New Delhi: Sugar prices can rise as the government on Wednesday set a floor price for the sweetener as part of a package that also includes an allocation of Rs 1,175 crore to buy 30 lakh tonnes of the sugar for a buffer stock.

Besides, the government will provide a Rs 4,500crore soft loan to expand ethanol capacity over three years. It will bear an interest subsidy of Rs 1,332 crore for five years. There will also be a one-year moratorium on the loan. Earlier, the government had announced a Rs 1,540crore production linked subsidy to farmers.

The bailout, however, does not address the distortion in cane pricing, which is the root cause of the crisis facing farmers. The government has decided to create a buffer stock of 3 million tonnes for one year, which will result in a Rs 1,175crore burden, to be paid in the form of storage costs to mills.

Abinash Verma, director-general of the Indian Sugar Mills Association (Isma) said, "the ex mill sugar price works out to around Rs 35 per kilo and therefore the Rs 29 is inadequate. It will, therefore, be a challenge to expect the sugar industry to clear the huge cane price arrears on this basis".

He said "creation of buffer stocks of 30 lakh tonnes will reduce some surplus sugar from the market, though only for a year, and will improve market sentiments to support domestic prices. What is concerning is that there is no idea or proposal on rationalisation of cane pricing policy, which is actually the main reason for all the problems of the industry today".

Unlike other crops, the raw sugar price is fixed first by the Centre and then by the state. The Centre sets a minimum price or a fair and remunerative price (FRP). The state government tops it with a state advised price (SAP). Often, SAP is fixed to woo the farmers for political considerations without a thought for the market price of sugar and is the single most important contributor to farm distress. The decisions are aimed at helping mills to clear part of the over Rs 22,000-crore arrears to farmers.

Announcing the cabinet decision, food minister Ram Vilas Paswan said the minimum selling price of white/refined sugar has been fixed at Rs 29 per kg. The government has notified Sugar Price (Control) Order, 2018, under Essential Commodities Act, 1955, to fix the minimum selling price.