix D, we give an assessment of the scope for productivity gains in cane growing were various policy constraints relating to cane pricing, water pricing, competition among mills and better provision of extension services relaxed. There appears to be considerable scope for yields of cane per hectare and yields of sugar per tonne of cane to be increased through better practices . Our assessment is that cane growing costs could feasibly be reduced by around 20% by the year 2005 in the tropical areas and by 15% in the sub-tropical areas . 6.42 Based on the multiplicative effects of the average yield potentials indicated in Tables D. l and D2, it appears productivity could be increased by over 40% in Maharashtra and by nearly 35 % in Uttar Pradesh. Again, as for milling, although this is considerably more than we have assessed to be possible in our simulation, we prefer to err on the side of conservatism and make allowance for the fact that productivity gains are not costless and may not be taken up evenly across the industry. Moreover, we have assumed an underlying productivity growth of 1.3% per year (or an aggregate gain of 14%) with or without policy change. 6.43 Increasing sugarcane land, capital and labor productivity in the model by 20% for the tropical regions and 15% in the sub-tropics has a much more dramatic economic effect than increasing milling productivity. Reflecting a further increase in international competitiveness, imports decline from 3.9 million tons in the previous simulation to 1.3 million tons or 5.2% of India 's sugar consumption . Sugarcane production expands a further 13% and sugar production expands by 20%. Maharashtra expands sugarcane production at nearly twice the rate that Uttar Pradesh but both expand sugar production at nearly the same rate 6.44 As a result of all the changes discussed so far~ the pattern of regional sugar production in India is shifted away from Maharashtra toward Uttar Pradesh by the year 2005 . Compared with the situation now, with Uttar Pradesh producing 28 and Maharashtra producing 33% of the country' s sugar, in this simulation for the year 2005 Uttar Pradesh produces 32% and Maharashtra  - 65 - produces 28%. This suggests current policies could be favoring Maharashtra and discriminating against Uttar Pradesh. 6.45 The increased production causes world and domestic sugar prices to decline between 5 and 9% and cane prices to decline by 17%. In this simulation, by the year 2005 the sugar price is similar to its current level, but production of sweeteners overall has expanded about 50% and sugar production by 83% compared to the current situation. 6 .46 The lower prices compared with the previous simulation and the increased production at lower cost provide projected economic gains of US$1.328 billion dollars a year. Consumers receive almost all of this gain. Compared with the 25% increase in productivity in milling, the economic gains from productivity increases in sugarcane growing are far more significant as a source of economic growth. Detailed results are presented in Table B.7. C. Two Options To Meet Sweetener Demand Growth: One Is 30% Dearer 6.4 7 Our analysis suggests India faces two broadly different but plausible options for satisfying its rapidly growing demands for sucrose based sweeteners : • An expensive growth option; and • A cheap growth option. 6 .48 The expensive option involves persisting with existing policies. This option involves growth through increased input usage, following existing patterns of production, trade and use of technology. This option is expensive because to command more of the economy's primary resources and to be competitive in bidding for these the sugarcane sector will need to pay more for them . And it will only be able to do this if it receives higher prices for its output. This will only be able to be done if it is protected from imports . 6.49 The cheaper option involves considerable policy refonn . This is needed to relax constraints which impede resource mobility within the sector and discourage the uptake of better technologies . Rather than encouraging growth through increased input usage, this option would encourage growth through productivity increases (yield increases) and the more efficient allocation of existing resources . This would limit the extent to which the sector would need to bid up the price of resources and indeed, more efficient resource use would help offset the costs of resources such as labor which will rise anyway. This way growth in production and consumption would be able to occur without increases in the price of sweeteners. 6.50 Our analysis suggests that the second option is far superior to the first. With policy reforms the allocative and technical efficiencies which could be introduced to the sugarcane sector would sustain annual factor productivity growth of over 3 .5% for at least a decade. In terms of international best practice, India's sugarcane policies have held the sector back meaning there is considerable scope for technical and economic catchup. The ensuing economic gains could be worth around $2 billion ($1.328 +.365 +.278) a year in real terms by the year 2005 or around 26% of the sector' s value added in the year 2005 . And all this could occur without protection from the world market. Further, potential losses of US$ 0.6 billion a year would be avoided by not having the dual market system. What Policy Reforms Could Mean For Producers And Consumers 6.51 The potential advantages of policy reform for consumers and producers are best illustrated by comparing simulations 3 and 6. The greatest differences in economic welfare exist between the two scenarios represented by these simulations . Both scenarios have zero tariffs, similar to the  - 66 - existing situation, but simulation 6 includes all policy reforms. Table 6.1 gives a summary of the results for both simulations and shows the potential economic benefits to producers and consumers of policy reforms in simulation 6 over simulation 3. 6.52 Higher productivity and the removal of the dual market tax on producers represented in simulation 6, allows producer profits to increase by nearly $0.5 billion a year. With increased productivity this occurs despite lower cane and sugar prices . Lower prices benefit consumers considerably. They encourage higher consumption and extend the spending power of consumers' incomes by over $2 billion a year. Table 6.1: Advantages to consumers and producers of policy reform by 2005 Scenario/simulation 3 Scenario/simulation 6 Policy setting zero tariff zero tariff dual market free market policy constraints no policy constraints Production (kt/year) Cane 283 727 347 833 Sugar 16 905 23 885 Sweeteners 23 224 30 312 Consumption (kt/yr) Sugar 23 959 25 001 Sweeteners 30 278 31 429 Imports (kt/yr) 7 253 1 316 Prices (Rslt) Cane 685 606 Levy sugar 9 050 na Retail sugar 17 930 14 375 Change in consumer welfare (US$ billion/yr) na 2.099 Change in producer profits (US$ billion/yr) na 0.453 D. The Broad Conclusions From The Results Are Unambiguous 6. 5 3 Although we cannot be certain of the exact magnitudes of gains from policy changes based on the projections of our model, they do clearly demonstrate the potential of existing policies to strongly retard the sector' s economic growth under a set of highly plausible assumptions. Indeed, we have tended to err on the side of conservatism in making our assumptions . So, if anything, it would appear that existing policies have the potential to hold back even greater opportunities . The projections also clearly demonstrate some of the broad factors underlying the outlook for the sector including: • If economic growth is strong, sweetener demand and sugar demand in particular will also grow strongly but so will labor costs .  - 67 - • If cost increases cannot be offset by productivity growth, price will have to rise significantly through import protection or India will need to import large quantities of sugar. • If India imports large quantities of sugar it will force up the world and Indian prices. • With changes in policy India appears to have the potential for large productivity gains and sweetener production growth. • If India achieves policy reforms, it has the capacity to largely meet its own sweetener requirements at internationally competitive prices and with few imports, and • India will face a big challenge to drive all imports from the market at internationally competitive prices and because of its high internal transport, handling and port charges, is highly unlikely to emerge as a significant exporter.  - 68 - 7. What Do We Propose? 7. 1 The previous chapter illustrates some of the changes of opportunities for the sugarcane based industries which are implicit in India's prospective population and income growth over the coming decade. This chapter addresses the features which we believe should characterize the industries and their markets if they are to make their greatest contribution to India's well-being as these changes occur. It makes a number of proposals which are designed to achieve the objectives embedded in this vision for the industries . A. Vision: Catch Up To World Best Practice And Work Sugarcane Resources Harder 7.2 An appropriate vision for the industries might be: • Internationally competitive, prosperous and ecologically sustainable sugarcane and sugar milling industries, • In which all participants are able to maximize their opportunities and are rewarded for initiative and excellence, • For the benefit of Indian sugar consumers who are able to express their preferences and have them met for various amounts and qualities of sugar, • And for the ultimate benefit and welfare of all Indians . 7.3 Characteristics of the industries and their markets which are implicit in this vision are: • International competitiveness with minimal restraints on interregional trade and on imports and exports; • Operating within a general set of commercial rules rather than rules made specifically for cane and sugar; • Risks of producers and users being borne at least cost by those who incur them; • Rewards being able to be appropriated by those who take initiatives; and • Targeted assurance of sugar supplies at affordable prices to those in need as part of a government funded safety net. 7.4 We now tum to the various ingredients of policy to examine what their objectives should be, what ends should be aimed, and what steps should be taken now. B. Marketing: Allow Markets To Work Aim • Obtain gains from free trade and avoid the costs of the dual market system taxing domestic sugar in favor of foreign sugar and, encouraging sugar production in some states at the expense of others . From model results, achieving this objective could be worth around $0 .9 billion a year by the year 2005 - $0.6 billion from not taxing domestic sugar through the dual market.  - 69 - Objectives • No regulated distinctions in the market for sugar - let sugar be sugar irrespective of who produces it, where it is produced, or who consumes it. • Let quality, quantity and price differences reflect consumer preferences and producer opportunities. • Ensure targeted access to sugar by those who have special needs as a social obligation on the whole community and not a cost on sugar producers. Ends in view • Complete removal of dual market distinctions between free market and levy/PDS sugar. • Certainty of access to sugar imports without regulatory or tariff restraint. • Ability to respond to any incentives to export sugar sold at free market prices without the obligation to pool benefits/costs with other exporters; any benefits from access to quota protected export markets to be put to general community use. • Regulation of marketers/traders be of a general nature driven solely by economywide commercial legislation with no special treatment of sugar as a commodity. • Any assistance to consumers be focused on the poor and be a cost to the public purse, not a transfer from one group of sugar producers/consumers to another. Actions • Over the next five years systematically lower the levy percentage of mill production so that by the year 2000 all production can be sold at free market prices. • Bind a commitment to unrestricted access to sugar imports by any importer with the World Trade Organization. • Remove the requirement that all exports of sugar be through the ISIEC; mills or traders be free to export in their own right to any market unrestricted by import quotas; rights to export to quota protected markets (currently the United States and European Union) be tendered by a central government agency and any revenues obtained be allocated for research and development or other authorized common industry objectives. • All sugar specific commercial restrictions on stocks, finance, hedging and futures operations, forms of storage and packaging, and movement and destinations of sales by merchants/traders be removed; licensing/registration requirements for merchants/traders be of a general prudential and/or health and safety nature and not discriminate commercially. • Over the five years during which the levy percentage is increased, the levy price also be increased; any PDS purchases of sugar increasingly be a cost to the central government; to the extent that PDS requirements exceed levy purchases state agencies buy sugar in the domestic free market or imports; and the PDS itself be reviewed with a view to focusing on the needs of low income consumers. From model results, the costs of providing targeted compensation to the truly needy may be around $80 million a year only by the year 2005.  - 70 - Priority • High. • Little else can be achieved until this crucial step is undertaken. Implications and considerations 7.5 Opening the market completely to imports will expose the industry to the fluctuation of the world market. The market is known as a highly volatile one and historically this is true. However, as seen in Chart 4. 4, this volatility has not been marked over the past 13 years. There are good reasons to believe the world market will become even less volatile in the future as other countries liberalize their sugar trade and so pass less instability to that market - see discussion on GATI in chapter 4 and discussion on the outlook for world price. 7. 6 Volatility is something Indian producers must already deal with anyway. Domestic sugar and cane prices vary to some extent and cane prices in particular vary considerably between years and mills - see Charts 4.1 , 4.4, 5.1 , 5.2 and Tables 4.1 and 4.2 . Moreover, the profitability of mills is unpredictable and subject to the vagaries of government price setting. Supplies of cane vary considerable due to cane pricing arrangements as well as the weather. Growers are uncertain of payment. Interest rates and inflation may be greater sources of uncertainty. Stockholding requirements of mills are unpredictable and outside a mill 's control which adds to its uncertainties and instability of profit flows . Futures markets cannot be used to spread and transfer risk. The extent to which government varies the levy proportion has fluctuated greatly over the years which introduces another source of uncertainty. Many of these uncertainties would be reduced by the actions listed above. 7.7 If the industry is directly exposed to these volatilities they will have incentives to find ways to spread risk. If not, and government funded schemes are set up to deal with volatilities, this will mask the risk, pass the cost of risk t_ o the rest of the economy and prevent it being dealt with efficiently. 7. 8 Government controlled schemes to protect producers from international market forces run the risk of locking resources up into unproductive sectors and creating big fiscal costs . 7. 9 Buffer stocking schemes do not work. There is a big literature on this and it can be proved mathematically they cannot work. For examples, look at Australia 's wool stock scheme and the International Tin Council ' s scheme both of which did tremendous damage to their markets. 7. I 0 Buffer fund schemes can be shown to be superior to buffer stock schemes, but private savings can be shown to be superior to buffer fund schemes . Private savings should be promoted as a way of spreading income risks between years. 7 .11 The Indian cropping sector appears to be fairly well suited to dealing with volatility. Indian sugarcane producers have clearly indicated their flexibility to take land out of cane on some occasions and to put it back on others . It appears that this along with the big gur and khandsari subsectors make the Indian sugarcane sectors one of the most flexible in the world . Sugarcane is usually grown with other crops, so growers are able to spread their risks across crops . Sugarcane is grown increasingly as an annual crop or with only one ratoon. This gives Indian sugar and sugarcane producers an advantage over many producers in other countries . If not exposed to the  - 71 - world market, Indian producers would not be able to exploit their advantage in dealing with market volatility. 7 .12 India as a large producer has the ability to influence the world price itself and its flexibility to respond to that market will have a stabilizing influence on it. A study on Brazil (Borrell 1991) shows that liberalization of its sugar trade could provide considerable added stability to the world market. There is no reason to believe India could not do the same. 7 .13 Based on the experience of studying the costs of many schemes designed to protect domestic producers from fluctuating world prices across many commodities in many countries, we advise strongly against succumbing to political pressures to provide such a scheme for Indian sugar producers . The main problem is that even temporary safeguard/safety net measures become vulnerable to political interference. They become captured by vested interest and manipulated in ways which make them difficult to remove or control. They come to stand in the way of normal commercial dealings. To be successfully operated they usually require supplementary regulation which becomes institutionalized and causes further costly market distortions . 7. 14 Policy should instead be oriented toward making sure capital markets work efficiently to allow producers to spread risks . In this regard, allowing futures markets for sugar to be accessed and used would be an important step in the right direction. Sugar policy should aim to promote and monitor the use of sugar futures markets in India. They should also aim to promote and monitor the efficient provision of other financial services to the sector to encourage saving as an important income stabilizing measure. 7 .15 To the extent that political pressures cannot be avoided, the GATT provides a safeguard policy. These are the safeguard clauses of the GA TI for developing countries to impose temporary import controls when the IMF deems import controls to be a threat to the country's balance of payments stability (this may require an IMF waiver) . This at least puts the arrange- ments under external scrutiny, makes them difficult to be captured by vested interests, provides an automatic sunset clause to the arrangements and therefore makes them reasonably predictable so they do not impose long term political uncertainties. C. Licensing of sugar mills: make mills more competitive and unconstrained Aim • Obtain productivity gains and international compet1t1veness m milling through technological catchup toward international best practice. Model results indicate economic gains in the order of US$350 million annually by 2005 from such improvements . However, to the extent that better milling practices may also enhance technology transfer and uptake in the canegrowing sector, it will also help achieve some productivity gains on-farm as well. These productivity gains in total are estimated to be worth US$1.3 billion a year by 2005 . Better practices in milling may help achieve part of this .  - 72 - Objectives • Create opportunities to reward superior management of sugar mills and most efficient forms of ownership. • Encourage mills to improve productivity of sugar production through optimal locations and scales of operation. • Encourage growers and millers to enter into sound commercial relationships which will enable growers to negotiate best prices and terms and conditions for the delivery of their . cane and so help both parties to exploit whatever comparative advantages they have - for instance to grow early maturing varieties with high sugar content. Ends in view • No commercial barriers to entry or to exit from milling; the only restrictions on the location and size of mills be those of general zoning or environmental protection laws. • Complete contestability between mills for supplies of cane from growers and sales of sugar. • No restrictions on takeovers or amalgamations between mills other than those of general trade practices laws; no restrictions on mill size (minimums or maximums) other than those of zoning or environmental protection laws . • Competitive neutrality of government policies between cooperative, private or public forms of mill ownership. • Complete contestability among growers as to where and to whom they sell cane; a flexible structure of grower organizations to negotiate on their behalf with mills, constrained only by general trade practices laws . Actions • Licensing be terminated as a central government responsibility; a set of objective criteria be established in each state for the licensing/registration of sugar mills which relate solely to factory zoning, environmental protection, public health and safety and general prudential requirements. • New mills in new areas continue to have no obligation to deliver sugar to the PDS; they not have any grower delivery zoning imposed upon them and they not be required to accept deliveries from every grower. • States give two years notice of termination of compulsory zoning of cane growers in existing mill areas; thereafter all mills be free to purchase cane from whom they wish. • Terminate the mandated requirement to have mill based cooperative cane societies in Uttar Pradesh (and other northern states); encourage the devolvement of some of their functions to smaller district based bodies which can negotiate on behalf of growers; refer other of their functions to central trade practices administrations to supervise mill pricing and payment activities; • States prepare pro forma constitutions for voluntary district cane negotiating committees and proforma contracts for commercial relationships between growers and mills.  - 73 - • Governments review the charter of mills in the public sector to ensure that financial targets are set and principles of competitive neutrality apply; states review the composition of boards of governors of cooperatives to ensure commercial excellence and a commercial orientation, with financial targets, of their activities; and 'sick' mills be allowed to 'die' by the removal of state tax deferments and debt underwriting. Priority • High, and needs to be done in concert with changes to the dual marketing system. • Delicensing is more important than dezoning. Indeed, with delicensing and general freeing up of marketing arrangements, competitive pressures are likely to be exerted which could lead to a rationalization of zoning were zoning to remain - see below. Implications and considerations 7. 