Column : A sweet move by Rangarajan

Written by Abinash Verma | Updated: Oct 13 2012, 07:32am hrs
The sugar sector is highly controlled by the government through various regulations, mostly archaic and unreasonable. Controls like a regulated release mechanism and the burden on industry to supply levy sugar at a discounted price for the public distribution system were introduced much before India gained its independence in 1947. The industry suffers an annual loss of R3,000 crore by supplying levy sugar. The release mechanism denies the mills their rights to plan their sugar sales, stocks and cash flows, very essential to timely payment of cane dues to farmers, especially during the crushing season when the cash needs are at the maximum. Quantitative restrictions and delayed permissions for specific time periods for sugar exports have resulted in lost opportunities, leading to high sugar inventories, crashing sugar prices and cane price arrears. The compulsion of packing sugar only in jute bags has not only removed competition from the packaging sector, but resulted in annual losses of R1,000 crore to the mills.

On the sugarcane side, politics in cane pricing by some states has hit the industry quite badly. The unreasonably high cane prices fixed as SAPs, without any economic basis or linkage to the final product prices, has made the industry uncompetitive within and outside the country. Indian sugar often gets priced out from the global market due to high costs of production. Payments to farmers in some years get delayed if the returns to mills are low, leading to huge cane price arrears. The absence of any relationship between the raw material and product price is seen to be the main cause of cyclicality in sugarcane and sugar production.

Recognising all the above problems, the Rangarajan Committee has recommended a total decontrol of the sugar sectora much-awaited, welcome step in the right direction. The committee correctly feels that this R80,000 crore industry has the potential to grow into a R1,60,000 crore industry in the next 4-5 years. It has been accepted that this sector requires and certainly deserves investments both at the factory level as well as at the farm level. In view of the growing domestic demand for sugar, expected to reach around 31-32 million tonnes in the next 7-8 years, such investments will be crucial. The sugar industry already has a capacity to produce 30 million tonnes of sugar, and, therefore, with improved availability of sugarcane, the higher domestic demand can be comfortably met.

The scope of increasing cane area in India is limited, and, therefore, we need to improve sugarcane yields and sugar recoveries. Not only will this require more research for better sugarcane varieties and thereby investments to help achieve these objectives, but we also need to improve on farm mechanisation, practices and techniques. With an average yield of around 64 tonnes per hectare, there is clearly a huge potential to increase the same by another 20-25 tonnes per hectare. Otherwise, with a lack of enough sugarcane and inadequate sugar production, there is a fear that India might become a net importer of sugar by 2020.

Inadequate investments in the sector are a direct result of a lack of freedom with the mills to plan their cash flows and sugar inventory, continuous losses and an unpredictable working environment. Sugar mills are unable to plan their sugar sales both in the domestic and the international markets, especially when the opportunities are good. It becomes a huge bother during the crushing period when the need for liquidity is the highest.

The Indian sugar industry is the only industry in the country and the only sugar industry in the world where the financial burden of a social welfare programme for supply of levy sugar for the PDS is borne by the government. The Rangarajan Committee accepts that the farmers are affected adversely and along with the general consumers are actually cross-subsidising the programme. Accordingly, it has justifiably recommended that the government should buy its sugar requirements for PDS from the open market.

On the sugarcane side, the politics of fixation of sugarcane price without linking it to the returns to the sugar mills is not only creating chaos in the sector but leading to losses to the sugar mills in some years and/or massive cane price arrears resulting in the infamous Indian sugar cycle. The much-awaited recommendation to link the sugarcane price to sugar price and thereby do away with the requirement of unreasonable state-advised prices, will be in line with the practices followed worldwide. This linkage will also provide a stable environment and guarantee assured returns for both the mills and the farmers, thereby controlling the cyclicality.

The acceptance of the Rangarajan Committees recommendations would give the required freedom to mills and bring them at par with other Indian industries and other sugar industries of the world. Globally, Indian sugar will be more competitive. It would also provide a stable environment vis--vis government policies which, in turn, would give confidence to the investors to put their money in a sector that will not remain unpredictable any more.

It is now to be seen how quickly the government accepts these recommendations. The environment today is perfect, especially when the sugar production is just enough to meet the domestic requirement and the prices should remain stable, ensuring a reasonable price to consumers, and fair returns to the mills and farmers. If the Indian sugar industry is expected to grow to meet the continuously increasing domestic demands for sugar, the road map suggested by the Rangarajan Committee will need to be implemented without any further delay.

The author is director general of the Indian Sugar Mills Association