The Finance Ministry has turned down Agriculture Minister Sharad Pawar's proposal to hike sugar import duty immediately so as to address mounting cane arrears, saying such a move would lead to inflation.
In a letter written recently to the Finance Minister, Pawar had said that arrears of sugar mills have risen to over Rs 10,000 crore (Rs 100 billion) and there was a need to hike import duty to curb shipments, which is putting downward pressure on local prices.
It is felt that lower prices will hit the margins of sugar mills, which may defer payment of sugarcane arrears.
At present, import duty on sugar is at 10 per cent.
According to highly placed sources, Finance Minister P Chidambaram, after holding discussions with Pawar and Food Minister K V Thomas, has decided to keep the proposal on hold till August.
The sugar import duty issue was discussed at length during the meeting and the Finance Minister was of the view that such a move could have an adverse impact on sugar prices in the open market during June-August period, when prices normally remain slightly firm, sources said.
Arguing against the hike in import duty, Chidambaram and Thomas said the government at present has no mechanism to control local sugar prices following decontrol of the sector.
That apart, the likely increase in retail prices would also have an impact on the subsidy, which the Centre has offered to give to state governments for procuring sugar from the open market for PDS distribution.
The Centre has partially decontrolled the sugar sector and mills are no longer under obligation to supply sweetener to the Centre for the Public Distribution System.
Industry body Indian Sugar Mills Association has also been demanding hike in import duty of sugar.
Sugar production in India is expected to be be 24.5 million tonnes in the 2012-13 marketing year (October- September), higher than the domestic demand of 22 million tonnes.