Govt’s sugar quota system is floundering — Here’s why

By: |
New Delhi | March 16, 2019 5:34 AM

Mills are barred from selling more than the quotas and are liable to penal action for any violation, although no action has been initiated so far.

sugar, sugar industry, economy, india economy, sugar millsLow cash flow has also dented mills’ ability to service debt.

The government’s sugar sales quota system — reintroduced in June 2018 after a gap of five years apparently to help clear cane arrears — is floundering. Sales data submitted by mills and co-operatives with the food ministry suggest in four of the nine months through February, they have sold more (in the range of 5% to 23%) than the quota allocated to them and in the remaining months, they have sold less, sources told FE.
Mills are barred from selling more than the quotas and are liable to penal action for any violation, although no action has been initiated so far.

This has brought to the fore the food ministry’s inability to enforce the very quota system it had lobbied hard to bring back last year in the pretext of jacking up sugar prices and improving mills’ realisations, even though the efficacy of the licence raj was always doubted.

Now, the fluctuations in sales against the quotas (See the chart) have raised questions about the government’s ability to forecast the market appetite and fix the sales limits accordingly. Given this backdrop, analysts have called for an abolition of the quota system altogether.

Before its re-introduction, the quota system was scrapped in April 2013, as part of the UPA government’s move to loosen control over the sugar sector following recommendations by the Rangarajan panel. Prior to that, such limits were imposed by the food ministry to control sugar sales through the so-called release order mechanism.

As per the Essential Commodities Act, millers violating the quota rules cane face penalty and even imprisonment, in certain cases, by up to one year.

Mills feel the curb on monthly sales, even when the government has fixed a minimum sale price of `31 per kg, have impaired their ability to improve cash flow and potentially delay the clearance of cane arrears that have exceeded a staggering `20,159 crore as of February 22 ( a record for this time of the year). This is because when the quota is set lower than the market requirement, mills can’t sell more and realise more. Similarly, when the quota is fixed much higher than the market appetite, it only encourages bulk consumers to seek discounts from mills; some large consumers even ask for supplies on credit.

For instance, the food ministry has set a quota of 24.5 lakh tonnes for March, up 17% from the previous month (Even in February, the actual sales were almost two lakh tonne less than the quota). Since the minimum sale price of `31 per kg hasn’t offset the wide gap between the cost (`36-37 per kg) and earnings of sugar mills due to exorbitantly high cane prices mandated by the Central and state governments, selling at steeper losses could only stoke a downward spiral of the market prices of the sweetener. This doesn’t augur well even for the government ahead of the general polls.

In a recent letter to the food secretary, the Indian Sugar Mills Association said: “The intention behind announcing a high monthly quota of 24.5 lakh tonne for March 2019 may be to allow mills to get better revenue and cash flows from more sales of sugar. However, if the market requires around 20-21 lakh tonne, mainly because there were extra quotas in the previous two months, there is no way that the mills would be able to sell more than what the market could want.”

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Low cash flow has also dented mills’ ability to service debt. The massive arrears have resurfaced in regular intervals, especially in years subdued sugar prices, thanks to exorbitantly high cane prices year after year by both the Centre and states like Uttar Pradesh.

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