16 While we are clearly recommending dezoning of mills as a first best option, it should be noted that other countries which are achieving much better levels of productivity than India do so with forms of mill zoning in place. There is a widespread belief that the delicensing of cane mills, in the sense of permitting mills to determine their own capacities without requiring the formal approval of the Government, also implies the dezoning of cane supplies -- the removal of any exclusive rights which individual mills may have to the supplies of cane within an area around their factories. This is not necessarily so. 7. 17 Some people fear that the ending of zoning may prove positively counter-productive in the effort to move towards a more efficient Indian sugar sector, especially if it is difficult to establish workable contracts between growers and millers. While delicensing is a critical step toward reform and dezoning is a first best option in the long term, there may be a second best option which involves delicensing and zoning. More specifically, this option involves no direct control over the capacity of mills through licensing but it does involve establishing a mill 's right to draw cane from a zone under common specified terms and conditions and this right becomes a tradable asset of the mill. 7 .18 An important feature of this option as practiced in other sugar producing nations (such as the European Union, Brazil, South Africa and the United States) is to create a total separation between the payment made to the grower for cane and the technical and financial performance of the factory supplied with cane or beet. In these countries, the grower is paid a price which takes full account of the sugar content of the cane or beet delivered to the factory, and this price is, in effect, computed on the basis of a constant, guaranteed recovery of sugar in the factory, regardless of the actual performance of the factory. This ensures that growers have no incentive to switch from one processor to another, and can concentrate upon doing what they themselves can control, namely the volume and quality of their product. At the same time, it puts the onus fully upon the processors to improve their performance, in the knowledge that they enjoy the entire benefit from investments and other measures designed to increase their profits, and that the incentives to attain these benefits are not diluted by being forced to share them with growers. 7 .19 The pressure applied to the factories to improve their performance is powerful. If a factory records poor recoveries, it has to bear the full financial costs of this failure to achieve industry norms, since the farmer is protected from its shortfalls by the cane payment formula. On  - 74 - the other hand, a factory whose performance is better than the industry average will enJOY significantly higher profits than its rivals . 7 .20 These differences in performance could have the merit of helping to hasten the rationalization of the processing industry without undue disruption to the sugar sector. Factories which find it impossible to keep pace with the industry norms -- whether because of inadequate scale or because of outdated and inefficient equipment -- will eventually be forced to consider selling all or part of their operations to other millers, as a means of leaving the sector in a graceful way. The sale of these operations would inevitably include the sale of all or part of their cane zones, since such zones represent an integral part of the structure of an industry. In Australia considerable rationalization of milling has occurred while zoning has remained in place. But it was not until other competitive pressures were exerted on the industry that this process began. So it is very important that delicensing and liberalizing of the market (removing the dual market) occur if zoning is not to be costly. This highlights another important feature of the option. Zones must be tradable assets . Better mills must be free to buy out less efficient mills and not be restricted in such activities by licenses -- which is why delicensing is important. Equally it is important that other policy constraints which might restrict the competitive activities of innovative mills, such as the cane societies in Uttar Pradesh, must be removed. Competitive pressure must be unleashed. 7 .21 Since the right to cane zones becomes one of the tradable assets of a sugar mill, it is essential that procedures be established to facilitate mills to trade all or part of these zones to other mills. For existing mills, the zones are already established, and are implicitly capitalized into the value of the milling companies. Therefore, the normalization of zoning arrangements and the introduction of procedures for their sale should not cause undue difficulties if this option is considered. For new mills, seeking to open up in areas currently not allocated to existing mills, or in areas surplus to the requirements of existing mills (common in Uttar Pradesh), it is recommended under this option that the rights to such zones should be auctioned off by the State Government. These auctions would then represent the only barrier to entry to the industry. Other decisions, such as the daily crushing capacities of new or expanded mills, would be left entirely to the private companies undertaking the investment. 7 .22 Problems can arise with zoning which is why we call it a second best policy option. • Political forces will be exerted to try and change the terms and conditions of delivery to suit the most powerful vested interests . In this way changes to the terms and conditions are likely to be political rather than economic -- a recipe for costly mistakes in the long term . • Isolated mills with separate mill areas which, due to size or geographic constraints, are relatively inefficient by industry standards may be forced to close if they cannot meet the terms and conditions. Yet sugar production even with relatively inefficient milling may still be the activity of greatest comparative advantage. • Common and fixed terms and conditions (under a cane payment formula) will prevent growers and millers negotiating on specific terms and conditions which would allow both parties to exploit their particular comparative advantages. The fixed terms and conditions tend to lock in existing technology. As technological opportunities change the terms and conditions of delivery need to be changed to enable that technology to be  - 75 - exploited. In Australia, for instance, the lack of these freedoms is probably holding back considerable productivity advances. 7.23 It is for the reasons above we recommend zoning as second best and dezoning as a first best long term option. And indeed we recommend dezoning as a first best option in the immediate term as well if meaningful long term commercial contracts can be established between growers and millers or groups of growers and millers. And there is little to suggest this should not be possible. Indian cane producers have long negotiated terms and conditions of delivery with gur manufacturers . In a sense the challenge for policy is to facilitate better commercial contracting. We also recommend this option as first best because, typically, the common fixed terms and conditions (a cane payment formula) established under the zoning option become politically difficult to remove once their short term attractiveness is passed as is happening in Australia. D. Cane Pricing: Make Millers Compete More Aims • Obtain productivity gams and international competitiveness m canegrowmg through technological catchup toward international best practice. Model results indicate economic gains in the order of US $1. 3 billion annually by 2 00 5 from such improvements . As stated above, better milling practices may also enhance technology transfer and uptake in the canegrowing sector, which will help achieve some of these on-farm productivity gains, but to some extent productivity gains could also boost mill productivity. Better quality cane in tandem with higher extraction rates at mills have a multiplicative effect and it is difficult to accurately assign benefits . Nonetheless, big benefits appear possible from reforn1 in this areas . Objectives • Prices be formed in ways which draw supplies of cane from the most efficient growers in sed by mills (or competing gur and khandsari the most efficient locations, to be proces_ producers) which most efficiently meet the needs of Indian (and potentially world) consumers. • Rewards from sugar sales be equitably distributed to participants in the industries in ways which maximize prosperity and security at least social cost. Ends in view • Growers allowed to obtain the price for their cane which reflects its value to sweetener production from mills which are free to compete for sugar sales and can compete for cane supplies (at least in the long-term depending on what happens with zoning), subject to the discipline of potential imports but not restrained by restrictions on exports or obligations to subsidize PDS sales. • Growers required to face up to the risks of the marketplace and enabled to adopt risk management strategies which can most effectively be made at the farm level. • Minimal political direction and administered discretion in price formation.  - 76 - Actions • States terminate the requirement of mills to pay SAPs; central government retain the SMP but it be set at no more than 70% of expected market realizations, it rise by no more than the rate of consumer prices in any year, and it be a minimum first payment by mills on delivery of cane; • Growers be free to negotiate individually over pncmg and payment conditions with individual mills, but states encourage the formation of district negotiating committees (groups of growers) and contracting arrangements between growers and mills to overcome the problems of too many small growers. This could be formalized to incorporate the ideas about payment of cane on sugar content and zoning mentioned above . • Every effort be made by states to encourage payment for cane on the basis of the grower's cane sugar content. • A price transparency body in each state be given statutory authority to audit all sugar mills and publish information about the basis of payment and the average and range of returns paid by mills to growers; this preferably be a general price transparency body rather than one established solely for the sugar industry. Priority • High and needs to be done in concert with changes to the dual marketing system and delicensing. Implications and considerations 7 .24 There is strong evidence from many different countries that investments in cane sampling equipment and in the establishment of payment systems which reward growers according to their cane quality are profitable for both growers and millers . Once growers are rewarded for the production of sugar, rather than of cane without regard to sugar content, it is usual to find farmers adapting their agronomic techniques (notably in the application of nitrogenous fertilizers and in the use of irrigation), the timeliness of their cane harvesting (to avoid stale cane) and in their choice of varieties, to boost their output of sugar per hectare. Factories, too, benefit from cleaner and fresher cane, via lower extraneous matter content and higher mixed juice purities, which translate into higher sugar recoveries . 7.25 There is no reason at all to doubt that India would also benefit from the introduction of a cane quality payment system. The estimates presented in this report suggest that it should be possible to increase recovered sugar output per hectare by more than 20% for little overall additional cost. 7 .26 The obstacle to the attainment of this improvement in cane quality is primarily a practical one: namely, the implementation of a cane quality payment system for a very large number of small farmers , each of whom delivers only small tonnages of cane each time that they supply the factory . Many of the countries which apply quality payment systems rely upon comparatively large farmers, who supply hundreds or thousands of tons of cane each year, and who do so in large units, such as truck loads of 20 tons, which can be sampled quickly and easily.  - 77 - 7 .2 7 The introduction of quality payment systems and cane sampling for small farmers was pioneered by the Mauritius sugar industry, which has improved its system over a period of more than 50 years. The local cane economy is made up of a small number of large plantations and tens of thousands of very small to small farmers, many of whom farm less than one hectare of cane such as occurs in India. In order to sample growers whose individual deliveries of cane may amount to only two or three tons, the government, growers and millers have agreed that a number of very small farmers will be grouped together for the purposes of sampling. The farmers are given some freedom in the choice of farmers with whom they will be grouped~ but it is usual for them to come from a small area, with very similar agricultural and climatic conditions. This is similar to what we are suggesting with district negotiating committees. 7.28 When cane is delivered to the mill from one of the farmers in a group, the cane is weighed, and a pre-determined proportion of cane trucks from the group is sampled. The quality assessment applied to all cane deliveries from the group is then assumed to be the average calculated from the samples selected from their cane. Therefore, each farmer is assumed to have the same cane quality as all others in the same group. 7.29 The Mauritius system works very well indeed. Growers' representatives are allowed to observe the cane sampling, which is undertaken under government supervision~ and there is a well- established procedure for arbitration in the case of a dispute. The number of disputes which arise is very small, and the information generated by the repeated sampling has proved very valuable in the application of extension work. Issues which inevitably arise with cane sampling, such as deliveries to out-stations, have been resolved in Mauritius, without undermining the basis of the system. 7.30 It is to be recommended that joint delegations of growers and millers from India should visit Mauritius to learn about the practicalities of the local cane quality payment system, and to examine how it can best be implemented in Indian circumstances. E. Subsidies And Taxes: Review Them And Get On To A Value Added Basis Aim • Avoid the possibilities of resource misallocation created by subsidies and put taxes on a value added basis to ensure government shares the risks of market downturns with producers and does not exacerbate instability in profits with fixed taxes. As model results show, under a liberalized trading system subsidies and taxes have the potential to be more distorting than under current marketing arrangements. Objectives • Policy interventions by state and union governments be neutral in their impacts on input and output prices within the sugarcane and sugar processing industries, and between these industries and others with which they compete. • Risk management be handled by efficient resource allocation and an open finance market rather than by regulated marketing and subsidized (but rationed) finance.  - 78 - • Revenue raising taxes have minimal impact on resource allocation decisions by cane growers or sugar millers. Ends in view • Such interventions as occur through input or output prices be broadly uniform across competing activities but phased out as the Indian economy continues to be deregulated and opened to the rest of the world. • Any soft credit arrangements which operate pro tern be equally available to all agricultural or agriculturally based processing activities. • Water and electricity pricing mechanisms for agricultural users be based on usage and cover (at least) operating and maintenance costs. • Any taxation of sugar mills be based solely on value added and be levied at ad valorem rates. Actions • Give notice of termination of favorable state and union government financing of equity in cooperative mills; no new government participation in equity beyond 1996. • Announce an intention to have full recovery of operating and maintenance costs of water and electricity usage in agriculture by 2000; set up a taskforce in Maharashtra and Uttar Pradesh to examine options for the introduction of metering systems on an individual or shared basis for water and electricity usage and management. • State and union governments . consult with a view to replacing cane purchase taxes, sugar excise and the cess to finance the SDF with a single ad valorem tax on value added by sugar mills· a revenue sharing agreement be worked out for the allocation of funds received between state and union governments and the sugar industry; and financial targets set for public and cooperative mills be incorporated into notional value added for the purpose of this tax, to ensure that value added is not diluted by passing undue benefits on to growers or state governments as a means of minimizing tax. Priorities • Moderate. • Other reforms mentioned above can be carried out independently of this. However, any further subsidized development of water resources for the sugar industry is likely to exacerbate regional distortions in cane and sugar production.  - 79 - F. Research And Development: Current Technology Needs To Be Disseminated Aim • Enhance the development and uptake of productivity improving technology to bolster attempts to achieve productivity gains estimated from the model. Objective • Ensure that the means and incentives exist to promote an efficient combination of new technology development and uptake of known technology. Ends in view • Funding of research and extension be predictable. • Existing backlog of known technology be effectively extended to cane growers and sugar mills. • Research and development anticipate priorities for productivity improvement such as labor usage in mills and cane delivery, handling and payment systems. Actions • As a consequence of terminating the sugar cess and of allowing sick mills to die, the SDF be terminated and a component of revenue raised from the value added tax be allocated to funding research and development (including extension). • Increased funding be allocated to training and employing extension officers with a view to increasing the uptake of known technology and improving the efficiency of fertilizer, water and electricity use as subsidies are phased out. • Explicit R&D activities be designed and funded to improve labor usage in mills and transport and assembly systems for cane delivery . Priorities • Increased compet1t1ve pressures ansmg from other reforms are likely to result in increased demands for extension and technology transfer. If there is an inadequate supply of well trained people and facilities for this task, the scope for productivity improvements will be reduced. • The provision of an adequate supply of extension service should have a more immediate priority than other research. G. Infrastructure: Ensure Its Maintenance And Development Objective • Any infrastructure development be evaluated according to strict cost-benefit criteria and only proceed if users can be charged on a basis of at least covering operating and  - 80 - maintenance costs, and on the firm undertaking that charges will be increased as those costs increase. Ends in view • An improvement in the productivity of infrastructure use. • An assurance that infrastructure is maintained. • Infrastructure be expanded only as seen to be economically justified and to have a greater payoff than using existing infrastructure more productively. Actions • See previous actions on water and electricity pricing. • Initiate reviews of the structure and adequacy of road systems serving sugar mills with a view to improving the basis of charging for the costs of road use and using funds allocated from the value added tax for road development. H. Administration: Review With The Aim Of Getting Better Coordination Objectives • Policies affecting cane growing and sugar milling be developed and monitored on an economywide basis and in ways which do not create a demand for administration from fragmented administrative interests . • Policies be effectively implemented in ways which mmumze policing costs of administrators and compliance costs of those who are administered. Ends in view • A reduction in the number of departments~ commissions and agencies administering cane and sugar policies . • Incorporation of cane and sugar policies into broader agricultural and manufacturing sector policies which take economywide objectives and consequences into account. • A quarantining of policy development from opportunities by administrators to perpetuate or expand administration for its own sake. Actions • Activities of state sugar/cane commissions be integrated into activities and priorities of state departments of agriculture. • Monitoring and surveillance activ1t1es deemed necessary for sugar mills or sugar marketers be undertaken in the context of general trade practices or pricing transparency legislation rather than made-to-measure arrangements for sugar.  - 8I - I. Actions Need To Be Taken On A Wider Front Than Cane And Sugar Alone 7.31 India has adopted a general policy objective of achieving an economy which is open to the world and capable of adjusting to change with the minimum of regulatory impediments. To these ends it has floated the rupee and liberalized investment opportunities. However, a number of additional actions need to be taken on a general front if sugarcane growing is to compete efficiently for land and mills are to compete efficiently for capital and labor as economic and population growth create new demands for sweeteners. Actions • Review the appropriateness of land ownership and leasing restrictions with a view to permitting economies of scale to be achieved in agricultural production in ways that are compatible with sustainable land use and social equity. • Review foreign ownership restrictions with a view to permitting a more appropriate capital base and international linkage to technology and know-how. • Review labor laws with a view to establishing common safety net criteria for employees in all industries with opportunities to negotiate rewards for labor productivity improvements on an enterprise by enterprise basis.  - 82 - References Ahluwalia, D. 1993, 'Public Distribution of Food in India: Coverage, Targeting and Leakages, Food Policy, pp. 33-54, February. Borrell, B., Quirke, D., de la Pena, B. and Noveno, L. 1994, Philippine Sugar: An Industry Finding its Feet, Centre for International Economics, Canberra. Borrell, B., Bianco, J. and Bale, M. 1994, Brazil's Sugarcane Sector, Policy Research Working Paper 1363 , Latin America and the Caribbean, Country Department I, The World Bank, Washington, D.C. Borrell, B. and Duncan, RC. 1990, A Survey of the Costs of World Sugar Policies, Working Paper WPS 522, International Economics Department, World Bank, Washington, D.C. Chaubey, J. 1994, Maharashtra: Agricultural Development Project, mimeo, World Bank, Washington, D.C. Cooperative Sugar 1995, Annual Issue , vol. 27, New Delhi. Goldar, B.N. and Gulati, A. 1991, Effective Incentives for Sugarcane and Sugar (unpublished). Gulati, A. and Sharma, P.K. 1991 'Government Intervention and Agricultural Markets: Nature, Impact and Implications', Journal of Indian School ofPolitical Economy, vol. 3, no. 2 pp. 205-237. Gulati, A. and Sharma, P.K. 1991 , Government Intervention and Incentives in Indian Agriculture During 1980s, the World Bank, Washington, D.C. Gulati, A. and Sharma, A. 1995, ' Subsidy Syndrome in Indian Agriculture', in Economic and Political Weekly, 30 September. Indian Sugar Mills Association 1994, Indian Sugar Year Book 1993-94, Vol. 1, New Delhi. Ministry of Agriculture 1995, Reports of the Commission for Agriculture Costs and Prices on Price Policy for Crops Sown in 1994-95 Season, Government oflndia, New Delhi. National Federation of Co-operative Sugar Factories Limited 1995, 35th Annual Report 1994-95, New Delhi. Pursell, G. and Gulati, A. 1993, Liberalizing Indian Agriculture: An Agenda for Reform, Working Paper 1172, Policy Research Department, The World Bank, Washington, D.C. Singh, G.B. and Sinha, O.K. (eds.), 1993 , Sugarcane Research and Development in Sub-Tropical India , Indian Institute of Sugarcane Research, Lucknow, India. Ray, S.K. (1990), Stabilizing the Sugar Economy, Journal of Indian School of Political Economy, May- Aug. 1990. World Bank 1995, India: Country Economic Memorandum, Report No. 14402-IN, Country Department II, The World Bank, Washington, D.C.  Appendix A Page 1 of 22 Model of the Indian sugar industry This appendix summarizes the structure of the India sugar model. General features • The model is comparative static and primarily designed to conduct 'what if experiments. The model can also be used to make projections about the likely size and structure of the sugar sector at a given point in time in the future, given a set of plausible assumptions about variables determined outside of the model. • The model is partial equilibrium and therefore does not account for behavior or interactions outside the sugar sector. These interactions are supplied by the exogenous scenario. • The model is comprised of two basic components: fundamental input-output relationships between components along the processing chain in the sweetener sector; and economic behavior of agents represented by maximizing behavior embodied in conventional economic theory . • A comprehensive structural database is compiled - a representation is given in Chart 2 .1 - with dimensions covering regions, industries, commodities and factors of production. A schematic diagram of the model 's database is given in Table A.2. Sugar products include those for which we explain supply, demand and prices - namely, cane, mill whites , gur, khandsari and molasses . For other product groups, prices are exogenous . Also, we assume that sugar commodities can be sourced from all model regions including imports from outside India. • The objective of this input-output style database is to provide a snapshot of the sector at a point in time. The database uses latest available data from a range of published sources including the Indian Sugar Millers ' Association. Quantities for 1994-95 were combined with latest available 1993-94 farm, wholesale and retail prices for cane, sugar, gur and khandsari. The model uses these data to compute value shares in which relative weights - say, the share of white sugar in the total sugar budget - are important in determining economic responses to changed circumstances . The calculation and derivation of the base data set is given in Table Al . Theoretical structure • Producers choose inputs to minimize production costs subject to a two tier production function. At the first level there is no substitution between input categories and the primary factor bundle. At the second level supply responses are determined by the ability to substitute between factors of production, primarily land and labor. • The model is based on conventional economic theory representing highly competitive behavior. Following the assumptions of perfect competition and constant returns to scale technology, profits can accrue only to factors of production. Supply of each commodity, by region, is equated to demand for that commodity across all regions, thus determining a regional price for each commodity .  Appendix A Page 2 of 22 • The consumer's decision involves a three tier system. At the first level consumers choose aggregate sweetener consumption depending on income levels and prices. At the second level this consumption is then allocated between sugar, gur and khandsari depending on preferences embodied in the model's elasticity system. At the final level consumers choose the source of that product on the basis of relative prices (including imports) differentiated by source. The model falls into the class of a non-homogeneous product model or. as some may know it, an Armington style model. Critical parameters • Parameters used in the model can be classified thus. Technical coefficients relating to input-output coefficients derived from the base data set. Critical economic parameters including demand elasticities and cane supply elasticities. Other parameters can be assigned by adoption of polar assumptions. For example, the sugar sector can be assumed to be a small sector of the economy - therefore the price of labor is determined elsewhere and is available in any quantity required. Levels of subsidies and taxes. The relative sizes of these impediments are identified in the main body of the report. Table A.2 Schematic database for Indian sugar model Region I Region n Region I Region n Region I Region n industries industries consumption consumption exports exports Sugar products Four industries growing, milling Five regions can source three Each region can 0 Row sums = value of Region 1 sugar, etc. can source five sugar products from their export its sugar production in region 1 commodities (cane, sugar, etc.) own and other regions and products from their own and the other imports four regions plus (in principle) imports Sugar products 0 Row sums = value of Region n production in region 1 or total imports Other products Each industry in each region 0 0 0 0 Row sums = total cost buys inputs from the rest of of other products economy Labor, capital. Each industry in each region has 0 0 0 0 Row sums = total cost land a primary factor endowment of primary factors Production Each industry in each region Each sweetener product may Each sweetener export could Row sum = total net subsidies and may receive or pay subsidies attract taxes and/or subsidies be subsidized or taxed subsidies taxes and taxes on inputs and output Total costs a a b b c c a Column sums = total output equals total costs by industries in each region. 6column sums =total value of household and industrial consumption of sugar products. cColumn sums = total value of export sales by region. Note: Some cells other than those indicated will be zero. Demand elasticities • Critical demand elasticities, evaluated in 1994-95 terms, are given in Table A.3. These elasticities were sourced from a survey conducted by Goldar and Gulati ( 1991) and are modified to be consistent with an AIDS demand system which is subject to conventional properties of homogeneity and symmetry .  Appendix A Page 3 of 22 Supply elasticities • Critical supply elasticities relate to the cane growing sector. By their relatively low value added nature, sugar milling gur and khandsari production have highly elastic responses depending on the capacity utilization assumed. Many of the important interactions between the growing sector and upstream industries are largely a function of the ability of cane growers to respond, and policies that regulate cane prices or milling capacity. • Table A.4 lists the important cane supply elasticities. In column I we list the partial supply elasticity or the short term response possible given a I% change in producers' cost-price situation - given that the amount of the fixed factor, primarily land, cannot adjust. But over the medium term land can move to other activities . To recognize this the elasticity of supply of fixed factors to cane is listed in column 2. Maharashtra is assigned a lower elasticity to reflect the fact that shortages of water, an input tied to land, will restrict production growth in this region. Long term supply elasticities are a function of these assumptions and assumptions we make about exogenous factors. Table A.3 Critical demand elasticities oflndian sugar model While sugar Gur Khandsari Expenditure Uttar Pradesh 2.1 -0.3 0.7 Maharashtra 1.4 -0 .9 1.0 Tamil Nadu 1.3 -0 .2 1.0 Karnataka 1.5 -0.5 1.0 Other regions 1.6 -0.2 1.0 Own price Unar Pradesh -1.0 -0 .9 -1.4 Maharashtra -0 .7 -1.0 -1.0 Tamil Nadu -0.8 -0.9 -1.0 Karnataka -0.9 -0.9 -1.8 Other regions -0.8 -0.9 -1.0 Source: Mission Estimates; CIE .. Table A.4 Critical supply elasticities Short term supply elasticilies Land supply elasticilies Uttar Pradesh 0.35 0.5 Maharashtra 0.30 0.3 Tamil Nadu 0.30 0.3 Kamataka 0.30 0.3 Other regions 0.35 0.5 Source: Mission Estimates, CIE .. Industries cost structures • The final important component of the model 's database is the cost structure of endogenous industries, especially the value share of cane in the total value of output of sugar, gur and khandsari and the importance of fixed factors in the total costs of each industry. The cost structures used in the model are listed in Table A. I.  Appendix A Page 4 of 22 Table Al: Indian sugar summary data, 1994-95 quantities and 1993-94 price Uttar Maharashtra Tamil Kamat aka Other All regions Pradesh Nadu regions Sugarcane Production kt. 110000 37500 23000 21000 56285 247785 Area OOO's ha 1910 430 225 265 906 3736 Yield tons/ha 58 87 102 79 62 66 Dispos1t1on Mill use kt. 40000 38200 10000 10000 30380 128580 Khandsari kt. 8500 200 100 1200 2020 12020 Gur kt. 48300 380 9885 1500 17386 77451 Seed, feed and juice kt 13200 4500 2660 2520 6854 29734 Net exports of cane kt 0 -5780 355 5780 -355 0 Seed. feed and juice usage Seed cane usage kt 6600 2250 1380 1260 3377 14867 Seed cane usage O/o 6 6 6 6 6 6 Seed cane usage RsM 3491 1454 811 741 1927 8424 Feed and juice kt 6600 2250 1280 1260 3477 14867 Feed and juice Rsm 3491 1454 752 741 1984 8422 Cane prices Statutory minimum price Rs OO's kg 39.67 45 .4 39.85 44.58 38.46 40.70 Purchase taxes Rs OO's kg 3.00 2.20 6.54 4.68 3.00 3.35 Other taxes Rs OO's kg l.19 0.00 0.00 0.00 0.50 0.64 Actual cane price Rs OO's kg 52.90 64.62 58.78 58.78 57.06 56.66 Purchase taxes Rs OO's kg 3.00 2.20 6.54 4.68 3.00 3.35 Other taxes Rs OO 's kg 1.19 0.00 0.00 0.00 0.50 0.64 Total cane cost Rs OO's kg 57.09 66.82 65.32 63.46 60.56 60.65 Value of cane production RsM 58190 24234 13519 12343 32114 140400 Milling sector Mill whites kt 3600 4200 JOOO JOOO 2949 12749 Yieid (cane) % 9.0 11.0 10.0 10.0 9.7 9.9 Sugar distribution Levy sugar % 34 34 40 40 34 35 Free market sugar % 66 66 60 60 66 65 Levy sugar kt 1228 1432 400 400 1006 4465 Free market sugar kt 2372 2768 600 600 1943 8284 Reg10nal levy prices Ex factory Rs/100 kg 770 718 764 722 792 753 Excise duty Rs/100 kg 38 38 38 38 38 38 Cess payment Rs/ 100 kg 14 14 14 14 14 14 Wholesale prices Rs/ JOO kg 822 770 816 774 844 805 Transport and distribution Rs/100 kg 83 135 89 131 62 100 Retail prices Rs/100 kg 905 905 905 905 905 905 Reg tonal free market prices Ex factory Rs/100 kg 1186 1172 1171 1126 1180 1175 Excise duty Rs/100 kg 71 71 71 71 71 71 Cess payment Rs/100 kg 14 14 14 14 14 14 Transport and distribution Rs/ 100 kg 50 71 27 72 93 67 Wholesale prices Rs/ JOO kg 1321 1328 1283 1283 1358 1327 Transport and distribution Rs/100 kg 179 179 179 179 179 179 Retail prices Rs/100 kg 1500 1507 1462 1462 1537 1506 lvfolasses kt 1800 1681 450 450 1367 5748 Yield (cane) % 4.50 4.40 4.50 4.50 4.50 4.47 Ex factory price Rs/t 1500 1500 1500 1500 1500 1500 Total revenues Levy sugar RsM 9449 10276 3057 2888 7959 33630 Free market sugar RsM 28145 32431 7026 6755 22941 97298 Molasses RsM 2700 2521 675 675 2051 8622 Total output RsM 40294 45229 10758 10318 32951 139550 Unit return of output Rs/kg 11.19 10.77 10.76 10.32 11.17 10.95 Cane (plus taxes) costs Rs million 22836 25527 6532 6346 18397 77989 Cane (plus taxes) costs Rslt 571 668 653 635 606 607 Transport costs Rslt 60 60 60 60 60 60 Total cane costs Rslt 531 728 713 695 666 667  Appendix A Page 5 of 22 Table Al: Indian sugar summary data, 1994-95 quantities and 1993-94 prices (Continued) Uttar Maharashtra Tamil Karnataka Other Total Pradesh Nadu regions G"r Production kt 3864 30 791 120 1391 6196 Yield (cane) % 8.0 8.0 8.0 8.0 8.0 8.0 Prices Ex factory Rs/100 kg 791 1210 883 883 829 815 Transport and distribution Rs/100 kg 79 121 88 88 83 82 Wholesale price Rs/100 kg 870 1331 971 971 912 897 Transport and distribution Rs/100 kg 100 100 100 100 100 100 Retail price Rs/100 kg 970 1431 1071 1071 1012 997 Total revenues Total output Rs/kg 30575 368 6979 1059 11527 50509 Unit return of output RsM 7.9 12.l 8.8 8.8 8.3 8.2 Total return RsM 30575 368 6979 1059 11527 50509 Cane costs RsM 25551 246 5810 882 9920 42408 Cane (plus taxes) costs Rs/t 529 646 588 588 571 567 Transport costs Rs/t IO 10 IO 10 10 10 Total cane costs Rs/t 539 656 598 598 581 577 Khandsari Production Kt 723 17 9 102 172 1022 Yield (cane) % 8.5 8.5 8.5 8.5 8.5 8.5 Prices Exfactory Rs/100 kg 1093 1136 1136 1136 1093 1099 Transport and distribution Rs/100 kg 109 114 114 114 109 110 Wholesale price Rs/100 kg 1203 1250 1250 1250 1203 1208 Transport and distribution Rs/100 kg 100 100 100 JOO 100 100 Retail price Rs/100 kg 1303 1350 1350 1350 1303 1308 Molasses OOOs tons 340 8 4 48 81 481 Yield (cane) % 4.0 4.0 4.0 4.0 4.0 4.0 Ex factory price Rs/t 1500 1500 1500 1500 1500 1500 Total revenue Khandsari RsM 7898 193 97 1159 1877 11224 Molasses RsM 510 12 6 72 121 721 Total output RsM 8408 205 103 1231 1998 11945 Unit return of output Rs/kg 11.6 12.l 0.0 12. l 11.6 11.6 Cane costs RsM 4497 129 59 705 1153 6542 Cane (plus taxes) costs Rs/t 529 646 588 588 571 567 Transport costs Rslt 20 20 20 20 20 20 Total cane costs Rs/t 549 666 608 608 591 587 (Continued)  Appendix A Page 6 of 22 Table Al: Indian sugar summary data, 1994-95 quantities and 1993-94 prices (Continued) Uttar Maharashtra Tamil Karn at aka Other Total Pradesh Nadu regions Consumption Population - 1994-95 Rural million 122 53 40 34 438 687 Urban million 30 33 21 15 138 238 Total million 152.1 86 .3 61.1 49.2 576.7 925.4 Share of rural in total O /o 80.2 61.3 65 .8 69.1 76.0 74.3 Sugar production by state Levy sugar kt 1228 1432 400 400 1006 4465 Free market sugar kt 2372 2768 600 600 1943 8284 Gur kt 3864 30 791 120 1391 6196 Khandsari kt 723 17 9 102 172 1022 Total sugar kt 8187 4247 1799 1222 4512 19967 Molasses kt 2140 1689 454 498 1448 6229 Trade in free market sugar Imports kt 99 56 40 32 374 600 Exports kt 0 200 0 0 0 200 Consumptwn by state-includes imports Levy sugar kt 734 416 295 237 2783 4465 Free market sugar kt 1107 1723 631 413 4811 8683.6 White sugar kt 1841 2139 926 650 7593 13149 Share of consumption by state O /o 14.0 16.3 7.0 4.9 57.7 100.0 Gur kt 1141 320 227 183 4325 6196 Khandsari kt 723 17 9 102 172 1022 Total sweetener consumption kt 3718 2492 1168 940 12148 20467 Molasses kt 1024 581 41 I 331 3882 6229 levy sugar average pnce Made available to PDS kt 734 416 295 237 2783 4465 Leakage from PDS O /o 49.6 26.2 33 .8 33.8 39.5 39.2 Levy sugar actually consumed kt 370 307 195 157 1684 2713 Per person sugar consumptwn Levy sugar-plus leakage Kg/person 4.8 4.8 4.8 4.R 4.8 4.8 Free market sugar Kg/person 7.3 20.0 10.3 8.4 8.1 9.4 Gur kg/person 7.5 3.7 3.7 3.7 7.5 6.7 Khandsari kg/person 4.7 0.2 0.1 2.1 0.3 1.1 Total sweetener consumptwn kg/person 24.4 28.7 19.0 19.0 20.7 22.1 Molasses kg/person 6.7 6.7 6.7 6.7 6.7 6.7 Net trade by state excluding imports and exports Levy sugar kg/person 494 1016 105 163 -1777 0 Free market sugar kgiperson 1364 901 9 219 -2493 0 Gur kg/person 2723 -290 564 -63 -2935 0 Khandsari kg/person 0 0 0 0 0 0 Total sweetener consumption kg/person 4581 1627 678 319 -7205 0 Molasses kg/person 1116 1108 43 167 -2434 0 ta/ value of consumption of purchases prices To. Levy sugar RsM 6642 3768 2669 2149 25184 40412 Free market sugar RsM 16601 25955 9226 6035 73953 130737 White sugar RsM 23244 29723 11895 8184 99137 171149 Gur RsM 11071 4584 2430 1956 43759 63799 Khandsari RsM 941 I 230 1I5 1377 2236 13368 Molasses RsM 1536 871 617 497 5822 9343 Molasses Total output kt 2140 1689 454 498 1448 6229 Ex factory price Rs / t 1500 1500 1500 1500 1500 1500 Value RsM 3210 2533 681 747 2172 9343 (Continued)  Appendix A Page 7 of 22 Table Al: Indian sugar summary data, 1994-95 quantities and 1993-94 prices (Continued) Uttar Maharashtra Tamil Karnatak Other Imports All Pradesh Nadu a regions sources Trade matrices Intermediate usage - cane sold to seed cane Uttar Pradesh kt 6600 0 0 0 0 0 6600 Maharashtra kt 0 2250 0 0 0 0 2250 Tamil Nadu kt 0 0 1380 0 0 0 1380 Kamat.aka kt 0 0 0 1260 0 0 1260 Other regions kt 0 0 0 0 3377 0 3377 Total kt 6600 2250 1380 1260 3377 0 14867 Intermediate usage - cane sold to mil/mg Uttar Pradesh kt 40000 0 0 0 0 0 40000 Maharashtra kt 0 32420 0 5780 0 0 38200 Tamil Nadu kt 0 0 10000 0 0 0 10000 Kamat.ale.a kt 0 0 0 10000 0 0 10000 Other regions kt 0 0 355 0 30025 0 30380 Total kt 40000 32420 10355 15780 30025 0 128580 Intermediate usage - cane sold to Gur Uttar Pradesh kt 48300 0 0 0 0 0 48300 Maharashtra kt 0 380 0 0 0 0 380 Tamil Nadu kt 0 0 9885 0 0 0 9885 Kamat.aka kt 0 0 0 1500 0 0 1500 Other regions kt 0 0 0 0 17386 0 17386 Tot.al kt 48300 380 9885 1500 17386 0 77451 Intermediate usage - cane sold to khandsari Uttar Pradesh kt 8500 0 0 0 0 0 8500 Maharashtra kt 0 200 0 0 0 0 200 Tamil Nadu kt 0 0 100 0 0 0 100 Kamat.aka kt 0 0 0 1200 0 0 1200 Other regions kt 0 0 0 0 2020 0 2020 Total kt 8500 200 100 1200 2020 0 12020 Consumption - sugar cane Uttar Pradesh k.'1 6600 0 0 0 0 0 6600 Maharashtra kt 0 2250 0 0 0 0 2250 Tamil Nadu kt 0 0 1280 0 0 0 1280 Kamat.aka kt 0 0 0 1260 0 0 1260 Other regions T kt 0 0 0 0 3477 0 3477 Total kt 6600 2250 1280 1260 3477 0 14867 Consumption - levy sugar Uttar Pradesh kt 734 0 0 0 0 0 734 Maharashtra kt 0 416 0 0 0 0 416 Tamil Nadu kt 0 0 295 0 0 0 295 h.amataka kt 0 0 0 237 0 0 237 Other regions kt 494 1016 105 163 1006 0 2783 Total kt 1228 1432 400 400 1006 0 4465 Consumption - free sugar Uttar Pradesh kt 1008 0 0 0 0 99 1107 Maharashtra kt 0 1667 0 0 0 56 1723 Tamil J\iadu kt 0 0 591 0 0 40 631 Kamat.aka kt 0 0 9 372 0 32 413 Other regions kt 1364 901 0 228 1943 374 4811 Total kt 2372 2568 600 600 1943 600 8684 Cons umption - gur Uttar Pradesh kt 1141 0 0 0 0 0 1141 Maharashtra kt 355 30 0 0 0 0 385 Tamil Nadu kt 0 0 227 0 0 0 227 Kamataka kt 100 0 0 120 0 0 220 Other reg10ns kt 2268 0 564 0 1391 0 4223 Total kt 3864 30 791 120 1391 0 6196 Consumption -khandsan Uttar Pradesh kt 723 0 0 0 0 0 723 Maharashtra kt 0 17 0 0 0 0 17 Tamil Nadu kt 0 0 9 0 0 0 9 Kamat.aka kt 0 0 0 102 0 0 102 Other regions kt 0 0 0 0 172 0 172 Total kt 723 17 9 102 172 0 1022 (Continued)  Appendix A Page 8 of 22 Table Al: Indian sugar summary data, 1994-95 quantities and 1993-94 prices (Continued) Uttar Maharashtra Tamil Kamat aka Other Imports All sources Pradesh Nadu regions Consumption - molasses Uttar Pradesh kt 1024 0 0 0 0 0 1024 Maharashtra kt 0 581 0 0 0 0 581 Tamil Nadu kt 0 0 411 0 0 0 411 Kamataka kt 0 0 0 331 0 0 331 Other regions kt 1116 1108 43 167 1448 0 3882 Total kt 2140 1689 454 498 1448 0 6229 Exports Cane kt 0 0 0 0 0 0 0 Levy sugar kt 0 0 0 0 0 0 0 Free market sugar kt 0 200 0 0 0 0 200 Gur kt 0 0 0 0 0 0 0 Khandsari kt 0 0 0 0 0 0 0 Molasses kt 0 0 0 0 0 0 0 Prices Farmlfactorylbas1c prices Cane Rs/ton 529 646 588 588 571 571 571 Levy sugar Rs/ton 7697 7175 7642 7220 7915 7915 7915 Free market sugar Rs/ton 11864 11717 11710 11259 11805 11717 9374 Gur Rs/ton 7913 12102 8826 8826 8288 8288 8288 Khandsari Rs/ton 10932 11364 11364 11364 10932 10932 10932 Molasses Rs/ton 1500 1500 1500 1500 1500 1500 1500 Cost of cane by using industry Cane growing Rsiton 529 646 588 588 571 na 567 Sugar milling Rs/ton 631 728 713 695 666 na 667 Gur Rs/ton 539 656 598 598 581 na 577 Khandsari Rs/ton 549 666 608 608 591 na 607 Taxes Cane sold to sugar milling Uttar Pradesh Rs./ton 42 22 65 47 35 na 40 Maharashtra Rs./ton 42 22 65 47 35 na 40 Tamil Nadu Rs./ton 42 22 65 47 35 na 40 Kamataka Rs./ton 42 22 65 47 35 na 40 Other regions Rs./ton 42 22 65 47 35 na 40 Consumption of levy sugar Uttar Pradesh Rs/ton 520 520 520 520 520 na 520 Maharashtra Rs/ton 520 520 520 520 520 na 520 Tamil Nadu Rs/ton 520 520 520 520 520 na 520 Kamataka Rs/ton 520 520 520 520 520 na 520 Other regions Rslton 520 520 520 520 520 na 520 Total Consumpt10n of free sugar Uttar Pradesh Rs/ton 850 850 850 850 850 850 850 Maharashtra Rs/ton 850 850 850 850 850 850 850 Tamil Nadu Rs/ton 850 850 850 850 850 850 850 Kamataka Rs/ton 850 850 850 850 850 850 850 Other regions Rs/ton 850 850 850 850 850 850 850 Consumer prices Retail level prices Cane Rs/ton 529 646 588 588 571 na 56- Levy sugar Rs/ton 9050 9050 9050 9050 9050 na 90 ~ Free market sugar Rs/ton 15003 15068 14619 14619 15373 na 150: Gur Rs/ton 9704 14313 10708 10708 10117 na 9967 Khandsari Rs/ton 13025 13500 13500 13500 13525 na 13084 Molasses Rs/ton 1500 1500 1500 1500 1500 na 1500 (Continued)  Appendix A Page 9 of 22 Table Al: Indian sugar summary data, 1994-95 quantities and 1993-94 prices (Continued) Uttar Maharashtra Tamil i\adu Karn at aka Other Total Share in Pradesh regions Output Rs million Rs million Rs million Rs million Rs Rs million miUion Cost structure - cane growing Sugar cane 3491.4 1454.1 81 LI 740.6 1926.8 8424.0 0.06 Levy sugar 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Free market sugar 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Gur 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Khandsari 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Molasses 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other costs 4201.3 8549.9 4096.2 3740.0 5941.l 26528.5 0.19 Cane transport 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Hired labor 19877.7 7258.2 4150.3 3789.4 10276.4 45352.0 0.32 Land 32656.2 9153 .3 5677.9 5184.2 15093.5 67765.2 0.48 Net subsidies -2036.7 -2181.J -1216.7 -1110.9 -1124.0 -7669.3 -0.05 Total costs 58190.0 24234.3 13518.9 12343.3 32113.9 140400.4 1.00 Cost structure - cane milling Sugar cane 22836.0 25527.l 6531.5 6345.9 18396.9 79637.3 0.57 Levy sugar 0.0 0.0 0.0 0 .0 0.0 0.0 0.0 Free market sugar 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Gur 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Khandsari 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Molasses 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other costs 6620.7 9156.9 1179.4 1565.4 5697.2 24219.7 0.17 Cane transport 2400.0 2292.0 600.0 600.0 1822.8 7714.8 0.06 Hired labor Capital 4270.3 4082. l 913.8 858.9 3559.9 11982.6 0.09 Capital 4167.3 4964.8 1533.4 948 .3 3474.0 16790.2 0.12 Net subsidies 0.0 -794.4 0.0 0.0 0.0 -794.4 -0.01 Total costs 40294.3 45228.5 10758.2 10318.4 32950.8 139550.2 1.00 Cost structure - Gur Sugar cane 25550.7 245.6 5810.2 881.7 9919.7 42407.9 0.84 Levy sugar 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Free market sugar 0.0 0.0 0 .0 0.0 0.0 0.0 0.0 Gur 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Khandsari 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Molasses 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other costs 753.7 18.4 175.4 26.6 241.2 1215.2 0 .02 Cane transport 483.0 3.8 98.9 15.0 173.9 774.5 0.02 Hired labor 1507.4 36.7 350.8 53 .2 482.3 2430.4 0.05 Capital 2280.6 63.5 544.2 82.6 710.4 3681.2 0.07 Net subsidies 0.0 0.0 0.0 0.0 0.0 0.0 0.00 Total costs 30575.4 367.9 6979.4 1059.1 11527.4 50509.2 1.00 Cost structure - Khandsari Sugar cane 4496.5 129.2 58.8 705.3 1152.5 6542.4 0.55 Levy sugar 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Free market sugar 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Gur 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Khandsari 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Molasses 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other costs 782.3 15.2 8.8 105.2 169.l 1080.6 0.09 Cane transport 170.0 4.0 2.0 24.0 40.4 240.4 0.02 Hired labor 977.9 19.0 11.0 131.4 211.4 1350.7 0.11 Capital 1981.S 37.8 22. 