Government plays sugar daddy to states, announces package without any reform

Written by fe Bureau | New Delhi | Updated: Dec 7 2013, 14:25pm hrs
An informal group of ministers headed by agriculture minister Sharad Pawar on Friday recommended interest-free loans of Rs 7,200 crore to the beleaguered sugar industry, mainly for clearing cane arrears, with a repayment moratorium of two years, reports fe Bureau in New Delhi.

This apart, the panel constituted at the behest of Prime Minister Manmohan Singh also recommended that the level of mandatory ethanol blending with petrol be doubled to 10% and additional incentives to encourage mills to produce raw sugar for exports.

For the record, the industry has welcomed the proposals. But analysts cautioned that after factoring in all these benefits and the R11 per quintal incentive announced by Uttar Pradesh government, the gap between the viable price of cane and state-advised price (SAP) in the state would still be roughly R31.75 per quintal.

Total interest subvention will be 12%. Of that, 7% will be (paid) from the sugar development fund, while 5% from the government of India, Pawar said after Friday's meeting. Mills will have to repay loans in five years, but can get a moratorium on repayment in the first two years, Pawar said. The Cabinet will take a final call on this issue in next two weeks, he added.

Pawar also said the rescheduling of existing loans for all the sugar mills would take place in accordance with the Reserve Bank of India guidelines. He, however, didn't elaborate. These apart, the panel will also recommend incentive to produce raw sugar up to 4 million tonnes a year in sync with the WTO recommendation on marketing and promotion of the sugar sector, he added.

Mills in UP suffered losses of R3,000 crore in 2012-13 and they still expect to incur losses to the tune of R4,000 crore in the current marketing year through September 2014 due to the elevated cane price.

It will help to a limited extent, but the gap between SAP and the viable price is still too large to be bridged by this, Commission for Agricultural Costs and Prices (CACP) chairman Ashok Gulati told FE. The raising of ethanol blending from 5% to 10%, if implemented quickly and sincerely, can go a long way in helping the sugar industry. But to realise its full potential, we need to free up the molasses markets completely from any permits, quotas and movement restrictions. The idea to build a buffer stock of sugar will also help, Gulati said.

The move came after the UP government last week announced a waiver of entry tax, purchase tax and society commission, which together account for R11 per quintal or 3.9% of cane value in the state, ending an impasse as mills had refused to crush at an elevated cane price of R280 per quintal when sugar prices remained subdued and the floor price set by the Centre stood at R210.

The industry has already made it clear the realistic price for sugarcane is Rs 225 per quintal based on the Rangarajan panel formula. The interest-free loans by the Centre could benefit the industry in UP, which is worst hit due to "arbitrary fixing" of SAP of cane, to bridge the gap with SAP by Rs 2.25 per quintal. This assumes that mills in the state would get roughly 30%, or Rs 2,400 crore, of the interest-free loans recommended by the ministerial panel based on their production level and the mills would have to take loans from banks to clear the cane arrears of roughly Rs 2,400 crore.

Although the industry welcomes the move to double the mandatory level of ethanol blending with petrol, senior executives expressed doubt if any such announcement will be followed strictly by oil marketing companies as currently the average blending level in the country stands at a meagre 2% despite the government's diktat to implement the 5% blending level by June 2013. Raising the blending level, however, will mainly have an indirect impact on sugar prices as mills would be encouraged to produce more ethanol out of cane by using the sugar-heavy molasses, instead of sugar, when stocks of the sweetener are adequate in the country and, thus, prevent prices from spiralling downward. Assuming that the direct or indirect impact from such a move will add another Rs 10 per quintal to the industry's kitty and UP government's recent incentives worth Rs 11 per quintal, the gap between the viable price of cane and the SAP fixed by the UP government would still be roughly Rs 31.75 per quintal, said industry executives.

Nevertheless, the Indian Sugar Mills Association hailed the Centre's move. "The industry welcomes the initiatives of the central government to help the sugar industry to face the financial crisis it is going through. It will help the industry clear arrears of farmers," ISMA director general Abinash Verma said. The proposed measures would also help the industry venture into the production of a new product, 'raw sugar', and grab opportunities whenever they are available, he said.

However, he added that the long-term solution for the cash-starved industry would be the implementation of the revenue-sharing formula for cane pricing.