Crushed by debt, UP sugar mills threaten to suspend operations

Written by fe Bureau | New Delhi | Updated: Aug 6 2014, 09:48am hrs
Sugar CrisisSugar mills in UP already incurred Rs 4,000 crore in losses for the two years through 2012-13. (Thinkstock)
Cash-starved sugar mills in Uttar Pradesh have threatened to suspend operations in the next marketing year starting October. The development has aggravated a crisis in the industry, which the Centre had tried to resolve earlier this year by facilitating cheaper loans of R6,600 crore to mills across the country to clear cane dues.

Uncertainty also looms over the Rs 4,400-crore additional subsidised loans promised by the Centre in June.

Mills in UP already incurred Rs 4,000 crore in losses for the two years through 2012-13 and are staring at further losses of roughly R3,250 crore in the current marketing year. This is because returns from sugar sales failed to keep pace with the state-advised price (SAP) for cane fixed by the UP government, far exceeding the price set by the Centre.

sugar mill

Having incurred a loss of R5.50 on the sale of each kilogram of sugar at the current price of R31.50, the UP Sugar Mills Association on Monday served a notice to the state conveying mills inability to crush cane next season, said Abinash Verma, director general of the Indian Sugar Mills Association (ISMA).

He said unless the state keeps its promise of firming up a formula linking the price of cane to its by-products and offering a financial assistance of R9 per quintal of cane, even clearing cane arrears of around R5,000 crore this season would be a herculean task.

Banks, after reluctantly agreeing to offer mills working capital loans in 2013-14 following assurances of relief by the state government, have again started refusing to provide loans, further complicating the situation for the industry, millers said on Tuesday.

Kushagra Bajaj, vice-chairman and joint MD of Bajaj Hindusthan, said: We have been in this business for 90 years and we have never seen such a situation. Around 75% of the mills in the state have gone to either the BIFR or the CDR cell due to the crisis. We want a level playing field with the mills in Maharashtra or Karnataka (where the recovery rate is much higher and prices reasonable).

Asked what could be a fair price of cane, Verma said according to the current ex-factory price of sugar, mills won't be able to pay more than R235 per quintal for cane, factoring in the Rangarajan formula. Rangarajan had suggested offering 70% of realisation from sale of cane by-products or 75% of returns from sugar sales to farmers for cane purchases, which the industry demands should be implemented in UP, as states like Maharashtra and Karnataka follow similar models.

As of July 15, UP accounted for 64% of the country's total cane arrears of R10,451 crore, although the dues in the state have now come down to just around R5,000 crore. The state produced almost 27% of the country's sugar in 2013-14.

Last December, after the mills had threatened not to crush cane, arguing the SAP of R280 per quintal was 24% higher than the rate according to Rangarajans formula and 33% more than the price fixed by the Centre, the state government "promised" to set up a panel under its chief secretary to bring out its own linkage formula by April 2014 and find a permanent solution to the crisis.

The state also promised to offer mills incentives worth R20 per quintal on cane purchases during 2013-14 if they started crushing. However, it has so far offered only R11 per quintal, in the form of a waiver of purchase tax, entry tax and society commission. Even after several meetings, top state government officials remai-ned noncommittal about providing the rest of the promised incentives as well as bringing out the linkage formula, senior industry executives said.

What makes the matter worse in UP is the fact that cane price in the state is highest in the country with the lowest recovery rate (9.2% compared with nearly 12% in Maharashtra). Interestingly, UP offers R60 per quintal subsidy to state-run mills for cane purchases. This has prompted the private mills to argue that such a move proves that even the state government knows the right price of cane is R220 per quintal.

Tarun Sawhney of Triveni Engineering said that due to lower cost of production, sugar from states such as Maharashtra have started making inroads into Punjab, the traditional market of mills in UP.

ISMA president Ajit Shriram said that while the UP government should announce the linkage formula at the earliest and provide the promised incentive for the 2013-14 season, the central government should also notify its decision to raise the import duty on sugar to 40% from 15% so that cheaper inflows from overseas stop.