1 265.2 424.7 2731.2 0.23 Net subsidies 0.0 0.0 0.0 0.0 0.0 0.0 1.00 Total costs 8408.2 205 .2 102.6 1231.1 1998.2 11945.3 1.00 Italics indicate observed data. na Not applicable  Appendix A Page 10 of 22 Table AS: Retail budget shares for the Indian sugar model White sugar Gur Khandsari Total Uttar Pradesh Budget shares 0.5172 0.2495 0.2333 1.0000 Expenditure parameters 0.4000 -0.3000 -0.1000 0.0000 Expenditure elast1c1ty 1.7733 -0.2026 0.5713 1.0000 Scaled expenditure elast1c1ty 2.1280 -0.2431 0.6856 1.2000 AIDS parameters White sugar -0.1000 0.0000 0.1000 0.0000 Gur 0.0000 0.0000 0.0000 0.0000 Khandsari 0 .1000 0.0000 -0.1000 0.0000 Price elasticities White sugar -0.6761 0.2495 0.4266 0.0000 Gur 0.5172 -0.7505 0.2333 0.0000 Khandsari 0.9459 0.2495 -1.1954 0.0000 Total effect White sugar -1.0382 0.0748 0.2633 --0.7000 Gur 0.1552 -0 .9252 0.0700 -0.7000 Khandsari 0.5838 0.0748 -1.3587 -0.7000 Maharashtra Budget shares 0.8338 0.1598 0.0063 1.0000 Expenditure parameters 0.3000 -0.3000 0.0000 0.0000 Expenditure elasticity 1.3598 -0.8771 1.0000 1.0000 Scaled expenditure elasticity 1.3598 -0.8771 1.0000 1.0000 AIDS parameters White sugar 0.0000 0.0000 0.0000 0.0000 Gur 0.0000 0.0000 0.0000 0.0000 Khandsari 0.0000 0.0000 0.0000 0.0000 Price elasticities White sugar -0.1662 0. 1598 0.0063 0.0000 Gur 0.8338 -0.8402 0.0063 0 .0000 Khandsari 0.8338 0.1598 -0.9937 0.0000 Total effect White sugar -0.7498 0.0479 0.0019 -0.7000 Gur ·0.2502 -0.9521 0.0019 -0.7000 Khandsari 0.2502 0.0479 -0.9981 -0.7000 Tamil Nadu Budget shares 0.7978 0.2022 0.0000 1.0000 Expenditure parameters 0.2500 -0.2500 0.0000 0.0000 Expenditure elast1c1ty 1.3134 -0.2363 0.0000 1.0000 Scaled expend/lure elast1c1ty 1.3134 -0.2363 0.0000 1.0000 AIDS parameters White sugar 0.0000 0.0000 0.0000 0.0000 Gur 0.0000 0.0000 0.0000 0.0000 Khandsari 0.0000 0.0000 0.0000 0.0000 Price elast1c1t1es White sugar -0.2022 0.2022 0.0000 0.0000 Gur 0.7978 -0.7978 0.0000 0.0000 Khandsari 0.7978 0.2022 -1.0000 0.0000 Total effect White sugar -0.0607 0.0607 0.0000 -0.7000 Gur 0.2393 -0.9393 0.0000 -0.7000 Khandsari 0.2393 0.0607 -1.0000 -0.7000 (Continued)  Appendix A Page 11 of 22 Table A5: Retail budget shares for the Indian sugar model White sugar Gur Khandsari Total Karnataka Budgec shares 0.6692 0.2167 0.1142 1.0000 Expendaure paramecers 0.3200 -0.3200 0.0000 0.0000 Expenditure elast1c1ty 1.4782 -0.4768 1.0000 1.0000 Scaled expenditure elast1c1ty 1.4782 -0.4768 1.0000 1.0000 AIDS parameters White sugar -0.1000 0.0000 0.1000 0.0000 Gur 0.0000 0.0000 0.0000 0.0000 Khandsari 0.1000 0.0000 -0.1000 0.0000 Price elasticities White sugar -0.4803 0.2167 0.2636 0.0000 Gur 0.6692 -0.7833 0.1142 0.0000 Khandsari 1.5451 0.2167 -1.7618 0.0000 Total effect White sugar -0.9487 0.0650 0.1837 -0.7000 Gur 0.2007 -0.9350 0.0342 -0.7000 Khandsari 1.0767 0.0650 -1.8417 -0.7000 Other States Budget shares 0.6557 0.3252 0.0191 1.0000 Expenditure parameters 0.4000 -0.4000 0.0000 0.0000 Expendaure elasticity 1.6100 -0.2300 1.0000 1.0000 Scaled expenditure elasticity 1.9320 -0.2760 1.2000 1.2000 AIDS parameters White sugar 0.0000 0.0000 0.0000 0.0000 Gur 0.0000 0.0000 0.0000 0.0000 Khandsari 0.0000 0.0000 0.0000 0.0000 ?nee elaseicilles White sugar -03443 0.3252 0.0191 0.0000 Gur 0.6557 -0.6748 0.0191 0.0000 Khandsari 0.6557 0.3252 -0.9809 0.0000 Toca! effect White sugar -0.8033 0.0976 0.0057 -0.7000 Gur 0.1967 -0.9024 0.0057 -0.7000 Khandsari 0.1967 0.0976 -0.9943 -0.7000  Appendix A Page 12 of 22 Model documentation This file provides an exhaustive list of variables and equations of the Indian sugar model. The model is based on a linear set of equations and variables in percentage change form but is solved using a non-linear approximation method by updating the base data set after each small change solution. set regions # states #( Up, Mah, Tn, Kar, 0th ); set sources# states plus imports# (Up, Mah, Tn, Kar, 0th, imports); subset regions is subset of sources; set corns# commodities# (cane, levy, free, gur, khan, molas); set ind #industries# (cane, sugar, gur, khan); set source# sources of white sugar# (dom.inp); set other_coms #Other corns# (cane, molas); set sugar_ bun #sugar consumption corns# (white, gur, khan); set sugar_corns (levy ,free); set nsugar_corns #commodities# (cane, gur, khan, molas); subset other_corns is subset of corns; subset sugar_ corns is subset of corns; subset nsugar_corns is subset of corns; set inputs # inputs to industries # (cane, levy, free, gur, khan, molas, inputs); subset corns is subset of inputs; set factors # value-added components # (lab, fixed); variable (all,i,inputs )(allj,ind)(all,r,regions )( aJl,s,sources) x 1(ij,r,s) #demands for inputs into production by industry#; (allj,ind)(all,r,regions) z(j,r) #activity levels by industry #; (all,i,inputs )( allj,ind)( all,r,regions )( all,s,sources) p I r(ij,r,s) # purchasers price of inputs by region #; (all,i,inputs)( allj,ind)( all,r,regions) al(ij,r) # technical change shifter on inputs to production#; (allj,ind)(all,r,regions) xo(j,r) # net subsidies by region #; (allj,ind)(all,r,regions) ps(j,r) ft price of net subsidies by region#; (all, v.factors )( al!j,ind)( all,r.regions) xp(v j,r) t+ demands for primary factors by industry#; (all, v.factors )( allj,ind)( all,r,regions) pp(v j,r) /: price of primary factors by industry #; (al I. v.factors )( allj,ind)( a!Lr,regions) ap(vj,r) i:; technical change shifter on primary factors by industry#; (al l,i,inputs )( allj,ind)( all,r,regions )( all,s,sources) x I marg(ij,r,s) c margin requirements for inputs #; (all,i,inputs )( allj.ind)( all,r,regions )( all,s,sources) p 1marg(ij,r,s) P price of margins on inputs#; (all,i.inputs )( allj.ind)( all.r,regions )( all,s,sources) powtax 1(i,j,r,s) /l power ofthe tax on inputs#; (all,i,inputs)(all,j,ind)(all,r,regions)(all.s,sources)spectaxl(ij,r,s) ;; specific tax on inputs #; (a!Li.inputs )( all.r.sources) pO(i,r) ii farm and factory prices by region #; (all,i.coms) pm(i) r.; cif price of imports by source #; (all.i.coms) fpm(i) t: shifter on cif price of imports #; (all,i,coms) tm(i) # tariff equivalent of imports #;  Appendix A Page 13 of 22 (all,i,coms) xm(i) # volume of imports # ; ( allj ,ind)( all.r,regions) pj(j,r) # average industry price by region #; (all,r,regions) pop(r) # population by region #; (all,r,regions) ry(r) # incomes by region #; (all,i,sugar_ bun)(all,r,regions) x2t(i,r) # demand for sugar in total #; (all,r,regions) p2t(r) # average price of sugar bundle #; ( all,i,coms )( all,r,regions )( all,s,sources) p2r(i,r,s) # consumer price of sugar commodities #; (all,i,coms)(all,r,regions) p2(i,r) # consumer price of sugar commodities #; (all,i,coms)(all,r,regions) x2(i,r) # consumer price of sugar commodities #; ( all,i,corns )(al l,r ,regions)( all,s,sources) x2r( i,r,s) # household demands by source #; (all,i,sugar_bun)(all,r,regions) x2b(i,r) # demands for white, gur and khandsari #; (all,i,sugar_bun)(all,r,regions) p2b(i,r) # prices for white, gur and khandsari #; (all,i,sugar_bun)(all,r,regions) t2b(i,r) # taste shifters for white, gur and khandsari #; (al l,i,coms )( all,r,regions )( all,s,sources) x2marg(i,r,s) # margin requirements for consumption #; (al l,i,coms )( all,r,regions )( all,s,sources) p2marg( i,r,s) # margin requirements for consumption #; ( all,i,coms )( all,r,regions )( all,s,sources) powtax2( i,r,s) If Ad valorem taxes on inputs esp cane #; ( all,i,coms )( all,r.regions )( all,s,sources) spectax2(i,r,s) # Ad valorem taxes on inputs esp cane #; ( all,i ,other_corns)( all ,r,regions) t2o( i,r) # taste shifter for cane and molasses #; (all,i,sugar _ coms)(all,r,regions) t2i(i,r) # taste shifters for levy and free sugar #; (all,i,coms)(all,r,regions) x4(i,r) i:; exports to the world by region #; (all,i.coms)(all,r,regions) p4(i,r) # fob export price #; (all,i,coms)(all.r.regions) t4(i,r) Fl power of the export tax #: (all.i,coms)(all,r.regions) f4(i.r) f:; export volume shifter #; (all,i,coms)(allj,ind)(all,r,regions) xOj(ij,r) # output of commodity by industry and region #; (all,i,coms)(allj,ind)(all,r,regions) aO(ij,r) # technical change shifter on output by industry #; (all,i,coms) xO(i) # national output by commodity #; ( allj,ind)( all,r,regions) income(j,r) # income by region #;  Appendix A Page 14 of 22 (all,r,regions) n(r) # supply of fixed factors by cane growing #; (all,r,regions) fn(r) # shift variable for land #; ! Data reads ! File data; coefficient (all,i,inputs )( allj,ind)( al l,r,regions )( all,s,sources) Atilde(ij ,r,s) # factory value of inputs to industry by region #; read Atilde from file data header "COO l "; coefficient (all,i,inputs )( all,j,ind)( all,r,regions )( all,s,sources) Ktilde(ij,r,s) # value of margins on inputs to industry by region #; read Ktilde from file data header "C057''; coefficient (all,i,inputs )( allj,ind)( all,r,regions )( all,s,sources) Ktildetax(i,j,r,s) #value of taxes on inputs to industry by region #; read Ktildetax from file data header "C05 l "; coefficient ( all,i,inputs )( allj,ind)( all,r,regions )( all,s,sources) Atildepp( ij,r,s) # purchasers prices of inputs to industry by region#; formula ( all,i,inputs )(all,j ,ind)( all,r,regions )( all,s,sources) Atildepp(ij,r,s)=Atilde(ij,r,s) +Ktilde(i,j,r,s )+ Ktildetax(ij,r,s ); coefficient (all,i,corns )( all,r,regions )( all,s,sources) Ctilde(i,r,s) # factory value of household consumption by region #; read Ctilde from file data header "C003 "; coefficient (all,i,coms )( all,r,regions )( all,s,sources) Mtilde(i,r,s) # value of margins on household consumption#, read Mtilde from file data header "CO 19"; coefficient (all,i,coms )( all,r,regions )( all,s,sources) Mtildetax(i,r,s) # value of taxes on household consumption#; read Mtildetax from file data header "C02 l "; coefficient (all.i,corns)(all,r,regions) Dtilde(i,r) # value of exports by region #; read Dtilde from file data header "C007''; coefficient ( all,i.inputs )( allj,ind)( all,r.regions )( all,s,sources) Avolume(i,j,r,s) # volumes of inputs to industry by region #; read Avolume from file data header "QOOI "; coefficient (all,i,coms )( all.r,regions )( all,s,sources) Cvolumes(i,r,s) ti consumption volumes by region #; read Cvolumes from file data header "Q002"; coefficient (all,i,corns )( all,r,regions) Evolumes(i,r) ;:: export volumes by region #; read £volumes from file data header "Q004"; coefficient (all ,i.corns )( all,j,ind)( all,r,regions) Yvols(i,j,r) /; volumes of commodities produced by industries #; read Yvols from file data header "Q014"; coefficient (all.i.coms )(al l,j,ind)( all,r.regions )( all,s,sources) Aprices(i,j,r,s) /:! factory I farm prices of inputs to industry # ; read Aprices from file data header "PRO l "; coefficient (all,i,corns )( all,j,ind)( all,r,regions )( all,s,sources) Ktprices(i,j,r,s) # taxes on inputs to industry # ; read Ktprices from file data header "PR5 l ";  Appendix A Page 15 of 22 coefficient (all ,i.coms )( all,r,regions )( all,s,sources) Cprices(i,r,s) # factory I farm prices on consumption #; read Cprices from file data header "PR03 "; coefficient (all,i,coms )( all,r,regions )( all,s,sources) Ctprices(i,r,s) # taxes on consumption by region #; read Ctprices from file data header ''PR2 I"; coefficient (all,i,coms )( allj,ind)( all,r,regions )(all,s,sources) Kprices( ij ,r,s) # margins on inputs to industry#; read Kprices from file data header "PR57"; coefficient (all,i,corns )( all,r,regions )(all,s,sources) Mprices( i,r,s) # margins on consumption by region #; read Mprices from file data header "PR 19"; coefficient (all,r,regions) Pop_ b(r) # base population#; read Pop_B from file data header "POPB"; coefficient (all, i,corns )( all,r,regions) Conspp( i,r) # consumption at purchasers prices by region#; formula (all,i,coms)(all,r,regions) Cons pp( i,r )=sum(s,sources, Ctilde(i,r,s)+Mtilde(i,r,s)+Mtildetax(i,r,s)); coefficient (all,i,coms)(all,r,regions)(all,s,sources) Consppr(i,r,s) # consumption at purchasers prices by region and source #; formula (all,i,coms )( all,r,regions )( all,s,sources) Consppr(i,r,s) = Ctilde(i,r,s)+Mtilde(i,r,s)+Mtildetax(i,r,s); coefficient (all, v,factors )( allj,ind)( all,r,regions) Utilde(v j,r) # primary factor inputs by regions #; read Utilde from file data header "H003"; coefficient (allj,ind)( all,r,regions) Xtilde(j,r) # production subsidies by region #; read Xtilde from file data header "CO IO"; coefficient (all,i.corns )( allj ,ind)(all,r,regions) Ytilde( ij,r) #j oint production matrix #; read Ytilde from file data header "C014"; zerodivide default 0.0 ; coefficient (all,i,coms)( allj ,ind)( all ,r,regions) YO(ij,r) ti share of each commodity in industry output #; formula (all,i.coms )(allj,ind)( all,r,regions) YO(ij.r) = Ytilde(ij,r) I sum(k,coms,Ytilde(kj,r)); coefficient (a ll,i,corns )(allj.ind)( all,r,regions) BO(ij,r) # share of industry by region in total output of i #; formula (all,i.corns )( allj,ind)( all,r,regions) BO(ij.r) = Ytilde(ij.r) I sum(k.ind,sum(t,regions, Ytilde(i,k,t))); coefficient (all,i,coms)(allj,ind)(all,r,regions) BOr(ij,r) I: share of industry by region in regional output of i #; formula (all,i.coms)(allj,ind)(all,r,regions) BOr(ij ,r) = Ytilde(ij,r) I sum(k,ind, Ytilde(i,k,r)); coefficient (all,i.corns )( all,r,regions) sigma2r(i,r) # substitution parameters between sources #; read sigma2r from file data header "P006"; coefficient (all,i,corns )( all ,r,regions) Totalsales(i,r) # total sales of each commodity by region #; formula (all,i,corns)(all,r,regions) Totalsales(i,r) = sum(s.regions, sum(j,ind,Atilde(ij,s,r))+Ctilde(i,s,r)) + Dtilde(i,r);  Appendix A Page 16 of 22 coefficient ( all ,i,coms )( allj ,ind)( all ,s,regions )( all,r,regions) S l cl(i,j ,s.r) # share of input use by region in total sales f:; formula (all,i,coms)(allj,ind)(all,s,regions)(all,r,regions) S l cl(ij,s,r) = Atilde(ij ,s,r) I Totalsales(i,r); coefficient ( all,i,coms )( all,s,regions )( all,r,regions) S2cl(i,s,r) # share of household use by region in total sales#; formula ( all,i,coms )( all,s,regions )( all,r,regions) S2cl(i,s,r) = Ctilde(i.s,r) I Totalsales(i,r); coefficient (all,i,coms )( all,r,regions) s4cl(i,r) # share of exports in total sales #; formula (all,i,coms )( all,r,regions ) s4cl(i,r) = Dtilde(i,r) I Totalsales(i,r); coefficient (all,i,coms) totalimps(i) # total imports on a national basis #; formula (all,i,coms) totalimps(i) = sum(r,regions, sum(j,ind,Atilde(ij,r,"imports")) + Ctilde(i,r,"imports")); coefficient (all,i,coms)(allj,ind)(all,r,regions) S l clm(ij,r) # share of inputs use by region in total imports #; formula (all,i,coms)(allj,ind)(all,r,regions) S 1clm(i,j,r) = Atilde(i,j,r, "imports") I totalimps(i); coefficient (all,i,coms)(all,r,regions) S2clm(i,r) # share of consumption by region in total imports #; formula ( all,i,coms )( all,r,regions) S2clm(i,r) = Ctilde(i,r,"imports") I totalimps(i); zerodivide default 0.333 ; coefficient ( all ,v,factors )(allj,ind)( all ,r,regions) Sp(v,j ,r) # share of each primary factors in total /.;; formula (all,v,factors )( allj ,ind)( all,r,regions) Sp(v,j,r)=Utilde(v,j,r) I sum(u,factors,Utilde(uj,r)); coefficient (all,j ,ind)(all.r,regions) Totalcosts(j ,r) /:I total costs by industry and region #; formula (all,j ,ind)(all,r,regions) Totalcosts(j,r)= sum( s,sources,sum( i,inputs,Atildepp( IJ,r,s))) + sum( v,factors ,Utilde(v,j,r)) + Xtilde(j,r); zerodivide default 0.0 ; coeffi cient ( all.i,inputs )( all,j,ind)( all,r,regions )( all,s,sources) H l r(i,j ,r,s) P share of inputs by region in total costs of industry j #; formula (all,i.inputs)(allj.ind)(all ,r,regions)(all,s,sources) Ill r(i j ,r,s) = Atildepp(ij,r,s) I Totalcosts(j,r); coefficient ( a ll.i.inputs)(a llj ,ind)(all,r,regions) HI (ij ,r) ;: share of inputs in total costs of industry j #; formula (al Li.inputs)( allj ,ind)( all,r,regions) HI (ij.r) = sum(s,sources, Atildepp(ij,r,s)) I Totalcosts(j,r); coefficient (all ,v,factors )( all,j ,ind)( all.r,regions) Hp(v j ,r) P share of primary factors in total costs of industry j #; formula (all ,v,factors)( allj,ind)( all ,r,regions) Hp(vj,r) = Utilde(vj.r) I Totalcosts(j,r); coefficient ( all,j ,ind)( all,r,regions) Ho(j ,r) ;; share of other costs in total costs #; formula (all,j.ind)(all,r,regions) Ho(j.r)= Xtilde(j ,r)rrotalcosts(j ,r) ; coeffi cient (allj,ind)(all,r,regions) Sigmap(j ,r) 1:1 primary factor substitution parameter#; read s1gmap from file data header "P030";  Appendix A Page 17 of 22 Coefficient (all,i,sugar _ bun)(all,r,regions) Conpp_ b(i,r) # budget share of sugar consumption bundl e #; Formula (all,r,regions) Conpp_ b("white",r) = Conspp("levy",r)+Conspp("free",r) ; Formula (all,r,regions) Conpp_b("gur",r) = Conspp("gur",r); Formula (all,r,regions) Conpp _ b("khan",r) = Conspp("khan" ,r); coefficient (all,r,regions) epsbig(r) # general sugar expenditure elasticity#; read epsbig from file data header "POOI "; coefficient (all,i,sugar_bun)(all,r,regions) gam_by(i,r) # specific expenditure parameters by region #; read gam_by from file data header "P002"; coefficient ( all,i,sugar_bun)( all,k,sugar_bun)( all,r,regions) gam _ bp(i,k,r) # own and cross price parameters by region #; read gam_bp from file data header "P003"; coefficient (all,r,regions) gen_p(r) # general price elasticity fro sugar #; read gen_p from file data header "P007''; coefficient (all,i,sugar_bun)(all,r,regions) eps_b(i,r) # specific expenditure elasticity by region #; Coefficient (all, i,sugar_bun)( al l,r,regions) Sh_ b(i,r) # budget share of sugar consumption in total #; Formula (all,i,sugar_bun)( all,r,regions) Sh_ b(i,r) = Conpp _b(i,r)/sum(k,sugar_bun.Conpp _b(k,r)); Formula (all,r,regions )( all,i,sugar_bun) eps_b(i,r) = I + [garn_by(i,r)/Sh_b(i,r)] ; Coefficient (all,i,sugar_bun)( allj,sugar_bun)(all,r,regions) tau_ b(ij ,r) # price elasticities for the sugar bundle #; Formula (all,i,sugar_ bun)(allj,sugar_ bun)(all,r,regions) tau_b(ij,r) = gam_bp(ij,r)/ Sh_b(i,r) + Sh_b(j ,r) ; Formula ( all,i,sugar_bun)( all,r,regions) tau_b(i,i,r) = -1 + [gam_bp(i,i,r)/Sh_b(i,r)] + Sh_b(i,r); coefficient (all,i,other _corns)( all,r,regions) eps_o(i,r) # expenditure elasticities for cane and molasses #; read eps_ o from file data header "P004"; coefficient ( all,i,other _corns)( all,r,regions) tau_o(i,r) # price elasticities for cane and molasses #; read tau_ o from file data header "POO 5''; coefficient (all,i,coms )( all,r,regions )( all,s,sources) S2r(i,r,s) # share of value of consumption by source #; formula (all,i,coms)(all,r,regions)(all,s,sources) S2r(i,r,s) = Consppr(i,r,s) I Conspp(i,r); coefficient sigma2i # substitution parameter between levy and free sugar #; formula sigma2i = 20.0 ; coefficient (all,i,sugar_ coms)(all,r,regions) S2i(i,r) # share of levy and free market sugar - value shares #; formula (all.r,regions) S2i("levy",r) = Conspp("levy",r) I (Conspp("levy",r)+Conspp("free",r)); formula (all ,r,regions) S2i("free" ,r) = l - S2i("levy",r); coeffici ent ( all,i,inputs )( allj ,ind)( all,r,regions )( all,s,sources) zeta l (ij,r,s) # share of basic values plus tax in purchasers prices #; formula (all,i,inputs)(allj,ind)(all,r,regions)(all,s,sources) zeta! (ij,r,s) = (atilde(ij ,r,s)+ kt~ldetax(ij,r,s)) /Atildepp(ij,r,s); coefficient ( all,i,coms )( all,r,regions )( all,s,sources) zeta2(i,r,s) # share of basic values plus tax in purchasers prices #; formula ( all,i,coms )( all,r ,regions)( all,s,sources) zeta2 (i,r,s) = (ctilde(i,r,s)+mtildetax(i,r,s)) I Consppr(i,r,s); coefficient ( all, i,inputs )( allj,ind)( all,r,regions )( all,s,sources) z_int(ij,r,s)  Appendix A Page 18 of 22 # power to ad valorem tax conversion factor, intermediate #; fonnu la ( all ,i,inputs )( allj. ind)( al l,r,regions )(al l,s,sources) Z _int(ij ,r,s) = ktildetax( ij,r ,s )/(ktildetax( ij ,r ,s )+ Atilde( ij ,r ,s) ); coefficient ( all,i,coms )( all,r,regions )( all,s,sources) z_cons( i,r,s) # power to ad valorem tax conversion factor, consumption #; formula ( all,i,coms )( all,r ,regions)( al\,s,sources) Z_ cons(i,r,s) = Mtildetax( i,r,s )/(Mtildetax( i,r,s )+ Cti lde(i,r,s) ); coefficient (all,i,coms) Sigmam(i) # supllya of imports elasticities # ; read sigmam from file data header "PO 18"; coefficient ( all,i,coms) Cifprices( i) # landed price of imports #; read cifprices from file data header "PR29" ; coefficient (all,r,regions) supland(r) # supply elasticity of cane land by region #; read supland from file data header "SUPL"; ! Input demands by industry ! !l! equation int_ dem # demands for inputs into production by industry # ( all,i,inputs )( allj ,ind)( all,r,regions )( all,s,sources) xl(ij,r,s) = z(j,r) + al(ij,r); !21 equation prim_ dem # demands for primary factors by industry # (all, v,factors)( al\j ,ind)( all,r ,regions) xp(v,j,r) = z(j ,r) - Sigmap(j,r) • ( pp(vj,r) - sum(t,factors,Sp(t,j,r)*pp(tj,r))) + ap(vj ,r) - Sigmap(j,r) • ( ap(v,j,r) - sum(t,factors,Sp(t,j ,r)*ap(t,j ,r)) ); . '3 ' equation other_ costs ;; demands for production subsidies # (allj.ind)( al l,r,regions) xo(j ,r) = z(j ,r); 1 Final demands 1 14 1 equation tot_ sug_ dem fl demand for sweeteners in aggregate # (all ,i.sugar_ bun)(all,r,regions) x2t( i,r) - pop(r) = epsbig(r)*eps _ b(i,r)*(ry(r)-pop(r)) ~ gen _p(r)*p2t(r) , !5' equation sug_ dems /: demand for components of sugar bundle # (all,i ,sugar _ bun)(all,r.regions) x2b(i,r) = x2t(i.r) + sum(k.,sugar_ bun,tau _ b(i,k.,r) * p2b(k.,r)) + sum(k.,sugar _ bun,tau _ b(i,k.,r) • t2b(k,r)); '6 ! equation oth _ dems ii demands for cane and molasses # (all,i.other _ coms)(all,r,regions) x2(i ,r) - pop(r) = eps_ o(i,r)*( ry(r)-pop(r)) tau _ o(i,r)*p2(i,r) + t2o(i,r):  Appendix A Page 19 of 22 '7! equation dems _white # demands for levy and free sugar # ( all,i ,sugar_ corns)( all,r,regions) x2(i,r) = x2b("white",r) - sigma2i*( p2(i,r) - p2b("white",r)) - sigma2i*( t2i(i,r) - sum(k,sugar _ coms,S2i(k,r)*t2i(k,r)) ); !8! equation tot_sug_pr # average price of sweetener bundle # (all,r,regions) p2t(r) = sum(i,sugar_ bun,Sh _ b(i,r)*p2b(i,r)); !9! equation price_ white #average pricec of white sugar# (all,r,regions) p2b("white",r) = sum(k,sugar _ corns,S2i(k,r)*p2(k,r)); !10! equation price _gur (all,r,regions) p2b("gur",r) = p2("gur",r); ! 