AFTER keeping the sugarcane price unchanged for two years, the Punjab government has added Rs10 per 40kg to the tally — taking the total to Rs180 — stirring a storm. The farmers, the industry and the urban consumers all reject it for different reasons and fears.

It leaves a question mark over the decision: whether the government intervenes in price mechanism to protect interest of any party, or it is trying to create a balance among all stakeholders but ‘leaving everyone imbalanced in the process,’ if taken against the backdrop reaction of the parties involved.

The farmers have rejected the increase straight away. Citing the officially calculated cost of cane production, which is Rs194 per maund for this year, they want the government to add some profit margin and take the price to a minimum of Rs200 per 40kg. It has not happened and farmers are threatening protests.

Since the government kept the price same for last two years, farmers were hoping for a substantial raise, especially with escalating cost of production, which is on official record.

During this period, farmers showed their resentment by decreasing cane acreage, which has dropped by 150,000 acres from 1.87m acres in 2012 to 1.72m acres last year, and the slide continues if farmers are to be believed. With floods damaging over 300,000 acres of cane at varying levels, the province might find it hard to meet yield target this year.

The government has to leave a reasonable profit margin with both the farmer and the industry in order to sustain the cane crop, and still try to keep sugar within the reach of the common consumer

The industry, reluctantly accepting the increase — because cane cost constitutes over 70pc of sugar production — wants the government to ensure that it does not cross the officially indicated limit, which it fears, by all estimations, would rise this year due to less acreage and floods damages.

As an additional insurance, it wants the government to slap duty on import of sugar to stabilise domestic prices so that it can recover additional cost of production that increased cane cost would bring.

Otherwise, it says it will not be in a position to clear the farmers’ dues even at the officially indicated prices, leave alone market escalation.

The urban consumers, who have to bear the brunt of both — the official price and the market price — are resisting potential stoppage of cheap import, which can keep the domestic prices in check.

Typically, they think that the government is trying to find an excuse to benefit their fellow politicians, who, regardless of being in government or opposition, own a majority of sugar mills.

This situation demands that the government opts for a tight rope walk, though the balancing act is increasingly difficult, if it wants to keep sugar market stable in domestic market.

It has to leave a reasonable profit margin with both the farmer and the industry in order to sustain the cane crop, and still try to keep sugar within the reach of the common consumer.

The successive governments have left everyone dissatisfied because of ever squeezing rate of return on sugar trade. Since the drivers of this escalating cost of production are evident, they should be manageable.

They include devaluation of rupee, deepening energy crises, increasing wages and taxation regime, which thrives on the general sales tax. Increasing prices of wheat have also raised the cost of production because wages in rural areas are linked directly with the price of wheat.

All these factors have contributed to the ever increasing cost of production for farmers and the industry. Delayed decision on fertiliser imports, which has at times huge cost of its own, is an added factor. The ministry of finance has been sitting on the proposals for import of fertiliser and finalisation of the subsidy regime for many months while the market has spun out of control.

In India, the government subsidises inputs rather than outputs to reap benefits. Pakistan needs to subsidise seed, fertiliser and energy for farmers to keep profit margins attractive and check on industry for manufacturing cheap outputs with low-priced inputs.

Published in Dawn, Economic & Business, October 20th, 2014