In a rare move, the food ministry overruled relatively liberal but pragmatic suggestions by the finance ministry and insisted on offering a less attractive loan package to the crisis-ridden sugar industry to help clear its huge cane arrears.
As the cane dues hit as high as R19,437 crore by the end of May, the Cabinet Committee On Economic Affairs approved a R6,000-crore loan package for sugar mills last month and decided to give a 10% interest subsidy to eligible mills for one year, as recommended by the food ministry.
Sources told FE that the finance ministry — in its suggestions in the Cabinet note to this effect circulated by the food ministry — had recommended that the government offer a 12% interest subsidy on the loan for two years. This is sort of an oddity. Usually, the administrative ministries asks of liberal support to the industries/sectors it represents and the finance ministry, as custodian of government finances, exercises control and trims such special packages.
The North Block’s proposal would have given a more realistic time frame to cash-starved mills to gather strength and repay debts without any defaults so that the actual purpose of giving the bailout package is somewhat served, analysts said. Former food secretary Sudhir Kumar, who advocated a tough stance, is learnt to have managed to impress upon the PMO before his retirement recently to approve the package with stringent conditions.
Most of the mills have been incurring heavy losses for a third straight year now due to a drastic mismatch between the exorbitant cane prices fixed by states like Uttar Pradesh and falling realisations from sugar sales.
In the last sugar season, the UPA government had provided the first loan package of Rs 6,600 crore to the sugar industry at a 12% interest subsidy for a period of five years.
The industry–which had been seeking the Centre’s help in adressing problems such as the absence of a formula linking the prices of cane with those of its by-products in states like Uttar Pradesh and the current slide in sugar prices to seven-year lows–was disappointed as the latest loan package was neither sought by it nor did it adress the basic problems flagged by it to resolve the crisis permanently.
While the finance ministry had suggested that the Centre impress upon producing states to implement the Rangarajan panel linkage formula, the food ministry refrained from such a move, said the sources. The panel had suggested that mills give 70% of the prices of sugar and other cane by-products or 75% of the price of only sugar be given to farmers for cane purchases.
The finance ministry was also of the view that banks be allowed to take an exclusive charge on sugar stocks against the loans offered by them to the mills and that much of stocks be segregated from the mills’ inventory. While the ministry may have in mind last year’s Allahabad High court order–which stated that farmers had the first right over the realisations from sugar sales and not lenders–when it wanted such a legal provision to prevent loans from turning into NPAs, such a move could also have helped the industry as well. This is because the mills getting the loans would have been forced to keep a certain portion of their stocks pledged with the banks away from the market, which could have reduced the glut in the market.
In May, a sugar industry delegation led by former Union agriculture minister Sharad Pawar had met Prime Minister Narendra Modi and demanded that the government buy 10% of the country’s sugar production this marketing year through September at a price based on the fair and remunerative price (FRP) of cane fixed by the Centre to spur demand and ensure that much of supply is held back from the market for two years. However, the Centre rejected the demand subsequently and instead offered the second loan package.
1.Give interest subsidy of 12% to sugar mills for a period of two years
2.Persuade states to implement Rangarajan formula on cane pricing
Limit interest subsidy to 10% and provide it for only one year