111 equation price_ khan (all,r,regions) p2b("khan",r) = p2("khan",r); !12! equation out_gur (all,r,regions) x2("gur",r) = x2b("gur",r) ; ! 13 ! equation out_ khan (all,r,regions) x2("khan",r) = x2b("khan",r); !14! equation cons_ by_ source # consumption of sweetners by source # (al l,i ,corns)( all.r ,regions)( all,s,sources) x2r(i,r,s) = x2(i ,r) - sigma2r(i,r)*(p2r(i,r,s) - p2(i,r) ); ! IS! equation price _ av ( all,i,corns )( all,r,regions) p2(i,r) = sum(t,sources, S2r(i,r,t)*p2r(i,r,t)); !16' equation exports_ vol # export volumes bu region # ( all,i,corns )( all,r,regions) x4(i.r) = -IO*p4(i,r) + f4(i ,r); ! Zero pure profits ! '17! equation zpp_prod # zero pure profits in production # (allj ,ind)(all.r,regions) pj(j ,r) = surn(i,inputs,sum(s,sources,H I r(ij,r,s )*p 1r(ij,r,s))) + sum(v,factors,Hp(vj,r)*pp(vj,r)) + Ho(j,r)*ps(j,r) - sum(i,corns,YO(ij,r)* aO(ij,r)) + sum(i,inputs,H 1(ij,r)*a I (ij,r)) + sum(v.factors,Hp(v j,r)*ap(v j,r));  Appendix A Page 20 of 22 I 18 1 equation av_ ind _pr # average industry price # (all,j ,ind)(all,r,regions) pj(j ,r) = sum(i,coms,YO(i,j ,r) • pO(i,r)); !19 ! equation output_ ind # output produce by each industry # (all,i,coms )( all,j ,ind)( all,r,regions) xOj(i,j ,r) = z(j ,r) + aO(ij ,r) ; !20! equation sugar_ levy_perc # levy percentage of milling by region # (all,r,regions) Yvols("levy", "sugar" ,r )* aO("levy","sugar" ,r) = - Yvols("free", "sugar" ,r )* aO("free", "sugar" ,r); !21! equation total_ output # total output by commodity # (all,i,coms) xO(i) = sum(j,ind,sum(r,regions, BO(ij,r) • xOj(ij,r) )); !22 ' equation pur_pri _int # purchasers' prices for intermediate use # (all,i,inputs )( allj ,ind)( all,r,regions )( all,s,sources) p lr(i,j,r,s) = zeta 1(ij,r,s)*[pO(i,s)+powtaxl (i,j,r,s)] + (l.0-zetal(i,j ,r,s))* plmarg(ij ,r,s); !23' t!4Ualion pur_pri _ hous # purchasers' prices for households # (all,i,coms)(all,r,regions)(all,s,sources) p2r(i,r,s) = zeta2(i,r,s)*[p0(i,s)+powtax2(i,r,s)] + ( l .0-zeta2(i,r,s))*p2marg(i,r,s); equation pow_ int_tax # power of tax on sales to intermediate # (al I, i. inputs)( al lj ,ind)( all ,r ,regions)( al l,s,sources) powtaxl(ij ,r,s) = Z_ int(i,j ,r,s)* (spectaxl(ij,r,s)- pO(i,s)); !25 ~ equation pow_ cons_tax c power of tax on sales to consumption # (al l,i,corns )( al l,r ,regions)( al l,s.sources) powtax2(i,r.s) = Z_cons(i,r,s)*(spectax2(i,r,s)- pO(i,s)); !26 1 equation exp _price # zero pur profits in exporting # (all,i,coms)(all,r,regions) p4(i.r) = pO(i,r) -.- t4(i,r); !27 ! equation mar_ inputs # margin requirements for inputs # (all.i.inputs )( allj ,ind)( al l,r,regions )( all,s,sources) x I marg(ij,r,s)=xl (ij,r,s); !28 1 equation mar_ hous # margin requirements for households # (all,i,coms )( all.r.regions )( all,s,sources)  Appendix A Page 21 of 22 x2marg( i,r,s )= x2r( i.r,s ); !29' equation bas_pr_ imps # landed price of imports #; (all,i,coms) pO(i,"imports") = pm(i) + tm(i); equation cif_pr_ imps # supply of imports - large country assumption # (all,i ,coms) !30! pm(i) = sigmarn(i) * xm(i) + fpm(i) ; !31! equation mkt _cl_ dom # market clearance by commodity and region # (all,i,coms )( all,r,regions) sum(j,ind,BOr(i,j,r)*xOj(i,j,r)) = sum( s,regions, sum(j ,ind,S lcl(i,j ,s,r)*xl(ij,s,r)) + S2cl(i,s,r)*x2r(i,s,r)) + S4cl(i,r)*x4(i,r); !32! equation total_ imps # market clearance for imports # (all,i,coms) xm(i) = sum(r,regions, sum(j,ind,S 1clm(i,j,r)*xl(ij,r,"imports")) + S2clm(i,r)*x2r(i,r,"imports")); !33' equation real _ income # income by industry and region # ( allj,ind)( all ,r,regions) income(j,r) = sum(v,factors, Sp(v,j,r) • (xp(v,j .r)+pp(v,j,r)) ); !34 ! equation mkt_cl_fixed # market clearance for land # (all,r,regions) xp("fixed'', "cane",r) = n(r); equation sup_ land_ cane fl supply ofland by region # (all,r,regions) n(r) = supland(r) • pp("fixed","cane'',r) + fn(r) ; ! Update statements ! update (al I, i,inputs )(al l,j,ind)( all,r,regions )( all,s,sources) atilde(i,j,r,s)=pO(i,s)*xl (ij,r,s); update (all, v,factors )( all,j,ind)( all,r,regions) utilde(vj ,r)=pp(v,j,r)*xp(vj,r); update (all,j ,ind)(all,r,regions) xtilde(j ,r)=ps(j ,r)*xo(j,r); update (change) (all, i, inputs)( al lj ,ind)( all ,r,regions )(al l,s,sources) ktilde (i,j,r,s) =ktilde(i,j,r,s)*(p l marg(i,j,r,s)+xlmarg(i,j,r,s))/ l 00 ; update (change) (al l,i, inputs)( all,j, ind)( all,r,regions )( all,s.sources) kti ldetax( i,j,r,s )=(ktildetax( i,j ,r,s )+atilde(ij,r,s) )* (pO(i,s)+x 1(i,j,r,s)+powtax1(ij,r,s))/l00 - atilde(i,j,r,s)*(pO(i ,s)+ x I (i,j ,r,s))/ 100; update ( all ,i,coms )( all,j ,ind)( all,r,regions)  Appendix A Page 22 of 22 yti Ide( ij ,r)=pO( i,r )*xOj( ij,r); update ( all,i,coms )( all,r,regions )( all,s,sources) cti Ide( i,r,s )=pO( i,s )*x2r( i,r,s ); update (change) (all,i,coms )( all,r,regions )( all,s,sources) mtilde (i,r,s) = mtilde(i,r,s )*(p2marg(i,r,s)+x2marg(i,r,s))II 00 ; update (change) ( all,i,coms )(all,r,regions )(all,s,sources) mtildetax( i,r,s )=( mtildetax( i,r,s )+cti Ide( i,r,s) )* (pO(i,s )+x2r(i,r,s)+powtax2(i,r,s ))/ 100 - ctilde(i,r,s )*(pO(i,s )+x2r( i,r,s ))/ 100; update ( all,i,corns )(all,r,regions) dtilde(i,r)=pO(i,r)*x4(i,r); update ( all,i,inputs )( allj,ind)( all,r,regions )( all,s,sources) Avolume(ij,r,s) = xl(ij,r,s); update ( all,i,corns )(all,r,regions )( all,s,sources) Cvolumes(i,r,s) = x2r(i,r,s); update (all,i,corns)(all,r,regions) Evolumes(i,r) = x4(i,r); update ( all,i,coms )( allj,ind)( all,r ,regions) Yvols(ij,r) = xOj(ij,r); update ( all,i,coms )( allj,ind)( all,r,regions )(al l,s,sources) Aprices(ij,r,s) = pO(i,s); update ( all,i,coms )( all,r,regions )(all,s,sources) Cprices(i,r,s) = pO(i,s); update (al I, i,corns )( allj,ind)( all,r,regions )(al l,s,sources) Kprices(ij,r,s) = plmarg(ij,r,s); update (all,i,coms )( all,r,regions )( all,s,sources) Mprices(i,r,s) = p2marg(i,r,s); update (change) (all. i,corns )( allj, ind)( all,r,regions )(al 1,s,sources) i\.tprices(ij.r,s) = (Ktprices(ij,r,s)+ Aprice~(ij,r,s)) • · (pO(i,s)+powtaxl(ij,r,s))/ 100 - Aprice!.( i.j ,1,s) • (pO( i,s) )/ I 00 update (change) (al l,i. corns)( all ,r ,regions)( all,s,sources) Ctprices(i,r,s) = (Ctprices(i,r,s)+Cprices(i,r,s)) * (pO(i,s)+powtax2(i,r,s))/l 00 - Cprices(i,r,s)*(pO(i,s))/J 00 ; update (all,i.coms) Cifprices(i) = pm(i); update ( all.r .regions) Pop_b(r) = pop(r);  Appendix B Page I of 7 Detailed simulation results Table Bl: Base data for Indian sugar model, 1994-95 quantities and 1993-94 prices Uttar Maharashtra Tamil Kamat aka Other All Pradesh Nadu regions regions Sugarcane Production kt. 110000 37500 23000 21000 56285 247785 Dispositron Mill use kt. 40000 38200 10000 10000 30380 128580 Khandsari kt. 8500 200 100 1200 2020 12020 Gur kt. 48300 380 9885 1500 17386 77451 Other kt 13200 -1280 3015 8300 6449 29734 Cane prices Actual cane price Rs/t 529 646 588 588 571 567 Milling sedor Mill whites kt 3600 4200 1000 1000 2949 12749 Sugar distribution Levy sugar O/o 34 34 40 40 34 35 Free market sugar % 66 66 60 60 66 65 Levy sugar kt 1228 1432 400 400 1006 4465 Free market sugar kt 2372 2768 600 600 1943 8284 Regional ex-factory prices Levy sugar Rs/t 7697 7175 7642 7220 7915 7531 Free market sugar Rs/t 11864 11717 11710 11259 11805 11746 Gur Production kt 3864 30 791 120 1391 6196 Ex-factory price Rslt 7913 12102 8826 8826 8288 8152 Khandsari Production Kt 723 17 9 102 172 1022 Ex-factory price Rslt 10932 11364 11364 11364 10932 10986 Trade in free market sugar Imports kt 99 56 40 32 374 600 Exports kt 0 200 0 0 0 200 Consumption by state Levy sugar kt 734 416 295 237 2783 4465 Free market sugar kt 1107 1723 631 413 4810 8684 Gur kt 1141 385 227 220 4223 6196 Khandsari kt 723 17 9 102 172 1022 Total sweetener consumption kt 3704 2541 1161 972 11988 20367 Per person sugar consumption Levy sugar - plus leakage Kg/person 4.8 4.8 4.8 4.8 4.8 4.8 Free market sugar kg/person 7.3 20.0 10.3 8.4 8.3 9.4 Gur kg/person 7.5 4.5 3.7 4.5 7.3 6.7 Khandsari kg/person 4.8 0.2 0.1 2.1 0.3 1.1 Total sweetener consumptron kg/person 24.4 29.4 19.0 19.8 20.8 22.0 Net intra - state exports Levy sugar kt 494 1016 105 163 -1777 0 Free market sugar kt 1364 901 9 219 -2493 0 Gur kt 2723 -355 564 -100 -2832 0 Khandsari kt 0 0 0 0 0 0 Retail prices Levy sugar Rs/t 9050 9050 9050 9050 9050 9050 Retail sugar Rs/t 15003 15068 14619 14619 15373 15175 Gur Rslt 9704 14373 10708 10708 10117 10344 Khandsari Rs/t 13025 13500 13500 13500 13025 13084 import prices Landed price cif Rslt 10652 Landed price plus tariff equivalent Rslt 11717 Tariff equivalent O/o 10  Appendix B Page 2 of 7 Table B2: Forecast for 2005 2 self sufficienn with elimination of cane subsidies in UP and Maharashtra and milling subsid,· in Maharashtra : Simulation 1 Uttar Maharashtra Tamil Karnataka Other All Pradesh Nadu regions regions Sugarcane Production kt 146689 50766 28637 28988 81119 336199 Disposition Mill use kt 78411 53286 19289 16322 61385 228693 Khandsari kt 8961 311 158 1647 2748 13825 Gur kt 43854 7 5435 65 9378 58739 Other kt 15462 -2838 3755 10954 7608 34942 Cane prices Actual cane price Rs/t 711 925 788 874 790 783 Milling sector Mill whites kt 7057 5859 1929 1632 5959 22435 Sugar distribution Levy sugar % 22 30 24 29 21 25 Free market sugar % 78 70 76 71 79 75 Levy sugar kt 1535 1785 470 470 1250 5510 Free market sugar kt 5522 4073 1459 1163 4709 16926 Regional ex-factory prices Levy sugar Rs/t 7697 7175 7642 7220 7915 7532 Free market sugar Rs/t 15582 16804 15236 15827 15621 15874 Gur Production kt 3508 I 435 5 750 4699 Ex-factory price Rs/t 10664 17178 11869 12946 11441 10903 Khandsari Production kt 762 26 13 140 234 1175 Ex-factory price Rs/t 15170 16362 15719 16709 15416 15435 Trade in free market sugar Imports kt 57 140 23 59 321 600 Exports kt 0 200 0 0 0 200 Consumption by state Levy sugar kt 921 523 339 267 3459 5510 Free market sugar kt 1919 3409 1419 1028 9552 17328 Gur kt 1109 93 75 37 3385 4700 Khandsari k.'1 762 26 13 140 234 1175 Total sweetener consumption kt 4711 4052 1847 1473 16630 28712 Per person sugar consumption Levy sugar - plus leakage kg/person 4.8 4.8 4.8 4.8 4.8 4.8 Free market sugar kg/person 10. l 31.5 20.2 18.6 13 .3 15.2 Gur kg/person 5.8 0.9 l.l 0.7 4.7 4.1 Khandsari kg/person 4.0 0.2 0.2 2.5 0.3 1.0 Total sweetener consumptzon kg/person 24.7 37.4 26 .3 26.6 23 .2 25 .1 Net intra - state exports Levy sugar kt 614 1263 131 202 -2209 0 Free market sugar kt 3660 604 63 193 -4522 0 Gur kt 2399 -93 360 -32 -2635 0 Khandsari kt 0 0 0 0 0 0 Reta il prices Levy sugar Rs/t 9050 9050 9050 9050 9050 9050 Retail sugar Rs/t 18729 20102 18132 19087 19253 19261 Gur Rslt 12456 17118 13788 13700 12995 12967 Khandsari Rs/t 17260 18471 17832 18824 17492 17526 import prices Landed price cif Rslt 10652 Landed price plus tariff equivalent Rs!t 16556 Tariff equivalent % 55  Appendix B Page 3 of 7 Table B3: Forecast for 2005 2 simulation 1 ~lus 25 ~er cent ~roductivitv increase in growing and milling: simulation 2 Uttar Maharashtra Tamil Karn at aka Other All Pradesh Nadu regions regions Sugar cane Production kt 165572 59305 33258 34065 90776 382976 Dispositron Mill use kt 91440 62305 22060 19594 65326 260724 Khandsari kt 9429 340 170 1665 3013 14617 Gur kt 41517 10 6735 94 13968 68425 Other kt 17086 -3350 4292 12712 8469 39210 Cane prices Actual cane price Rslt 517 686 581 646 575 574 Milling sector Mill whites kt 8230 6850 2206 1959 6341 25586 Sugar distribut10n Levy sugar % 19 26 21 24 20 22 Free market sugar O/o 81 74 79 76 80 78 Levy sugar kt 1535 1785 470 470 1250 5510 Free market sugar kt 6695 5065 1736 1490 5091 20077 Reg10nal ex-factory prices Levy sugar Rslt 7697 7175 7642 7220 7915 7532 Free market sugar Rs/t 11610 12362 11248 11539 11720 11791 Gur Production kt 3809 I 539 8 1117 5474 Ex-factory price Rslt 8238 14184 9288 10100 8748 8449 Khandsari Production kt 801 29 14 141 256 1242 Ex-factory price Rs/t 12955 13620 13359 14105 12949 13105 Trade in free market sugar lmports kt 60 118 22 53 347 600 Exports kt 0 200 0 0 0 200 Consumption by state Levy sugar kt 921 523 339 267 3459 5510 Free market sugar kt 2295 4055 1688 1240 11200 20479 Gur kt 1302 101 86 42 3943 5474 Khandsari kt 801 29 14 141 256 1242 Total sweetener consumpt10n kt 5319 4708 2128 1691 18858 32705 Per person sugar consumption Levy sugar - plus leakage kg/person 4.8 4.8 4.8 4.8 4.8 4.8 Free market sugar kg/person 12.0 37.4 24.0 22.4 15.6 17.9 Gur kg/person 6.8 0.9 1.2 0.8 5.5 4.8 Khandsari kg/person 4.2 0.3 0.2 2.6 0.4 I. I Total sweetener consumption kg/person 27.9 43.5 30.3 30.5 26.3 28.6 Net intra - state exports Levy sugar kt 614 1263 13 l 202 -2209 0 Free market sugar kt 4460 928 71 302 -5762 0 Gur kt 2508 -IOI 453 -34 -2826 0 Khandsari kt 0 0 0 0 0 0 Retail prices Levy sugar Rs/t 9050 9050 9050 9050 9050 9050 Retail sugar Rs/t 14771 15701 14161 14856 15309 15204 Gur Rs/t 10038 14687 11207 11252 10511 10493 Khandsari Rs/t 15049 15740 15479 16225 15033 15201 Import prices Landed price cif Rs.It 10652 Landed price plus tariff equivalent Rs/t 12450 Tariff equivalent % 17  Appendix B Page 4 of 7 Table B4: Forecast for 2005 2 free trade in the Indian sugar sector with imuorts but dual Sl'.stem still ouerating: simulation 3 Uttar Maharashtra Tamil Karnataka Other All Pradesh Nadu regions regions Sugarcane Production kt 124825 44061 24526 24178 66137 283727 Disposition Mill use kt 56832 45393 14393 12442 42400 171460 Khandsari kt 9600 330 169 1853 2942 14895 Gur kt 43322 9 6433 141 13252 63157 Other kt 15070 -1671 3532 9742 7542 34216 Cane prices Actual cane price Rslt 627 819 690 734 684 685 Milling sector Mill whites kt 5115 4991 1439 1244 4116 16905 Sugar distribution Levy sugar % 34 34 40 40 34 35 Free market sugar % 66 66 60 60 66 65 Levy sugar kt 1744 1702 576 498 1403 5923 Free market sugar kt 3371 3289 864 747 2712 10982 Regional ex-factory prices Levy sugar Rslt 7697 7175 7642 7220 7915 7554 Free market sugar Rs/t 15143 15821 15302 15045 15230 15373 Gur Production kt 3466 1 515 11 1060 5053 Ex-factory price Rs/t 9614 15850 10651 11203 10118 9830 Khandsari Production kt 816 28 14 157 250 1266 Ex-factory price Rs/t 14002 14935 14391 14890 13988 14135 Trade in free market sugar Imports kt 775 1328 571 560 4018 7253 Exports kt 0 200 0 0 0 200 Consumpt10n by state Levy sugar kt 1055 284 429 271 3884 5923 Free market sugar kt 1922 3801 1420 1105 9789 18036 Gur kt 1191 98 82 39 3644 5053 Khandsari kt 816 28 14 157 250 1266 Total sweetener consumption kt 4984 421 I 1945 1572 17566 30277 Per person sugar consumpt10n Levy sugar - plus leakage kg/person 5.5 2.6 6.1 4.9 5.4 5.2 Free market sugar kg/person 10. l 35.1 20.2 19.9 13.7 15.8 Gur kg/person 6.2 0.9 1.2 0.7 5.1 4.4 Khandsari kg/person 43 O.~ 0.2 2.8 0.3 1.1 Total sweetener consumpt10n kg/person 26.l 38.9 27.7 28.4 24.5 26.5 Net intra - state exports Levy sugar kt 689 1418 147 227 -2480 0 Free market sugar kt 2224 616 15 202 -3058 0 Gur kt 2274 -97 433 -28 -2583 0 Khandsari kt 0 0 0 0 0 0 Retail prices Levy sugar Rs/t 9050 9050 9050 9050 9050 9050 Retail sugar Rs/t 17577 18252 17370 17246 18032 17930 Gur Rs/t 11405 16048 12551 12632 11873 11860 Khandsari Rs/t 16091 17050 16509 17008 16068 16226 Import prices Landed price cif Rs/t 13292 Landed price plus tariff equivalent Rslt 13295 Tariff equivalent /o O 0  Appendix B Page 5 of 7 Table BS: Forecast for 2005 2 free trade in the Indian sugar sector with imJ:!orts and no dual svstem : simulation 4 Uttar Maharashtra Tamil Karnataka Other All Pradesh Nadu regions regions Sugarcane Production kt 130628 45222 24865 26595 68693 296003 Disposition Mill use kt 63292 46492 16126 14996 45554 186460 Khandsari kt 8981 313 160 1532 2847 13834 Gur kt 43198 7 4939 66 12685 60896 Other kt 15156 -1589 3640 10001 7607 34815 Cane prices Actual cane price Rs.It 649 582 534 633 650 628 Milling sec/or Mill whites kt 5696 5112 1613 1500 4422 18342 Sugar distribution Levy sugar % 0 0 0 0 0 0 Free market sugar O/o 100 100 100 100 100 100 Levy sugar kt 0 0 0 0 0 0 Free market sugar kt 5696 5112 1613 1500 4422 18342 Regional ex-factory prices Levy sugar Rs.It na na na na na na Free market sugar Rs/t 12900 13246 12487 12454 12962 12938 Gur Production kt 3456 1 395 5 1015 4872 Ex-factory price Rs.It 9889 16335 11124 12099 10430 10105 Khandsari Production kt 763 27 14 130 242 1176 Ex-factory price Rs.It 14314 15390 14851 15759 14322 14506 Trade in free market sugar Imports kt 648 680 245 338 3009 4921 Exports kt 0 200 0 0 0 200 Consumption by state Levy sugar kt 0 0 0 0 0 0 Free market sugar kt 2752 4273 1818 1382 12836 23063 Gur kt 1155 93 76 38 3510 4872 Khandsari kt 763 27 14 130 242 1176 Total sweetener consumption kt 4671 4393 1909 1550 16588 29111 Per person sugar consumption Levy sugar - plus leakage kg/person 0.0 0.0 0.0 0.0 0.0 0.0 Free market sugar kg/person 14.4 39.4 25 .9 24.9 17.9 20.2 Gur kg/person 6.0 0.9 I.I 0.7 4.9 4.3 Khandsari kg/person 4.0 0.2 0.2 2.3 0.3 1.0 Total sweetener consumpt10n kg/person 24.5 40.6 27.2 28.0 23.1 25 .5 Net mtra - state exports Levy sugar kt 0 0 0 0 0 0 Free market sugar kt 3592 1318 39 456 -5405 0 Gur kt 2301 -92 319 -32 -2495 0 Khandsari kt 0 0 0 0 0 0 Retail pnces Levy sugar Rs/t na na na na na na Retail sugar Rs.It 15818 16361 15301 15530 16287 16121 Gur Rs.It 11680 16327 13032 12896 12174 12155 Khandsari Rs.It 16405 17504 16968 17882 16402 16600 import pnces Landed price cif Rs.It 11845 Landed price plus tariff equivalent Rs.It 11846 Tariff equivalent % 0  Appendix B Page 6 of 7 Table B6: Forecast for 20052 simulation 4 ulus mill Ca(!ital and labor uroductivitv shocks : simulation 5 Uttar Maharashtra Tamil Karnataka Other AJI Pradesh Nadu regions regions Sugar cane Production kt 135539 47523 26569 26803 72138 308573 Disposition Mill use kt 70412 49493 17187 14862 49200 201154 Khandsari kt 8618 306 157 1487 2791 13359 Gur kt 41271 7 5615 87 12576 59557 Other kt 15239 -2283 3609 10367 7571 34503 Cane prices Actual cane price Rs/t 668 872 737 807 726 731 Milling :rector Mill whites kt 6337 5442 1719 1486 4776 19759 Sugar distribution Levy sugar % 0 0 0 0 0 0 Free market sugar % 100 100 100 100 100 100 Levy sugar kt 0 0 0 0 0 0 Free market sugar kt 6337 5442 1719 1486 4776 19759 Regional ex-factory prices Levy sugar Rs/t na na na na na na Free market sugar Rslt 12466 12825 12070 12196 12553 12531 Gur Production kt 3302 1 449 7 1006 4765 Ex-factory price Rs/t 10123 16506 11228 12105 10636 10339 Khandsari Production kt 733 26 13 126 237 1136 Ex-factory price Rs.It 14584 15653 15041 15841 14577 14752 Trade in free market sugar Imports kt 499 520 181 306 2363 3868 Exports kt 0 200 0 0 0 200 Consumption by state Levy sugar kt 0 0 0 0 0 0 Free market sugar kt 2822 4333 1849 1399 13026 23428 Gur kt 1130 91 75 37 3432 4765 Khandsari kt 733 26 13 126 237 1136 Total sweetener consumption kt 4684 4450 1938 1562 16695 29328 Per person sugar consumption Levy sugar - plus leakage kg/person 0.0 0.0 0.0 0.0 0.0 0.0 Free market sugar kg/person 14.8 40.0 26.3 25.2 18.2 20.5 Gur kg/person 5.9 0.8 1.1 0.7 4.8 4.2 Khandsari kg/person 3.8 0.2 0.2 2.3 0.3 1.0 Total sweetener consumption kg/person 24.5 41.] 27.6 28.2 23.3 25.7 Net rntra - state exports Levy sugar kt 0 0 0 0 0 0 Free market sugar kt 4014 1429 51 393 -5887 0 Gur kt 2172 -90 374 -30 -2426 0 Khandsari kt 0 0 0 0 0 0 Retail prices Levy sugar Rs/t na na na na na na Retail sugar Rslt 15491 16029 14935 15317 15977 15807 Gur Rslt 11914 16563 13134 13155 12393 12376 Khandsari Rs/t 16676 17768 17158 17964 16657 16846 Import prices Landed price cif Rs/t 11706 Landed price plus tariff equivalent Rs.It 11707 Tariff equivalent % 0  Appendix B Page 7 of 7 Table B7: Forecast for 2005, simulation 5 plus on farm productivity shocks: simulation 6 Uttar Maharashtra Tamil Karn at aka Other All Pradesh Nadu regions regions Sugar cane Production kt 148550 56179 31614 32372 79118 347833 Disposition Mill use kt 80494 58833 19129 18595 53701 230752 Khandsari kt 8935 330 166 1547 2940 13918 Gur kt 42823 13 8252 121 14347 65555 Other kt 16299 -2997 4067 12109 8131 37609 Cane prices Actual cane price Rs.It 555 709 602 669 605 606 Milling sector Mill whites kt 7623 6806 2013 1956 5486 23885 Sugar distribut10n Levy sugar % 0 0 0 0 0 0 Free market sugar % 100 100 100 100 100 100 Levy sugar kt 0 0 0 0 0 0 Free market sugar kt 7623 6806 2013 1956 5486 23885 Regional ex-factory prices Levy sugar Rs/t na na na na na na Free market sugar Rs.It 10955 11109 10460 10538 11055 10946 Gur Production kt 3426 I 660 10 1148 5244 Ex-factory price Rs.It 8704 14468 9548 10379 9130 8908 Khandsari Production kt 760 28 14 131 250 1183 Ex-factory price Rs.It 13357 13848 13563 14334 13268 13461 Trade in free market sugar Imports kt 178 145 50 94 849 1316 Exports kt 0 200 0 0 0 200 Consumption by state Levy sugar kt 0 0 0 0 0 0 Free market sugar kt 3016 4652 1996 1500 13836 25001 Gur kt 1245 96 84 40 3780 5245 Khandsari kt 760 28 14 131 250 1183 Total sweetener consumption kt 5020 4777 2094 1671 17867 31429 Per person sugar consumption Levy sugar - plus leakage kg/person 0.0 0.0 0.0 0.0 0.0 0.0 Free market sugar kg/person 15.8 42.9 28.4 27.1 19 .. 