Under this system the Central Molasses Board was responsible for allocating molasses from surplus to deficit states and for determining how much if any should constitute a surplus for export. In doing this it relied on estimates provided by the molasses controllers in the individual states, but because of the very low prices the surplus states preferred to use as much as possible of their molasses within the state, and hence tended to underestimate their production, while the deficit states benefited from allocations at these low prices and therefore tended to exaggerate their demand. The allocation to deficit states and for exports was therefore the outcome of complex negotiations in which lobbying by various interest groups and political considerations are dominant, and prices only have an indirect role.

After this general system of price and distribution controls was abolished in June 1993, the UP government introduced a system under which 65 percent of each mill's production has to be sold at the controlled price and to designated buyers. Haryana and Bihar also retained modified price and distribution controls. The Maharashtra government replaced the previous controls with a system of different excise taxes according to end use.

Until the 1991/92 reforms, molasses exports were canalised by STC and were limited to the quantities determined by the Central Molasses Board. As part of the reforms, molasses exports were decanalised i.e STC's export monopoly was abolished. However the general Molasses Board controls remained in place, and the STC export monopoly was replaced by a system in which all exports are compulsorily channeled through the national association of sugar mills working with a private exporter.22 STC retained a role in monitoring exports, including a requirement that it approve each export order in advance. The sugar mills which supply the exported molasses receive only the low controlled price,<sup>23</sup> and the very substantial profits remain with the sugar mill association and the private exporter. This system is enforced by the government through the Molasses Control Order and with the support in particular of the Ministry of Chemicals and Fertilizers.24 Before the 1991/92 reforms, imports of molasses were not restricted but were subject to very high import duties which were prohibitive. These tariffs were reduced in steps along with the general tariff reductions started in 1991/92, and in March 1995 they were cut from 50 percent to 10 percent. Given the present extremely distorted domestic molasses policies, it is possible that some imports will occur with this relatively low tariff, but not if future reforms rationalize the domestic market and allow India's very substantial export potential to be realized.

India's molasses exports between 1965 and 1995 are shown in Data S5. Under the restrictive policies described above, exports have been small and irregular. Because the control system has made it impossible to make firm long term export commitments, markets developed they could sell their molasses at free market prices ( see Goldar and Gulati (1991)), and there would be **less** khandsari molasses produced.

> 21 See Centre for International Economics (1996), Box 4.3 for a discussion of these developments.

22 The company owned by the sugar mills is the Indian Sugar and General Industry Export Import Corporation ( ISGIEIC). The private exporter is the Indian Molasses Co. For a number of years prior to decanalisation, STC had been using these two companies to arrange its molasses exports.

23 However the exporting mills receive some minor benefits in the **form** of the standard export incentives e.g. Special Import Licences (SILs) which allow the use of a small percentage of the foreign exchange earned to import otherwise banned consumer goods.

24 Alcohol exports were also decanalised during the 1991/92 reforms, but the STC export monopoly was also in this case replaced by a government backed export monopoly of the All India Distillers Association.

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