The price of sugar, both in the domestic market and the international market even with the export incentive, does not make the whole business viable. No wonder, several large sugar mills are seriously considering closure as an option due to this disparity in prices
According to Abinash Verma, Director General of Indian Sugar Mills Association (ISMA), the sugar mills are continuing to be under terrible stress due to the increasing burden of arrear dues to farmers, which has crossed Rs15,000 crore so far, and may go beyond Rs17,000 crore by the end of this month. The backlog of last year to cane growers is said to be over Rs2,600 crore.
In the meantime, the global sugar prices have also fallen, and, after many delays, petitions and protests, at last the government agreed to an export incentive of Rs4,000 per tonne for raw sugar.
By the time the Indian government announced this incentive, and permitted the export of 1.4 million tonnes, not only the international prices have fallen, but our competitors, like Brazil and Thailand, have now their own sugar to offer in the market.
Because of this change in the international market, even the Rs4,000 per tonne incentive offered has become unworkable, and an additional Rs1,500 may help in making some exports. So far, in spite of the clearance for 1.4 million tonne exports, only 18,000 tonnes appear to have been committed, as per press reports.
No one, particularly in the government, seems to realise the irony of mills having to pay a mandated price for sugarcane purchase, accepting what is offered by the farmers, while the sugar prices are determined by the market forces.
Sugar production is expected to be between 26.5 and 27 million tonnes (mt), as against the earlier estimate of 25 mt, thus leaving a surplus of 3 million. Domestic consumption is around 24.8 mt. This is in addition to the stock that has been carried forward from the last season.
Verma from ISMA echoes the feeling of being the most conversant with the sugar industry by saying that the problems faced by both cane growers and mills need a permanent, workable, long term solution. There is a need to link the cane price to sugar content. The "link-formula" recommended by the C Rangarajan Committee is collecting dust and not made applicable on a practical basis. This is likely to resolve many issues that have been plaguing the industry. The government should introduce this linkage-formula, and modify it later, if need be.
Most of the sugar mills are in a financial squeeze. Banks are hesitant to give working capital, and by continuing to crush the cane, as they come to their door steps, the mills are taking the liability to pay, sooner or later! The price of sugar, both in the domestic market and the international market even with the export incentive, does not make the whole business viable!
Press reports indicate that several large sugar mills are seriously considering closure as an option due to this disparity in prices. A reference can be made to Mawana Sugar Mills and Modi Sugar Mills in UP, who have informed their situation to Principal Secretary of State for Sugarcane Development, their plans to do so. Others seem to be sitting on the fence to see how the government reacts.
In a recent press conference, held by Indian Sugar Mills Association, they have made some serious suggestions and have reiterated that, prima facie, the difference between the Fair and Remunerative Price (FRP) and State Advised Price (SAP) should be met the relative state concerned. As reported, earlier in these very columns, ISMA has suggested that the government must create a buffer stock of say 2 million tonnes of sugar, so as to mop it up from the market, to make it available through the PDS - Public Distribution System.
Additionally, ISMA feels that it is time some serious thought is given to this industry in regard to financial restructuring, conversion of working capital to term loans, rescheduling of payments besides offering interest free loans to the industry. These would help revive the industry which is in dire straits with huge arrears to farmers and banks. Though the export market is dull at the moment, the incentive of Rs4,000 per tonne needs to be increased by Rs1,500 and also extended to white sugar. They have sought an incentive of Rs7/8 per litre of ethanol or removal of central excise duty on fuel grade ethanol, which, they feel would absorb 1 to 2 million tonnes of sugar in the market.
Also, sugar mills having ethanol production capacity will need to supply 25% of their alcohol production as ethanol for blending programme to be eligible for the export incentives. The tender for supply of ethanol by OMCs is likely to come out soon. Why not bring this supply also as a product that can be brought under the umbrella of DGS&D contract and eliminate the need to go for tenders every now and then?
On the whole, it is time the government organised a workshop on this industry to sort out the various issues that have been a hindrance in growth!
(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.