Unfortunately, in the recent Lok Sabha elections Jayalalitha successfully used the ruling Dravida Munnette Kazhakam (DMK) government's failure to keep its promise of increasing the sugarcane price to Rs 1000 per tonne as an electroral issue.

She has kept the issue alive after the elections as well. With some success, it appears, since Karunanidhi has virtually announced a Rs 1000 per tonne tag on sugarcane.

The announcement reflects the complete ignorance of the government on the state of affairs of the co-operative and public sector mills which it owns and are likely to face huge cane arrears, leave alone their accumulated loss of Rs 200 crore.Any fixation of raw material price without regard to the realisation of the end product is bound to create problems for any industry and theTamil Nadu sugar industry is a victim of precisely this situation.

Trouble began for the industry when the state government realised that cane pricing could be effectively used as a populist tool to win a vote bank.In Tamil Nadu, over the last decade (1988-98) the state advised price of cane has been increased from Rs 225 per tonne linked to 8.5 per cent recovery to Rs 660 per tonne, almost three times. While at the same period the realisation of sugar did not even double (if one factors the levy obligation).

This resulted in cash flow problems for the mills and the result was huge cane arrears both in co-operative and private sector. According to an industry expert, cane arrears were unheard of before in Tamil Nadu.The situation is even more alarming for the season just ended.

Unseasonal rains in December last year resulted in higher sugarcane yield but the recovery rate fell at an average by about one to two per cent. This would mean that the sugar mills will have to pay for more quantum of cane basedon last year's peak recovery when the current year's recovery was much lower. The cash mismatch is likely to result in huge cane arrears.

Moreover, the cane price of Rs 1000 per tonne (even assuming not linked to 8.5 per cent recovery) is not viable under the existing price structure. Such a cane price would, after including transportation cost, cane cess, subsidy, conversion cost, fixed costs, etc, mean a cost of production of Rs 17.33 per kg of sugar for the state's average recovery rate of nine per cent.

Of this, the industry has to supply 40 per cent of its production to the government as levy sugar at Rs 10.49 per Kg. For it to recover the loss on account of levy sale from the open market, the selling price should be in the range of about Rs 25 per kg. But the open market price cannot go to that level as imports (still under OGL) would flood in.

Thursday's international price of sugar was $255 per tonne (FOB) and the landed price of imported sugar will be as low as Rs 13.50 per kg even after takinginto account the duties, taxes and freight charges.

If the government does take a decision to hike the cane price irrationally, the local industry may have no choice but to seek legal remedy as sought by their counterparts in the states of Uttar Pradesh, Bihar and Karnataka. But right now they are keeping their fingers crossed and hoping that the BJP government would implement the Mahajan Committee report.

The committee has recommended setting up of a sugarcane pricing board rather than allowing the state governments to fix cane prices. If that happens, it may also give an escape route to chief minister Karunanidhi who seems to have put his foot in his mouth with his `invitation' to farmers.