Soon, there will be sweet returns from the sugar fields if the Central government's plans bear fruits. The Centre is in the process of breaking away the Rs 20,000-crore (Rs 200 billion) sugar sector from the shackles of government control.

As part of this plan, the government will get rid of the levy quota system from April 1, 2007, to allow mills sell their entire produce in the open market. In place of that, the Centre would spend more than Rs 1,000 crore (Rs 10 billion) to subsidise sugar for public distribution system (PDS). This may be partly paid for by an increase in excise duty.

In another move, the government may do away with the minimum support price (MSP) for cane to allow farmers get a better deal. Within a couple of seasons, growers may also be allowed to undertake contract farming instead of being tied to the fortunes of just one mill through cane-area reservation.

The proposal to decontrol sugar industry, mooted by food minister Sharad Pawar, is now being circulated among various ministries for comments.

The proposal says from April 1, 2007, mills would not be obliged to sell 10 out of every 100 sacks to the government for meeting PDS demand. Mills have complained in the past at having to supply 10% of their output at below-market prices to the government. Instead, a new mechanism would be put in place to ensure uninterrupted supply of cheap sugar to PDS.

To further improve the sugar mills' profitability, the government plans to dismantle the release control mechanism that dictates how much sugar each Indian mill can sell every month. As the mechanism allows the food ministry to control the availability of sugar in the open market, mills have been demanding they should be allowed to take their own marketing decisions.

The control on open market prices through the release control mechanism is an important reason why sugar futures have been unable to prove genuinely useful for local players. However, the government would continue to exercise control on how much sugar a mill can export.

To make cane a more attractive business proposition for the 45-million farmers and their families that depend on it, the government intends to get rid of the statutory minimum price for cane farmers and stop reserving sugarcane fields with a 15-km radius for individual mills.

A legal and policy framework would also be put in place over two years to allow farmers undertake contract farming for factories that pay an attractive price.

Meanwhile, to protect the country's poorest families, the government intends to put in place a new system. According to this, PDS demand would be met through state procurement at cheapest rates from the nearest sugar factory.

The Centre would give a fixed subsidy of Rs 4 per kg to make the sugar affordable. State governments would be free to fix the final retail price in their ration shops. The food ministry believes the entire proposal needs a total subsidy of Rs 1,037 crore (Rs 10.37 billion). Of this, Rs 74 crore (Rs 740 million) would come from the excise collected on the 10% produce of each mill that would henceforth be sold in the open market.

Excise duty may be further increased to partially meet the requirement. However, as in the past, this would be immediately passed on to consumers. The government already has an annual budgetary commitment of Rs 400 crore (Rs 4 billion) for sugar. The balance Rs 563 crore (Rs 5.63 billion) would have to come from additional budgetary support.

• India and the Commodity Trade: Coverage