the other two states, and hence the NPCs in UP are higher. It should be noted, however, that this result follows almost entirely from the particular assumption made about the geographical distribution of sugar under free trade. An alternative plausible assumption is that UP sugar would not be exported and would compete with imported sugar in UP itself and in other inland areas in the north west and north east. In that case transport costs to these inland markets would be added to the landed duty free price of imported sugar at the ports, and NPCs in UP would tend to be lower rather than higher than the NPCs in the other two states.

# _Nominal protection: khandsari_

# Methods.

As noted above, there are no complete all-India statistics of khandsari production. However, the study by Kalra and Gulati (1992) reports statistics of cane crushed in UP by khandsari units for the period 1981-90. Assuming an average sugar extraction rate of 6 percent, annual khandsari production in UP during this period would have varied between about 600,000 and 800,000 tons which would correspond to all-India production of between 1 million and about 1.3 million tons.<sup>3 0</sup> . Wholesale prices of khandsari at Bareilly in UP are published and can be used to estimate ex-factory prices. The details of these estimates are shown in Annex 8. Annual average wholesale prices are available for the 1965-94 period, except for 1965-69 and 1976-80. The missing prices for these years were interpolated by applying the wholesale price index for sugar, khandsari and gur to the recorded khandsari prices for 1970-75 according to the formula _Pi = WPIi / nj Pn / WPIn_ where Pi is the estimated price in year i, WPIi is the _n_ wholesale price index for sugar, khandsari and gur in year i, and Pn, n= 1970... 1975, is the average wholesale price of khandsari in year n. Excise taxes plus a marketing margin estimated at 1 percent of the wholesale price are then deducted to give an estimate of the ex-factory price received by the khandsari units. As noted previously, khandsari has been exempt from excise taxes since March 1984 31 and before that were always much lower than the excise taxes applied to mill sugar, and the marketing margins (taken from Goldar and Gulati) are also lower, so the downward adjustments of free market prices to give estimated ex-plant prices are also proportionately less. We should also note that excise tax evasion by khandsari units is generally considered to be more prevalent than by the mills, and so the extent to which actual realized khandsari ex-mill prices and the corresponding NPCs are underestimated, is also greater.

As regards the reference prices of khandsari, there are no separate records of international transactions or prices. However it is reasonable to suppose that the observed differences between the free market prices of mill sugar and khandsari in India represent an approximate consumer 30 According to Kalra's study, the sugar recovery rate from traditional non-sulphitation khandsari units is about 5 percent, and from the larger sulhpitation units about 7 percent. In the absence of any information on total production by these two routes, we have assumed an average extraction rate of 6 percent. The rough estimate of all-India khandsari production is obtained by assuming that khandsari units crushed the same proportion of the total cane used for khandsari and gur in the other states as in UP, and that the average khandsari extraction rate was also 6 percent.

31 Goldar and Gulati adjust for a khandsari excise tax after 1984, but this appears to be incorrect.

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