3 21.9 Gur kg/person 6.5 0.0 1.2 0.7 5.3 4.6 Khandsari kg/person 4.0 0.3 0.2 2.4 0.3 1.0 Tora/ sweetener consumptton kg/person 26.3 44.1 29.8 30.1 24.9 27.5 Net intra - state exports Levy sugar kt 0 0 0 0 0 0 Free market sugar kt 4785 2099 67 551 -7502 0 Gur kt 2181 -95 577 -30 -2633 0 l(handsari kt 0 0 0 0 0 0 Rerail pnces Levy sugar Rs.It na na na na na na Retail sugar Rs.It 14113 14456 13386 13881 14600 14375 Gur Rslt 10500 15147 11456 11721 10922 10914 Khandsari Rslt 15450 15970 15685 16460 15351 15557 Import pnces Landed price cif Rs.It 11101 Landed price plus tariff equivalent Rslt 11103 Tariff equivalent % 0  Appendix C Page 1of6 The technical efficiency of the Indian sugar industry • It is difficult to make a proper comparison of cane yields in India with those elsewhere. Indian data are not published on the ratio of the land planted to cane and the land harvested to cane; therefore, the average yields of cane per hectare per year are not available - only yields per hectare. In this and subsequent diagrams, we have computed the weighted average performance for seven leading cane producing countries (Australia, Brazil, Cuba, Mexico, South Africa, Thailand, US), and for these producers, data are presented after adjusting for the age of cane at harvesting, on the basis of yields per hectare per year. Accordingly, our comparisons overstate the international competitiveness of yields in India, on account of the important adsali crop in parts of the country. This is because the yield per hectare per year from 18 month adsali crops should be multiplied by 2/3 to be converted to yield per hectare per year. • Despite these qualifications, Indian field yields (C .1) are good by international standards - as they should be, in view of the reliance upon irrigation. More significantly, the upward trend in yields is impressive, since the proportion of the adsali crop in Maharashtra has fallen in recent years (and this trend would have reduced recorded yields per hectare, as the average growing period for cane between harvests was lowered) . • The sucrose content of cane is poor in India, and in UP in particular (C.2). Maharashtra's sucrose content is similar to the world average; UP 's sucrose content is 1% below the global average and about 3% below the country with the best average of 14.44%. • The contrast in trends in sucrose content between Indian and world cane industries is also unflattering to Indian producers . • The trends in sucrose content of cane per hectare (C.3) are, once again, not truly comparable between India and the other countries . For the other countries, the figures are expressed per hectare per year, as they were in. C. l. In India, however, the data are expressed purely on a per hectare basis, without any correction for the age of cane at the time of harvesting. Both India and the other countries display a modest upward trend. Inside India, the creditable performance of UP in improving its sucrose content is in marked contrast with the performance of Maharashtra (where the declining importance of the adsali crop, and thus the lower average age of cane at the time of harvesting, has been a factor, by reducing the recorded average yields per hectare). • The fibre content of Indian cane (C.4) is much higher than that of the other countries. This helps to explain how it is that many Indian mills have surpluses of bagasse for use either for particle board and pulp manufacture or for co-generation, or simply for steam generation in processing molasses into alcohol and alcohol derivatives . • The purity of the juice extracted at the first mill is always higher than the purity of the mixed juice obtained by combining the juice extracted from other mills. Therefore, it is disappointing to discover that the purity of Indian primary juice (C. 5) is lower than the mixed juice purity recorded in other countries (unfortunately, exact comparable data, in terms of primary or mixed juice purities are not available for India and the other countries). The low purity of the average Indian primary juice implies that staleness and poor post-harvest handling are a serious problem in India. The problem proves to be much worse in UP than in Maharashtra.  Appendix C Page 2of6 • There are losses of sucrose to molasses, bagasse, filter mud and effluent water during the processing of cane into sugar in the factory . After subtracting these losses, it is possible to derive the actual output of recovered sugar per hectare (C.6). The comparisons are, again, affected by the difference between yields per hectare per year (for the countries other than India), and the yields per hectare (for India) . • For Maharashtra, the declining share of the adsali crop (and thus the lower average age of cane at the time of harvesting) has pushed down the recovered sugar output per hectare. For UP and India, as a whole, the rate of increase in the output of sugar per hectare has been similar to that in the world at large. • Indian mill performance indicators are always presented in a 'Reduced' form, in which all measures have been normalized to a common standard. Other countries tend to publish their information on an Absolute (unadjusted) basis . The formulae applied in India to convert absolute values to a reduced form are straightforward; but the results of their application are very surprising in a few cases, as a few of the following diagrams indicate. In these diagrams, we have converted Indian data into an absolute form, and have transformed the international data into a reduced form , to permit direct comparisons both in absolute and reduced forms. • The absolute mill extraction rates in India (C. 7) are below international standards, even though Indian cane is green - not burnt, and is usually very clean, with minimal trash. The international benchmark presented in the diagram implies that extraction rates outside India are roughly 3 per cent higher than in India. The extraction rates in Maharashtra are much better than those in UP, and the gap between the two states is widening . This disparity is a reflection of the different harvesting practices in these states. In Maharashtra, the mills take responsibility for the harvesting and transportation of cane, and ensure that the cane arrives fresh at the factory . In UP, the cane societies oversee the timing of the delivery of the cane to the mills, but are not directly involved in the scheduling of cane cutting . Consequently, it is common to discover that cane which is delivered to a factory in UP has actually been cut several days before the date set for transporting it to the mill. • Reduced extraction (C.8) takes account of aspects such as the fibre content of the cane. Because of the high fibre content recorded in much of India, the reduced extraction rates in India are closer than the absolute extraction rates to international norms . The gap between the Indian and world averages is approximately 2%, with improvements observed in all regions over time. • Absolute boiling house recoveries (C.9) appear to be significantly higher in other countries than in India. This implies further criticism of the Indian performance, since, other things being equal, higher extraction rates (such as those found outside India) tend to imply lower juice qualities, as more impurities are extracted alongside the extra sucrose; and lower juice quality harms boiling house recoveries. Accordingly, one would expect good extraction rates outside India to be offset by poor boiling house recoveries ~ yet this does not occur. Within India, the Maharashtra performance is significantly better than that in UP, and is on average actually slightly better than in the other countries as a group. • Reduced boiling house recoveries are shown as being substantially higher in India than the other countries (C. l 0), and to have improved over time. Two crucial elements of the calculations are the mixed juice purity, which is not measured directly in many Indian mills, and the molasses quality . It seems surprising that Indian mills are reported as having better  Appendix C Page 3of6 reduced boiling house recoveries than other countries . Many of India's mills are small, and they appear, from field visits, to fare relatively poorly in terms of certain key stages of recoveries (e.g. , in extracting sugar from molasses, and in filtration) . Furthermore, unlike the other countries, they produce a direct white rather than a raw sugar (which normally implies higher recovery losses). Consequently, we would treat the comparisons in the diagram with circumspection. • Overall factory recoveries (C. 11) combine both of the disparate elements of milling and boiling house operations. The world's main cane nations have an overall extraction rate that is as much as 6 per cent above that in India in some periods . (The Indian data on which this diagram is based are derived from information that is actually published in a direct form on absolute losses of sucrose during processing. These published data imply that 22% or more of the sugar in cane is lost during processing, as against 17% or so in other countries.) Within India, Maharashtra fares much better than UP . • The reduced overall factory recovery rates (C.12) are also published in India, and paint a much more flattering picture of the Indian performance. These numbers can be shown to imply losses of sucrose during processing that stand at only 60% of the losses revealed by the absolute recovery data (which formed the basis of Chart 2, C 11 ). The reduced loss information suggests that, once fibre content and juice purity are taken into consideration, Indian mills actually perform better than their counterparts elsewhere . This is not consistent with the impression provided by field visits. • The overall losses of sucrose from cane (expressed as a percentage of the gross weight of cane) are higher in India than in other countries (C 13). Since the sucrose content of cane is lower in India, this implies substantially higher relative losses in India. Maharashtra performs better than UP in restricting its overall losses . • The reduced overall losses (depicted in C 14) portray India in a much better light, actually outperforming other countries. We have already indicated our skepticism about this outcome in the discussion of Diagram 12 .: • One of the weaknesses of India's cane processing industry is the small scale of its factories . C.15 contrasts average daily rated capacities in India and other countries . On average, Indian mills are little over one quarter of the size of mills elsewhere, with the subsequent failure to exploit economies of scale. • Diagram 16 casts doubt on the basis on which the Indian capacity data are prepared. Using those statistics, Indian mills are shown as achieving very close to 100% utilization, whereas mills elsewhere average closer to 70% utilization, during the period when crushing is occurring. One possible explanation is that the true average capacity of Indian mills is as much as 40% higher than the official figure implies . • The final diagram reveals that, thanks to a longer campaign, Indian mills extract more sugar per ton of daily grind, over the entire crop year, than mills elsewhere in the world. However, the impression conveyed by C. l 7 would be transformed if, as just suggested, the true level of mill capacities in India are of the order of 40% above the levels implied by official data.  Appendix C Page 4 of 6 C.l Cane Yields (/yr for non-India) C.2 Sucrose Content (%) of cane 100 13.5 - 80 13.0 ro .s:. ro Vi 60 J::. 12.5 Q) U; c: c: 40 t--~ - - ~ - - ClJ c 12.0 [ 0 c I- 0 20 - - - I- 11.5 11 .0 0 Main Cane Tc:ial Inda Maharashtra UP 10.5 Nations Cane India Maharashtra UP Producers Total ~ 66'67-7CY71 0 71172-7576 § 76177-ID'81 Leading o 81/82-85'86 m86'87-9Jt'91 m91/92-93194 I~76177-80181 o 81182-85/86 s86/87-90191 091192-93/94) C.3 Sucrose Yields (mt/ha/yr) - mt/ha for India C.4 Fibre content of cane (%) 14 . - - - - - - - - - - - - - - - - - - - , 16.0 12 15.5 ro 10 + - - - - - - - - - - - - - - < ro 15.0 E :E: gj 8 I/) Cl) 14.5 c: c: § 6 -t-;:""""""=E:'l----t c: 0 14.0 f- I- 13.5 4 - 13.0 2 - 12.5 0 Cane India Maharashtra UP Cane India Maharashtra UP Producers Total Producers Total Leading Leading 1 ~76177-80/81 081/82-85/86 886/87-90/91 091/92-93/94 1 1 ~76177-80/81 081182-85/86 s86/87-90191 0 91/92-93/94 f C.5 Mixed juice purity (%) - primary juice C.6 Final output of sugar (mt/ha/yr) - mt/ha purity for India for India 83 ~---------------~ 12 ro 84 -+--------------< 10 IV ~ 82 .c In 8 ~ 00 ~ 6 § 78 c: f- 76 {!. 4 74 +-"=---'--..__-+-~-'--'--"'-+-----''-'--'--'-+--'-'--'--'-i 2 0 lrda UP Cane India Maharashtra UP Tdal Producers Total Leading I ~ 1srn-B01a1 o e1182-85'86 a we7-9Q'91 o 91/92-93194 [  Appendix C Page 5 of 6 C. 7 Mill/diffuser extraction (%) C.8 Reduced mill/diffuser extraction(%) gj~-------------~ 95.5 ~------------------, 95.0 - 1 - - - = - - - - - - - - - - = = - - - - - - - - - ; 94 ro ~ 94.5 ~ ffi Vi 94.0 ~ 92 ~ 93.5 § 91 § 93.0 ....... 00 ....... 92.5 92.0 El=3-+-"'...,._==----1--'--"=--l-+----'--="'-'--+-----'--=--'-l 91.5 -+----»=---=-+--_.,_=-_._f--...l-...J=--'-f-..__,,=--'--i lrda ~a LP Cane lncia UP Tdci Produ::ers Taal Lea:iirg I ~ 7r:IT1-ff.181 o 81/82..ffiffi a ffi/87-0091 o 91/92-g}94 I I ~ 7677-80'81 o 81182-85'86 a 86'87-00'91 o 91,92-93'94 / C.9 Boiling house recovery C.10 Reduced boiling house recovery 00 ~~~~~~~~~~~~~ 91.0 ro ffi ..r:::. 00.0 ;----,........,-----------;==--i (ll ..r:::. -.. ~ ffi I/) Q) 00.0 c § 84 c 89.0 0 0 I- 82 I- 87.0 8)-+-'>'=-==-----1--'-<==-_i__;_--'--=:J........!.-+-----'--=--'-l ffi.O Cae lrda Mtacsttra LP lrda LP A-aims Tcta Tcta L.erlrg Le:drg I J ~ 7fl77-ID'irl o 'irl/B&ffi'ffi § ffi'B7-ro91 o 91~~ I 1 ~ 7f/77-ros1 o 81182-85'00 t3 ffi'87-00'91 o 91mm I I C.11 Overall factory recovery (%) C.12 Reduced overall factory recovery(%) 84 -, - - - - - - - - -- - - - - - - - , 86.0 ro 82 -:- 1 E ----r--=::--------=;;;;:J llJ 85.0 ~ 00 .!:. Vi Q) 84.0 ~ 78 c c 83.0 § 76 0 I- I- 74 i 82.0 72. 4----"""1-.J'=='---'-___J~~'-+---'----'--'--+--'---'--~ 81.0 Irda rv'Etaa;l"tra LP Care India 11/aharashtra UP Producers Taal Tda Leading I~ 7ffT7.fil81 D8V82-85'ffi § ffi'Sl-0091 0 91/fQ-~ I I ~ 76177-80/81 D 81/82-85186 8 86187-90/91 D 91/92-93194 1  Appendix C Page 6 of & C.13 Overall losses of sucrose(%) C.14 Reduced overall losses of sucrose (%) 30~-------------~ 25 ro 25 _,___ _ _---< ro 20 ~ 20 >-- ~ (/) 1.5 >-- ~ 1.5 >-- Q) § 1.0 - r c c 0 1.0 - r 05 - 0.5 ~ Q0+-=...__.=----+----'-=:::1-..L-+-__J_-=-__J_1---'--l:=--L-< 0.0 - lrda M:laaH1a LP Ccre Inda LP Tcta Prcx:it.rerS Tcia I~?fill~1 0 81182-85'86 El aY'B?-0091 D 91192-m94 I C.15 Average mill capacity (tonnes per day) C.16 Utilization of mill capacity a.cm . , . . - - - - - - - - - - - - - - - - , 100 IJ ~ I Ii,[I 7,cm + - - - - r - - . - - - - - - - - - - - - - 1 ('CJ ~ 6,cm H .r. ]l s,cm Ui C1) c: 4,cm c: c: § 3 ,cm 0 I- """" 2,cm 1,CXD 0 Cane India l'vlaharashtra UP lrda W'Bast1ra LP Producers Taal Tda Leading I ~ 81/82--85'86 D 8G'87-ro'91 ~ 91/9'2-93194 I ~ 81/EI2.ffiffi Dffi'Bl-0091 El 91~-9394 1 J C.17 Annual sugar output (in tonnes) per tonne of daily crushing capacity ~ .,.------------------, ~ 15 -'---- - - - - - ! Vi Q) c c ~ 5 0 lrda Wahra:trtra UP Tcia i~ s1182..ffiffi o 00'87-rosi t3 91192-~ I Note : The leading cane producing nations considered are Australia. Brazil, Cuba, Mexico, South Africa, Thailand, and the United States. Source: Mission Estimates using data from ISMA, NFCSF, LMC International.  Appendix D Page 1 of 6 Potential of productivity gains in cane cultivation in Maharashtra and Uttar Pradesh Indian cane yields have ample scope for improvement On the surface, land productivity of cane in India does not appear to be out of line with world standards. For the triennium ending 1992/93, the average yield of cane in India was 65 tons per hectare, which was marginally higher than the world average (61 tons/ha), and the average for Brazil (62.5 ton/ha) and Cuba (53 tons/ha). This picture, however, is misleading since the duration of the crop as well the irrigated coverage in India is quite different from the other main cane producing nations. Indian cane is largely irrigated (88% of cane area) whereas most of the world cane area is largely unirrigated. A correct comparison of Indian yields can only be made with irrigated yields elsewhere. Such a comparison, with places like Burdekin in Australia, or Zimbabwe, Swaziland, Malawi in southern Africa where annual yields range between 100 to 125 tons per hectare, shows that annual Indian yields in Maharashtra (which is almost fully irrigated) are still more than 30% lower (Chart 3.3 in Chapter 3). Within India, across the major cane growing states, cane yields differ by as much as 100%. Bihar in the sub-tropical belt, for example, has cane yields of only 50 tons/ha while Tamil Nadu (including Pondicherry) in the tropical belt achieves about 105 tons/ha (TE 1992-93). Yield differences, however, get reduced if one adjusts for the duration of the crop in different states. Typically, the states in the sub-tropical belt are characterized by 10 month crop, while those in the tropical belt, on an average, have crop duration of more than 12 months. Maharashtra, for example, has a crop duration of 14 months, which is a weighted average of adsali (18 months), pre-seasonal (15 months) and suru (12 months) crops. However, even within Maharashtra and Uttar Pradesh, yields differ substantially across different districts. For example, in 1992-93, Uttar Pradesh cane yields varied from 31 tons/ha in Varanasi in the eastern zone to 63 tons/ha in Muzaffarnagar in the western zone. Similarly in Maharashtra, in 1993-94, cane yields varied considerably from 61 tons/ha in Osmanabad in low recovery, low productivity zone, to 94 tons/ha in Nasik in medium recovery, high productivity zones. Further, if one compares the state average yields with those on demonstration plots or competition plots within the same agro-climatic zone, one finds in a state like Uttar Pradesh, for instance, that yields on demonstration plots are typically about 50% higher than the state average, whereas those on the competition plots yield almost four times the state average (Singh and Sinha, 1993; p.13) . The extent of this wide variation in yields, between India and other cane producing countries, within India across different states, and within the same state across different districts, is perhaps indicative of the scope available for productivity gains if existing constraints are removed. Productivity gains here go beyond land productivity alone and include total factor productivity (TFP), that is, productivity of all factors of production, including land, labor, capital, and other intermediate inputs.  Appendix D Page 2 of 6 Reduced water logging and improved drainage can raise productivity significantly What are these constraints that are preventing lagging districts from catching up with the high performers within the same state, or lagging farmers with those on demonstration plots or competition plots within the same district/agro climatic zone? Our field visits to Uttar Pradesh and Maharshatra, discussions with farmers and scientists, and a review of empirical literature on the subject, reveals the following : large parts of eastern and central Uttar Pradesh, northern Bihar (up to 30 per cent of cane area; see Singh and Sinha, 1993 ; p.10), West Bengal and Assam in the sub- tropical belt, and quite a few areas in Maharashtra, especially southern Maharashtra, in the tropical belt, suffer from water logging. This is either due to frequent flooding as in the sub- tropical belt, or overirrigation and soil texture (black cotton soils) as in Maharashtra. In eastern and central Uttar Pradesh, Bihar, West Bengal and Assam, water logging also constrains the use of higher doses of fertilizers and other modem inputs. Lack of easy availability of credit further compounds this problem. Water logging also induces the dreaded red-rot disease and several other pest and disease infestations, which have wiped out several good varieties of cane from this region. As a consequence, yields remain much below their true potential. Thus, taming the frequently swelling rivers through measures such as bunding in eastern and central Uttar Pradesh and northern Bihar, and augmenting rural credit in this backward belt can easily raise productivity of cane by about 20 to 30%. On the other hand, in western Uttar Pradesh and in Haryana, the major constraint remains that of lack of assured supply of electricity. As a result, many cultivators are not able to properly irrigate their fields while others use diesel engines as a stand by, which unnecessarily raises their cost, lowering the TFP by at least 5 to 10%. Improving electricity supply, without even unduly subsidizing it, therefore, has the potential to further raise TFP of cane in this part of the sub- tropical belt. In te tropical states of Maharashtra or Tamil Nadu, the constraints to productivity are increasing levels of water logging and salinity on the one hand and growing shortage of water on the other. In medium and high productivity zones very high frequency of irrigation (25 to 35, and sometimes going even going to 40 on adsali crop) is causing problems of water logging and salinity. On the other hand, low productivity zones suffer from acute shortage of water, so much so that a large number of mills (about 30 out of 110) in a state like Maharashtra are falling sick due to non-availability of sufficient cane resulting from lack of water. Many of these areas may have to go out of sugarcane cultivation, or undertake massive investments to make available irrigation water for cane . It is doubtful whether these additional investments would raise the TFP of cane cultivation in these rather water scarce regions . Also it remains equally doubtful, whether such investments would be justified on equity grounds . Maharashtra is a classic case where cane occupies only 2% of the state's gross cropped area but uses about two-thirds of the total irrigation water available in the state. Water logged/saline areas need proper drainage facilities , which have to be taken up collectively by farmers at block/district levels . It cannot be resolved at the individual farm level. Although some factories are taking an interest in this direction, given the large investments that are required, it remains a challenge to most of these areas to even sustain their existing yield levels . Strategic intervention by the state authorities, with the help of user groups, is required to improve drainage and raise productivity levels in water logged and saline lands . Results on some of the experimental farms reveal that drainage is an economically efficient proposition, which has the potential to raise TFP by at least 5 to I 0% in the affected areas. The challenge lies in carrying out collective action.  Appendix D Page 3 of 6 Drip appears promising and can further augment TFP but ... Under water scarce conditions, the method of irrigation becomes crucial. Changes in irrigation practices by an increased use of drip has the potential to not only save water and fertilizers, but also raise productivity. Analysis carried out at VSI in Pune reveals that drip has a potential to save about 40% of water and raise cane yields by up to 30% (although evidence from elsewhere suggests that yield gains of 10-15% are more likely) compared to furrow cultivation. The economics of drip on the experimental stations of VSI appears attractive, and can pay for its cost" out of expected returns within 4 to 5 years. Theoretically, in view of this, a subsidy on drip seems unnecessary, except as a promotional tool for the first two-three years. But then why drip is not picking up on its own amongst cane cultivators? The answer lies in the cheap rates for canal waters and electricity. Because of the flat rate nature of these rates, the farmers' marginal cost of getting water from these sources is close to zero. As a result, savings in water, although extremely desirable from society's point of view, are not very attractive to farmers. It appears, therefore, that drip will takeoff only if prices of canal waters and electricity are substantially revised upwards, otherwise government will have to subsidize very heavily to induce farmers towards drip. Nevertheless, drip can be a useful device in water scarce regions such as the north eastern part of Maharashtra as also other parts of Maharashtra that are suffering from water logging and salinity. It is widely known that the north-eastern Maharashtra, which has the lowest yields, suffers from acute water shortage. A large part of it is in fact drought prone. Scarcity of irrigation water is so much that many of the existing sugar mills in that area are thinking in terms of recycling the sewage water after treatment. This obviously would raise the cost of irrigation significantly, and therefore brings forward the basic question that the objective to raise cane productivity is not only with respect to land but also with respect to other factors of production that go into the production of cane, i.e. , total factor productivity. Drip may be helpful here too. There are several other methods of irrigation, besides drip, which can significantly save water compared to flood irrigation practice. One such method is called furrow method and another one is called skip furrow. Water use efficiency is highest under skip-furrow method, which saves about 36% water compared to that under flood irrigation, and simultaneously improves productivity (see Yadav in Singh and Sinha, 1993; p.91). Experts are of the opinion that better irrigation practices by saving water through drip, or skip-furrow method, or by raising canal water rates and electricity tariffs for groundwater irrigation has the potential to raise total factor productivity of cane by at least 10 to 15% in the tropical belt. It can help raise the all India cane TFP by about 5 to 10%. Better fertilizer management in the tropical belt can significantly raise TFP of cane. Application of fertilizers is very high (above 500 kgs per hectare, going up to 700 kgs/ha at places) in the tropical belt compared to less than l 00 Kgs per hectare in the sub-tropical belt. High frequency of irrigation leads to massive leaching of fertilizers, without giving commensurate returns. In fact, cane scientists consider anything above 300 kgs per hectare a 'luxury consumption zone', which gives rapidly decreasing marginal returns. The total factor productivity can be increased by reducing the fertilizer doses, or changing the way fertilizer is applied, or by changing the nature of irrigation practices. Further, yields can be augmented by changing to application of soluble fertilizers with drip or brick fertilizers with flood irrigation. A proper mix of N, P and K, and their appropriate combination with manures and vermi-compost {prepared through vermi-culture) can further help  Appendix D Page 4 of 6 raise TFP . The latter in fact rejuvenates the fertility of soil without causing any toxicity, which fertilizers cause. Farmers need to be educated that higher doses of fertilizers, especially nitrogenous, may lead to more greening of the crop and its high foliage without adding much juice to the cane. Thus, balanced use of fertilizers (N, P and K) is more important than just raising the level of fertilizer consumption in the tropical belt. For this, farmers need to be given extensive extension advice, besides, of course, correcting the current distorted relative prices of N, P and K fertilizers. The potential to raise TFP through better fertilizer management is quite high in the tropical belt ( 10 to 15%) and somewhat less (4 to 5%) in the sub-tropical belt. Better R&D and extension, abolition of cane societies, and reduction of adsali can raise cane productivity substantially During our field visits, farmers in western and central Uttar Pradesh were anxiously looking for the development and faster dissemination of better cane varieties with a high sucrose content. They were not happy with the performance of cane societies with respect to their role in R&D, and viewed them as creating a wedge between the farms and mills. They appeared to be at a disadvantage compared to cane cultivators in Maharashtra, where factories work closely to develop new varieties giving higher productivity. The high commission charged by cane societies did not seem to be coming back to farmers in terms of better R&D, or better extension. Establishing direct contact between mills and farmers by abolishing cane societies is recommended to improve R&D, and thereby contribute to realizing potential productivity gains of higher yields as well as higher sucrose content. Also, if extension workers are encouraged to work with mills, or with gram panchayats of these areas, it would increase their accountability and further help to achieve potential gains in productivity. Development of better varieties is a continuous process, which is being carried on in several sugar research institutes in the country. The problem at present is two fold : low germination of seeds and undue time lag between evolving a new variety and its dissemination . New methods are now being evolved to tackle both of these problems. One of these methods is ' spaced-transplanting technique ' where single buds are transplanted, ensuring almost 100% success in germination. It saves seed material by as much as 50% compared to the traditional methods of planting cane, and also has a much higher seed multiplication ratio of 1:40 compared to the conventional method ' s l : l 0 thereby reducing the time lag between evolving a variety and its faster dissemination. It also raises yields by 20-25% in the tropics and 40-50% in the sub-tropical zone (see Yadav in Singh and Sinha, 1993 ; p.84 for more details) . Even if only part of these gains are possible, it appears that these and other methods have the potential of raising TFP by at least 5 to 10% in the tropical and sub-tropical belts. There are also some new varieties on the horizon, which hold good promise especially for the tropical belt. One such variety being talked about, CO 86032, is to be released shortly for Maharashtra and is expected to raise yield levels from about 85 tons per hectare to about 120 tons per hectare on farmers ' fields . In experimental fields , it has already given yields above 150 tons per hectare. The sucrose content is about 12 to 13 per cent. Of course, only over time will it be possible to test the claims of the scientific community. Nevertheless, it appears that the development of tissue culture in cane research holds good promise, especially because it can multiply very fast, can hopefully check some of the dreaded diseases, and can raise yields of cane substantially.  Appendix D Page 5 of 6 The seed rate in India is high (5 to 6 percent even after taking into account ratoon) by world standards, and one of the primary reason for this is the lack of certified/treated seeds . Better R&D, improved extension, proper treatment of seed, spaced-transplanting technique (STP), can reduce this rate and correspondingly improve productivity. Further, development of such varieties that give good results for two or even three ratoons, along with change in cultivation practices that are suitable for more ratooning, has potential to reduce this seed rate and enhance productivity in Uttar Pradesh. The potential would be greater in eastern and central Uttar Pradesh, where there is a reasonably good amount of water available. The adsali ( 18 months) crop, which was dominant in high and medium productivity zones of Maharashtra, is gradually losing ground to pre-seasonal (15 months) and suru (annual) crops . One of the reasons is that adsali has to face two summers, while the others face only one summer. The incremental benefit in terms of higher yields of adsali vis-a-vis the extra consumption of water to make it survive through the second summer does not appear to be very favorable to farmers , especially as water is becoming scarcer. Thus, further reduction of adsali, in this area has the scope to raise productivity per unit of water and per unit of time. Freeing lease market for land and developing contract farming would help raise productivity The average size of sugarcane holding in India is less than one hectare. This acts as a constraint to investments in the farm either due to the poor financial position of the small and marginal farmer or due to the sub-optimal use of certain indivisible inputs, especially machinery. Freeing the lease market for land would help evolve an economically viable holding size without disturbing the ownership structures and thereby the socio-economic power structure in rural areas . Encouragement for contract farming by the sugar mills on leased-in lands has further potential to raise productivity as mills can invest more, and take greater risk in trying and evolving better varieties. Further, if mills have direct control over a substantial part of cane output, they can minimize the time between harvesting and crushing and thereby getting maximum sucrose content. At present, this is a problem in Uttar Pradesh, especially in areas where cane societies are not working well, and these are quite large in number. In such places, cane often takes 2 to 3 days between harvesting and crushing thereby lowering the sucrose content in the cane . This can be recovered through better organizational efforts on the one hand and enlarging the farm size and bringing it closer to the control of the mill. Of course, the terms of contract have to be transparent, and a general regulatory agency of the government, having representation of mills and cultivators, should monitor whether firms are adhered to the terms of contracts . While it is difficult to pin a single number as the potential gain in cane productivity that one can obtain by removing the constraints discussed above, our discussions with experts and cultivators in the field revealed that it can be anywhere between 20 to 35% at all India level. The lower end gives an idea of potential gain corresponding to partial removal of constraints, which seem very plausible, while the upper end corresponds to larger degree of freedom from constraints . We have been rather conservative in our assessment, and prefer to err on the lower side . Accordingly, we have assumed for our simulation purposes a potential gain of only 20% in cane productivity, which is obtainable by releasing various constraints, as listed in the following table. At all India level, the potential gain in cane productivity (after duly adjusting for duration of the crop) can even be larger once the further expansion of cane area, at the margin, starts shifting from the tropical zone to sub-tropical zone. This is because productivity gain does not mean raising land productivity at any cost, but it must lead to increase in output in relation to all inputs, on per month basis . In other words, the output-input ratio should go up . And it is this ratio that is  Appendix D Page 6 of 6 very favorable to the sub-tropical zone compared to the states of the tropical zone, despite the former having lower land productivity. Table D .1 Constraints and potential gains in productivity of sugarcane at all India level, with focus on Uttar Pradesh and Maharashtra Input Constraint Strategy to remove constraint Range of Expected gains in cane productivity Water Water logging, Develop drainage, Bunding of rivers, Promote 2-5 per cent at all India level; 5-10 flooding, and salinity Drip without subsidies per cent in South Maharashtra; 5-10 per cent in east Uttar Pradesh Water Acute scarcity, Reduce/stop underpricing water and electricity; 6-10 per cent at all India level; 10- especially during introduce drip; skip-furrow irrigation, replace 15 per cent gain in states of tropical summer adsali by pre-seasonal and suru belt, especially Maharashtra; 3-5 per cent gain in Uttar Pradesh. Fertilizer Too much fertilization Abolish/reduce subsidies on fertilizers; introduce 6-10 per cent at all India level; 10 in Maharashtra leading soluble fertilizers through drip; promote balanced to 15 per cent in states of tropical to increased toxicity; use ofN, P and K; mix with manures and vermi- belt and 4 to 5 per cent in Uttar under- fertilization in compost; give liberal credit for fertilizers in Uttar Pradesh Uttar Pradesh Pradesh. Pay by cane quality. Land Predomination of Free lease market; encourage contract farming; About 2-4 per cent at all India small and marginal extend liberal credit level; 4-6 per cent in Uttar Pradesh; holdings resulting in 1-2 per cent in tropical belt. lack of investments on the farm. Seed Low germination by Promote certified seeds; promote spaced 5-6 per cent at all India level; about world standards; red- transplanting technique; promote tissue culture; l 0 per cent in Uttar Pradesh; 3-5 rot disease, continuous revitalize R&D and extension by making the mill per cent in Maharashtra and other need for better an active partner; improve ratoon management; topical states. varieties with higher Review/abolish cane societies in Uttar Pradesh sucrose content and need to cut down lag between release and dissemination. Table D.2 Potential multiplicative impact of productivity increases by state and productivity increases used in the model percentage productivity increases over 10 years Uttar Pradesh Maharashtra Tamil Nadu Karnataka Other regions On-farm Reduced water logging 7.5 7.5 7.5 7 .5 7.5 Improved water management 3.5 12.5 12.5 12.5 3.5 improved fertilizer application 4.5 12.5 12.5 12.5 4.5 Better use of land 5.0 1.5 1.5 1.5 5.0 Better seed 10.0 10.0 4.0 4 .0 4.0 Total multiplicative on-farm increase 34.0 44.0 44.0 44 .0 34.0 Assumed in model 15.0 20.0 20 .0 20 .0 15.0 At mill Increased sucrose recovery 10.0 10.0 10.0 10.0 10.0 Economies of scale 42.0 42.0 42.0 42.0 42.0 Total mill productivity increase assumed in model 25.0 25.0 25.0 25.0 25.0  Appendix E Page 1 of 7 Input subsidies to sugarcane cultivation in Maharashtra and Uttar Pradesh To compare the efficiency of cane cultivation across different states, or cane with other crops, it is imperative to examine the level of subsidies that go into the cultivation of these crops. This appendix attempts to estimate input subsidies flowing to sugarcane cultivation in Maharashtra and Uttar Pradesh through cheap canal waters, electricity, diesel and fertilizers. Sugarcane cultivation is relatively more intensive in the use of these resources on a per hectare basis, especially water. For instance, the irrigation water requirement of sugarcane in Maharashtra is at least about 196 cm per season per hectare whereas for crops like groundnut and cotton, the per hectare water requirement is 20-30% less at 55 and 40 cm/ha per crop season respectively.1 The water needs of sugarcane in Maharashtra are greater than in the subtropical region such as Uttar Pradesh or Bihar because of climate and crop duration. Besides water, sugarcane is also an intensive user of other inputs, especially fertilizer. The cost of cultivation per hectare for sugarcane is six times the level of cotton and jowar and ten times the level of urad, 4 sunflower and saffiower.2 3 Subsidy through canal irrigation How much does it cost to have irrigation through canal network? How much is the farmer paying for this canal water? If the receipts cover the costs of supplying water, there is no subsidy involved in canal irrigation. But if there is an uncovered gap between costs and receipts, it may be deemed as irrigation subsidy. So the first step in estimating irrigation subsidy is to calculate the cost of canal irrigation. The next step would be its allocation across different crops . This is because different crops in the canal commands have different irrigation water requirements, and the cost/subsidy should be logically allocated across different crops in proportion of their relative irrigation water requirements, giving due weight to different crops as revealed by their area in canal commands .5 Thereafter, the water charges received from sugarcane farmers be deducted to obtain irrigation subsidy through canal waters . We have attempted to carry out this exercise here . The cost of canal irrigation has two components: (a) fixed capital cost; and (b) operational and maintenance costs . To estimate fixed capital cost of irrigation, Central Water Commission simply divides the expenditures incurred on construction of canal networks in a particular plan period by the potential created during the same plan period. This gives an estimate of about Rs . 66,000/ha at all India level for the Eighth plan period. Similarly, it has been worked out for earlier plan periods . To make it comparable over time, first they need to be brought at constant prices, and each plan period's cost estimate needs to be weighed by the potential created during that plan.6 7 But such a scheme would have serious limitation. The canal irrigation that is created in a particular year/plan is not created by the expenditure of that year/plan. There is a gestation lag between the time expenditures are incurred and potential created/utilized. We estimate that in the Indian case, on an average, there is a lag of about 12 years between the expenditure incurred and potential utilized. To take care of this gestation lag phenomenon, one needs to apply social rate of compounding/discounting to make the expenditure and potential created/utilized comparable. Obviously, the cost estimates would be very s.ensitive to the value of social rate of discount/compounding . We have tried to take alternative rates of 5, 7.5 and 10% per annum. Also, expenditure streams have been converted into constant prices to make them comparable over time . Only thereafter, capital cost of canal irrigation is worked out for each year.  Appendix E Page 2 of 7 The exercise is carried out for the last four decades from 1951 to 1990. The results reveal that the capital cost of irrigation potential utilized at all India level over the last four decades is Rs. 42,050/ha at 1988-89 price level with social rate of compounding at 5%. With inflation rate of construction hovering around 11 % during 1980s, this cost estimate of 1988-89 prices would translate to Rs. 87,300/ha of utilized area at 1995-96 prices. This is the picture at all India level. Obviously there are regional variations . For the northern region comprising Uttar Pradesh, Punjab and Haryana, the cost estimates are 64%ofthe all India estimate, while for the western region they are 112% of all India figure .8 That means for Uttar Pradesh one can take the capital cost of one hectare of canal irrigated area as Rs.55 ,872/ha. at 1995-96 prices, and for Maharashtra this cost would work out to be about Rs .97,777/ha. It may be noted that these costs correspond to a social rate of discount/compounding of 5%. If one takes this rate as 7.5% or 10%, these estimates would go up further. But this is a fixed cost that is to last for long periods. Assuming for the time being this to be a commercial enterprise competing for funds with the investment needs of other sectors, one needs to charge depreciation and opportunity cost of this capital to get an annualized (amortized) cost of capital. For this we need to know the life of this canal network. Normally major projects seem to have a life of 100 years while medium ones of 50 years. On an average if one takes the life of canal irrigation network to be around 75 years, there is need to charge depreciation at the rate of 1.5% per annum. The opportunity cost of funds invested in irrigation can be measured by the redemption yield on long term government bonds . For the bonds issued during 1980s, to be redeemed in 20-25 years, the yield was 8.5%. But the bonds that are being issued now have an interest rates of 13- 14%. Even if we take the lower bound of 8.5% as opportunity cost and another 1.5% as depreciation cost, the annualized (amortized) capital cost that needs to be recovered would be 10% cent of the capital cost (Rs .5587 for Uttar Pradesh and Rs.9778 for Maharashtra) . But this is the annualized (amortized) capital cost of canal irrigated area for all crops, which is a weighted average of the irrigation water requirements of different crops in the canal command, with their respective areas acting as weights . If'one adjusts this by the relative share of each crop in total irrigation water requirements, annualized (amortized) capital cost of canal irrigation for sugarcane would be much different in two states. This adjustment is important as the very logic of charging different rates for different crops under canal irrigation is the same, namely water intensive crops require more irrigation water compared to other crops and therefore should also pay more than other crops towards the cost of canal irrigation. If one carries out this adjustment, the cost of canal irrigation for sugarcane becomes Rs .106,731/ha in Uttar Pradesh and Rs.374,225/ha in Maharashtra. 9 On top of that there is the cost of operation and maintenance, which at 1988-89 prices had touched about Rs .225/ha during late 1980s. For the Ninth Five Year Plan (1997-2002), one is expecting an O&M cost of at least Rs.300/ha. for an average crop . If this is also adjusted in line with the relative irrigation water requirements of different crops, it would tum out to be Rs.573/ha for sugarcane in Uttar Pradesh and Rs.1149/ha for sugarcane in Maharashtra. These costs are on per hectare per annum basis . Since sugarcane in Uttar Pradesh is also an annual crop (10 months), this corresponds more or less directly to it. But in case of adsali sugarcane in Maharashtra, which has a duration of 18 months, 50 per cent more is to be added in this cost for that part of sugarcane that is of 18 months, and 25% in case of pre-seasonal as it has a duration of 15 months . Thus the capital cost of canal  Appendix E Page 3 of 7 irrigating adsali sugarcane crop in Maharashtra would be Rs.561 ,337/ha and that of preseasonal Rs.467, 781/ha at 1995-96 prices . These costs are way above any estimate that is churned out by ewe or the state irrigation departments. The reality is that irrigating sugarcane in Maharashtra through canals is one of the most expensive propositions that one can ever think of If this capital cost is amortized at the rate of 10 per cent per annum (8.5% as opportunity cost and 1.5% as depreciation), it would amount to an annual subsidy of Rs .37,000 to Rs .56,000/ha of canal irrigated sugarcane. This subsidy would represent 70-100 % of the sugarcane price. Therefore, if charged to direct beneficiaries, the entire profit of sugarcane cultivation would be wiped out. To put this in context, about 32% of cane area in Maharashtra relies on this sort of capital subsidy. Can/should this entire cost be charged to cane cultivators? Theoretically, beneficiaries of irrigation can be identified, and they must pay for the costs of irrigation. But one can always say that these costs are unduly inflated due to delays, spillovers, wrong planning by irrigation departments, no check on these costs by the user/beneficiary groups, and there being large scale leakage of expenditures during construction period, etc ., and therefore why should the cultivators pay for all these inefficiencies of irrigation systems? All these arguments have a merit, and perhaps can not be brushed aside, but it is also a fact that even after discounting for these leakages and inefficiencies in irrigation departments, the irrigation costs are still very high compared to water charges that the direct beneficiaries of irrigation are paying. Perhaps no where in the world, are capital costs of canal irrigation fully recovered from the cultivators . Presumably because irrigation, to some extent, is treated as part of the infrastructure. Earlier Finance Commissions used to emphasize that farmers must pay for O&M charges plus 2.5% return on capital. Gradually, the return on capital was reduced to 1% and then waived off The actual situation is that farmers are paying only about 30% of O&M costs at all India level. The Vaidyanathan Committee that went into the pricing of canal waters (GOI 1992) emphasized that farmers must pay for total O&M charges plus at least 1% interest on capital employed . If one goes by this, the canal irrigation rates need to go up by more than six times (from the present level of Rs .50/ha to Rs.310/ha, at all India level for an average of all crops) . For sugarcane in Uttar Pradesh, the irrigation rate should be about Rs. 1640/ha (Rs. 106 7 for l % interest on capital cost plus Rs .573 for O&M costs), against the actual rate of only Rs.237/ha through canals categorized under Schedule I and II (against Rs .86/ha for wheat and paddy). 10 Thus the irrigation subsidy on canal irrigated sugarcane in Uttar Pradesh would work out to be at least Rs . 1403/ha. In Maharashtra the rate for irrigating sugarcane would be about Rs.4891/ha per annum (Rs.3742 for 1% interest on capital cost and Rs.1149 for O&M cost). This means for adsali crop it would be about Rs. 73 3 6/ha and for pre-seasonal Rs .6114/ha for whole season. The weighted average rate for adsali, pre-seasonal, suru and ratoon crop, would work out to be Rs .5 5 84/ha. As against these costs, the actual rate for irrigating sugarcane through canal waters since 1 July 1994 was Rs .1750/ha., which is only 31 % of the irrigation cost computed as only 1% 11 of interest on capital plus O&M expenses . The irrigation subsidy for canal irrigated sugarcane in 12 Maharashtra thus works out to be Rs.3834/ha at 1995-96 prices. / J' J Electricity subsidy for irrigating sugarcane ' -.  Appendix E Page 4 of 7 In both the states covered under this study, the larger share of sugarcane area is irrigated through groundwater. In Uttar Pradesh, about 60% of sugarcane area is being irrigated through tubewells/pumpsets, while in Maharashtra this is about 68%. One is not very sure how many of these pumpsets/tubewells irrigating sugarcane really work on electricity and how many on diesel. But if one looks at the total number of pumpsets in the state, and works out the ratio of diesel and electrically operated pumpsets, perhaps one can get an idea about the electrically operated tubewells/pumpsets. Going by this assumption, we find that in 1989-90 only about 30% of these pumpsets worked on electricity in Uttar Pradesh, while this ratio was as high as 80% in case of Maharashtra. By now, rural electrification has made further progress, and these ratios must have gone up . In this exercise, due to lack of information for the latest year 1995-96, we assume that almost all pumpsets in Maharashtra work on electricity while this ratio is only 50% in Uttar Pradesh. To estimate electricity subsidy in irrigating cane in Uttar Pradesh and Maharashtra first we need the cost of generating and distributing electricity by State Electricity Boards. Next we need the consumption of electricity on a sugarcane farm being irrigated by electric pumpset. And finally we need to know the payment that the farmer is making for the consumption of that quantity of electricity. The difference in cost of supplying electricity and payment received from the farmer may be termed as electricity subsidy for irrigating cane. Going by this approach, we find that the cost of generating and supplying electricity by SEBs in 1994-95 was Rs. I. 73 /KWH both in Uttar Pradesh as well as in Maharashtra, against the all India average of Rs .1.62/KWH.13 Total electricity cost of irrigating a hectare of sugarcane through electrically operated pumpset, however, is obtained as Rs. 799 in Uttar Pradesh and Rs .2374 in Maharashtra.14 How much is the farmer paying to SEBs as against these costs? Both states have a flat rate system for electricity payment (in Maharashtra it is Rs .300 per pumpset per year), and then there are high defaults in payment of these bills as well. We do not have information on how much cane farmers default vis-a-vis other farmers . But if one takes the total payment by farmers for electricity consumption and divides this by the quantity of electricity consumed by them, one gets what is called as the revenue tariff per unit of electricity. This revenue tariff was 34 paise/kwh in Uttar Pradesh and 27 paise/kwh in Maharashtra in 1994-95 . Multiplying this rate by the consumption of electricity in irrigating a hectare of sugarcane farm (462 kwhs in Uttar Pradesh and 1372 kwhs in Maharashtra), one gets the revenue payment of Rs .157 and Rs .370 per hectare from cane farmers of Uttar Pradesh and Maharashtra respectively. Deducting these from the costs, one gets electricity subsidy of Rs .642 and Rs.2004 per hectare of sugarcane irrigated crop through electrically operated pumpsets in Uttar Pradesh and Maharashtra respectively.15 This incidentally turns out to be much lower than the subsidy one gets on canal irrigated sugarcane farms . Further, Uttar Pradesh has a large number of diesel pumpsets for irrigating sugarcane. It was 70% of the total pumpsets in Uttar Pradesh in 1989-90, which may have come down to about 50% with growing electrification in the state. Since diesel is also subsidized, it becomes imperative to work out this subsidy too. Going by the technical specification specifications of a diesel pump, it consumes 1.75 liters to irrigate lcm!ha. To irrigate 66cms/ha for sugarcane in Uttar Pradesh, it would consume 115.5 liters of diesel. Assuming a subsidy of Rs.2/litre on diesel, it works out Rs .231/ha as diesel subsidy for irrigating cane through diesel operated pumpset. Finally, what is the subsidy to sugarcane cultivation through cheap canal waters, electricity and diesel ? Since the canal irrigated area accounts for only 32% of cane area in Maharashtra and 22% in U.P, canal irrigation subsidy needs to be adjusted for this . Similarly, while in Maharashtra  Appendix E Page 5 of 7 rest of 68% of cane area is largely being irrigated through electrically operated pumpsets, in Uttar Pradesh this percentage is only 30. The other 30% is by diesel operated pumpsets, and the rest by other sources. Adjusting these ratios, the irrigation subsidy on per hectare of sugarcane area in the two states is as follows: Maharashtra: (Rs.3834x0.32) + (Rs.2004x0.68) = Rs.2590/ha Uttar Pradesh: (Rs.1403x0.22) + (Rs.642x0.3) + (Rs.230x0.3) = Rs.570/ha Thus, through water alone, cane cultivators in Maharashtra get about four and a half times more subsidy than cane cultivators in Uttar Pradesh. It may be noted that our calculations of subsidy have been on a rather conservative note and therefore provide an idea of the lower bound of irrigation subsidy to sugarcane cultivation. Subsidy on fertilizers It is well known that sugarcane uses not only much higher quantity of water compared to other crops, even after adjusting for time duration of crops, it also is a heavy user of fertilizers. It is more true in Maharashtra than in Uttar Pradesh. Since fertilizers are also highly subsidized, it is worth estimating the fertilizer subsidy to know the real cost of producing sugarcane to the society. Fertilizer pricing has undergone drastic changes since the onset of economic reforms in July 1991. First the urea prices were raised by 30% in August 1991, followed by decontrol of phosphatic and potasic fertilizers in August 1992. Decontrol was combined with the reduction in the prices of nitrogenous fertilizers by 10%. In September 1992, a flat rate subsidy of Rs. I 000/ton was introduced for DAP and MOP. In June 1994, urea prices were raised by 20%. The situation in 1995-96, therefore, is that of total control over nitrogenous fertilizers through Retention Price Scheme, and decontrol of phosphatic and potasic fertilizers with the retail price being regulated within a band through subsidy of RslOOO/ton on DAP and MOP. In this exercise we estimate the fertilizer subsidy for sugarcane cultivation in Maharashtra and Uttar Pradesh using a different methodology from the one used in the Central Government's budget. We have estimated what it would have cost the farmer if imports of fertilizers were open at zero import duty. This cost is compared with what he is actually paying for fertilizers. The difference between the two is defined as fertilizer subsidy . Thus, in a way, we first estimate the NP Cs of N, P and K separately, attach their relative consumption weights in sugarcane and find out weighted average NPC of fertilizers . This turns out to be 0.67. It indicates that the ratio of what the cultivator is actually paying for fertilizers (say Rs.100/ha) to what he would have to pay (Rs.150/ha) under a scenario of free trade and no subsidy is 0.67 . In other words, his present fertilizer cost (Rs. I 00/ha) would go up by 50% (to Rs.150/ha) under a no fertilizer subsidy . 16 regime. As noted earlier, we do not have the latest cost data for sugarcane cultivation in Maharashtra and Uttar Pradesh from Comprehensive Cost of Cultivation Surveys. But the data of 1990-91, the latest year for which it is available, reveals that the cost of fertilizers was Rs.2396/ha in Maharashtra and Rs.631/ha in Uttar Pradesh, a ratio of 3.8: 1 between Maharashtra and Uttar Pradesh. For the year, 1993-94, cost data at zonal level is available for Maharashtra from the state department of agriculture. Their weighted average for the state reveals that fertilizer cost is about Rs.4068/ha on sugarcane. But the data given by VSI shows the same cost for the same year as Rs.6625/ha. Given such inconsistencies in cost data, we assume that in 1995-96, farmer was spending at least about Rs.6000/ha in Maharashtra and Rs.1600/ha in Uttar Pradesh. The subsidy  Appendix E Page 6 of 7 on fertilizers, therefore, would be 50% - that is, Rs.3000/ha in Maharashtra and Rs.800/ha in Uttar Pradesh. Thus, the subsidies that flow to sugarcane cultivation through cheap irrigation and fertilizers amount to at least Rs.5590/ha in Maharashtra and Rs.1370 in Uttar Pradesh. 17 If one divides these numbers by the respective yields of cane in the two states, 81 tons/ha and 5 7/tons/ha in Maharashtra and Uttar Pradesh for the TE 1994-95, one obtains subsidy of Rs.69/ton in Maharashtra and Rs.24/ton in Uttar Pradesh. This could be about 8 to 10% of the price of output in Maharashtra and 3 to 4 % in Uttar Pradesh. But in terms of net profits in cane cultivation, this could amount to a significant proportion. 1 These figures are from All India Coordinated Crop trials of ICAR. However, ICAR's Handbook on Agriculture (1984) indicates that water requirement for sugarcane in Maharashtra is 280 to 300 cm/ha per season. From this data it would appear that the estimate of 196 cm/ha noted earlier is an under estimate, or at the lowest end of any range of irrigation water requirements for cane in Maharashtra. 2 Commission on Agricultural Costs and Prices (1993 ), Reports on Price Policy for Crops Sown in 1991-92 Season and 1992-93 Season. 3 Chaubey, J (1994), Maharashtra: Agricultural Development Project, A Note on Sugar Sector, Trends and Issues (World Bank, mimeographed). 4 These observations are based on the information in the Agricultural Atlas of Maharashtra prepared by the Government of Maharashtra. 5 In 1994-95, the weights of these crops were 0.21 for adsali (18 months), 0.13 for pre-seasonal (15 months), 0.21 for suru (12 months), and 0.44 for ratoon (assumed to be 12 months). Going by these weights, the average duration of cane in Maharashtra works out to be 13. 7 months. In 1980s, the weight of adsali was higher and so assumption of 14 months as average duration of cane crop is very much within reasonable limits. 6 Since sugarcane is a IO month crop, it replaces at least two crops. In western U.P, sugarcane really competes with wheat and paddy rotation, and both have high degree of irrigation. Some cultivators are also changing to rapeseed- mustard in place of wheat/gram in the rabi season. So to that extent even rapeseed-mustard can be taken as its competing crop. In the central and particularly in the eastern belt, tur starts competing with cane during the kharif season. Another important crop that competes with sugarcane both in the western and central zones is potato. 7 The latest information we have on cane is from VSI cost data for different zones in Maharashtra. But this data set is not comparable with Cost of Cultivation data set of GOI. And we don't have cost data from VSI for other competing crops to compare with that of sugarcane. 8 This figure is derived from the exercise carried out by Gulati, Svensen and Roychoudhury, 1995. For greater details see Table 3.5 (p. 54) in 'Strategic Change in Indian Irrigation' edited by Mark Svensen and Ashok Gulati, MacMillan, 1995 . 9 In Uttar Pradesh the overall capital cost of Rs.55872/ha really corresponds to an average crop whose water requirements are about 34.55 cm. ha. But sugarcane in U.P requires irrigation water to the tune of 66 cm ha. This means, for sugarcane irrigated hectare the capital cost would be Rs.55,872 (66/34.55) or Rs. I 06,731/ha. On the other hand, for Maharashtra, the capital cost of Rs97 777/ha corresponds to an average crop whose irrigation water requirements are 51.21 cm/ha. But the irrigation water requirements for sugarcane are at least 196 cm. ha. This implies that the capital cost of one hectare of canal irrigated sugarcane in Maharashtra is Rs. 97, 777 ( 196/51.21) or Rs. 374, 225/ha. at 1995-96 prices. 10 The canal irrigation rate for sugarcane is lower in the commands of canals categorised under schedule ill and IV. For example, it is just Rsl 18 for canals under Schedule ill (against Rs.64.25/ha for wheat and paddy)~ and Rs.50/ha from canals under Schedule IV (against Rs.19.77/ha for paddy).  Appendix E Page 7 of 7 11 Although the water rates for sugarcane are almost 6 times that of kharif/rabi cotton and rabi groundnut (Rs.300/ha), and 9 times that ofkharifrice or rabi wheat (Rs.200/ha), and 3 times of summer cotton or groundnut (Rs.600/ha), yet they fall much short of the lowest level of cost computed for supplying water to sugarcane through canal irrigation. The difference in cost and water rates is much less in case of other crops for the simple reason that their water requirements are much lower, and as a result their capital cost reduces substantially compared to that of sugarcane. 12 But what we still do not know is the percentage of default in the collection of water charges. Depending upon the . degree of default in this, the canal irrigation subsidy for sugarcane in Maharashtra would go up further. 13 This is an average cost for all the consuming sectors. Normally the cost of supplying to agricultural sector is higher than that of supplying to industrial sector due to widely dispersed nature of distribution as well as high transmission losses. 14 Obviously it would depend upon the total consumption of electricity in irrigating a hectare of sugarcane. Technical specifications of a 5HP pump reveal that it takes 2 hours for this pump to supply I cm ha water, and it consumes 7 kwhs of electricity. In Uttar Pradesh sugarcane requires 66 cm of irrigation water, while in Maharashtra irrigation water requirement of sugarcane is at least 196 cm. This means in Uttar Pradesh, electricity consumption for irrigating a hectare of sugarcane through electrically operated pumpset would be 462 kwhs and in Maharashtra 1372 kwhs. Multiplying these by the cost of electricity at the rate of Rs. I. 73/kwh in 1994-95, one obtains total electricity cost of irrigating a hectare of cane in U.P as Rs. 799 and in Maharashtra Rs.2374. 15 Sometimes it is alleged that since the consumption of electricity is worked out as a residual after taking the metered consumption of other sectors, it contains an element of overestimation as quite a bit of electricity theft is shown as consumption by agriculture. This overestimation of consumption depresses the revenue tariff charged from agriculture, and therefore acts towards overestimation of electricity subsidy. While this may be true to some extent, there is also another factor which works in the opposite direction. The cost of supplying electricity is generally higher than the overall cost for all sectors combined. We have, however, taken the average cost in this exercise, which underestimates the cost. Hopefully this compensates the overestimation in subsidy resulting from depressed revenue tariff. 16 The NPCs of N, P and K for the period 1992-93 and 1993-94 (average) turn out to be 0.5, 0.97, and 0.85 respectively. The relative weights of N, P and K in the total quantity of fertilizers being used in sugarcane are 0.6, 0.25 and 0.15 (on the basis of cost data for Maharashtra provided by VSI). This provides a weighted average NPC of 0.67 for fertilizers as a whole. To estimate the amount of fertilizer subsidy to sugarcane cultivators, we divide the actual expenditure that they are incurring on fertilizers (say Rs.100/ha) by 0.67 and then deduct their actual expenses from the resulting figure [that is, (100/0.67)-100=49.25]. Or roughly, one can say under no fertilizer subsidy regime, the sugarcane cultivators would have to pay 50% more than what they are paying now. 17 Out of Rs.5590/ha of subsidy in Maharashtra, Rs.2590 comes from irrigation (canal and electricity) and Rs.3000/ha from fertilizers . On the other hand, in Uttar Pradesh, out of Rs.1370/ha of subsidy, Rs.570/ha come from irrigation (canals, electricity and diesel), and Rs.800/ha from fertilizers.  Appendix F Page I of 2 Legal and regulatory provisions in the sugarcane sector The following is a list of legal and regulatory acts and orders pertaining to the sugarcane sector at the Central level and, as an illustration for a state, for Uttar Pradesh. Central Government Control Orders U oder the Essential Commodities Act and Other Regulations Sugar Export Promotion Act, 1958: Allows notification of export agency, fixation of overall export quantities and export quotas for mills, Sugarcane Press-mud (Control) Order, 1959: Regulates end use of press-mud by allowing sugar producers to sell press-mud only to those who certify they will use it as manure. Sugar (Regulation ofProduction) Act, 1961: Allows government to fix quantity of sugar that may be produced by any mill in any year, and the imposition of a special excise duty on production beyond that limit. Sugarcane Cess (Validation) Act, 1961: Allows imposition and collection of cesses on cane. Sugar (Control) Order, 1966: Regulates sugar production through licencing. Controls sugar sales (including quantities in free market) by producers. Grants powers to government to issue directions to producers and dealers on production, storage limits, sale, quality, grading. packing, weighing, movement, disposal and delivery of sugar. Allows power to call for any information from producer and dealers and grants powers of inspection, entry, search, sampling, seizure, etc. Sugarcane (Control) Order, 1966: Allows fixation of minimum price of cane payable by sugar mills and khandsari producers; regulates distribution and movement of cane; grants power to licence power crushers and khandsari units; power to call for information; power of entry, search and seizure. Gur (Regulation of Use) Order, 1968: Regulates use of gur to specific end uses . Levy Sugar Price Equalization Fund Act, 1976: Provides for the establishment of a fund to ensure that the price of levy sugar is uniform throughout India. Sugar Undertaking (Faking Over ofManagement) Act, 1978: Provides for temporary taking over, in public interest, of the management of certain sugar undertakings in certain circumstances. levy Sugar Supply (Control) Order, 1979: Allows government to direct producers and recognized dealers to supply levy sugar at a pre-determined price. Sugar (Retention and Sale by Recognized Dealers) Order, 1979: Specifies minimum stocks that have to be held by traders for possible sale to the government at a controlled price at any time. Sugar (Price Control) Order, 1979: Allows fixation of maximum ex-factory and retail prices for sugar.  Appendix F Page 2of2 Sugar (Restriction on Movement) Order, J 979: Prohibits inter-state movement of sugar without a government permit, except under specified circumstances. Sugar Cess Act, J 982 and Sugar Development Fund Act, J 982: Provides for imposition of cess on sugar production for the use of development of sugar industry. The legal framework behind the Sugar Development Fund. Uttar Pradesh Control Orders Under the Essential Commodities Act and Other Regulations UP. Sugarcane (Regulation of Supply and Purchase) Act, J 953 and UP. Sugarcane Supply and Purchase Order, J 954: Reserves zones from which mills can purchase cane. Formalizes administrative setup for implementation, including offices of the Cane and Sugar Commisioners, the Sugarcane Board, and Cane Development Councils for each zone. Outlines relationship between growers, societies, mills and government, including payment of societies ' commission and government taxes . Requires maintenance of cane purchase record, and registration with the Cane Commisioner. UP. Sugar and Gur Dealers Licencing Order, J 962: Licencing requirements, stock holding limits for sugar and gur dealers (defined as those traders holding stocks exceeding 10 quintals at any time) . l! P. Sheera Niyantran Adhiniyam, J 964: Regulates price, storage, gradation, supply and distribution of sugar molasses . UP. Restriction on Sugarcane Purchase Order, J966: Regulates purchase of cane for gur, khandsari by issuing purchase permits .·· U P. Khandsari Sugar Manufacturers (Open Pan) Licencing Order, J967: Licencing requirements for manufacturing khandsari by open pan method. UP. Vacuum Pan Sugar Factories Licencing Order, 1969: Licencingrequirements with state government for manufacturing sugar from cane by vacuum pan method. UP. Sugar Wages Board, 1970: Specifies wage scales to be applied to workers in vacuum pan sugar mills . UP. Sheera Niyantran Niyamavali, 1974: Directions for storage, preservation, sampling, movement, transfer and disposal of sugar molasses. UP. Khandsari Sugar (Levy) Order, 19 75: Allows levy procurement of khandsari if government so wishes . UP. Scheduled Commodities Dealers (Licencing and Restriction on Hoarding) Order, 1989: Applies to all private traders. Specifies licencing requirements and stock limits for gur and sugar, among other commodities. = CATALOGUERS I B'I L.li DRAFT CONFIDENTIAL Report No: 15678 IN Type: SR