Column: A bitter outlook without higher subsidies

By: | Published: August 8, 2015 12:21 AM

The aim should be to ship out the maximum tonnage, not calibrate the subsidy with the market

India is expected to produce 28 million tonnes (mt) of sugar in the sugar year (SY) 2015-16, commencing October 2015, with a carry-in of about 10 mt. Against the total consumption of 24 mt, this amounts to an excess of about 14 mt lying in warehouses, with huge sums blocked. The idea of building a buffer of 3 mt being pushed for by the industry— through government/FCI procurement—is impractical and thus has been abandoned. Under the circumstances, millers’ liabilities to banks could become terribly toxic. Farmers’ arrears, of about R19,000 crore now, would have also escalated.

The government is not remedying the core issue of arbitrary fixation of sugarcane price—the Fair and remunerative price (FRP) versus the state-advised price (SAP)—and the absence of its linkages to market realisation due to adverse political fallout. Indian sugar is cheaper than the cost of sugarcane, if the empirical rate of conversion is applied—a ridiculous case of an end-product selling cheaper than the raw material. Even revenue from by-products such as alcohol/ ethanol/ co-generation does not compensate the gap in present day earnings of integrated mills. Before the sugar sector is sucked into a vortex of doom, the government appears to tackle this problem from the back-end—which is, expanding the demand-pull through sugar exports and thus anticipating better value realisation in the domestic market.

According to reports, the government is contemplating export subsidy of R 5,000 ($78) per tonne for export of 4 mt of refined/raw sugar during SY 2015-16. In value terms, it means a subsidy of R2,000 crore ($312 million) on projected exports of R8,960 crore ($1.4 billion) with current fob price at $350/tonne of refined sugar.
Mills are currently realising R19,000/tonne ($297) for refined sugar export against the production cost of R31,000/tonne by passing on the massive losses to farmers by delaying payments. Net realisation for mills, with the proposed export subsidy, will go up by R3,000/tonne—almost equivalent to the prevailing domestic price of R22,000. This may enable higher domestic accruals on a pan-India basis. Mills in Uttar Pradesh are at a disadvantage in physical exports due to higher logistics costs than those in Maharashtra, Karnataka, Andhra Pradesh and Tamil Nadu.

In the last two years, the raw sugar subsidy was R3,371 (2013-14) and R4,000 (2014-15) per tonne, respectively; this was partially successful with exports touching 1 mt. Maharashtra has belatedly given a R1,000/tonne additional subsidy for mills in the state. As in the past, the proposed subvention of R5,000/tonne will be defrayed from the sugar development fund by increasing excise duty. The full benefit of this support could not be availed by industry as the notifications came much after the start of the sugar year.

The moot point is how effective will this subsidy be in evacuating stocks, though it would be in violation of WTO norms. Even if we forget WTO opposition for now, there is a danger of further depression in the prices. Crude values will stay cheaper, especially with Iran’s entry in the world pool. The bearish sentiments may prevail if India announces exports of 4 mt at subsidised prices. Further depreciation in the Brazilian real and some weakness in the Thai baht cannot be ruled out. The silver lining is the virtual absence of end-stocks with Brazil—the world’s largest exporter, at 25-26 mt—and the lower carry-in with Thailand.

Should the price realisation (now $350 fob) go up to $400/tonne fob in the coming months? Will the government tinker with subsidy of R5,000/tonne? Logically, it should not, because millers will still be exporting at a loss. The government, having decided to give subsidy, should not act as a trader for fixing and re-fixing the quantum of subvention. The sense is to ship out the maximum tonnage (up to 4 mt) than to calibrate subsidy with market volatility. If necessary, pre-audit clearance should be obtained so that ad hoc interventions can be prevented—either due to internal or external pressures. Conversely, if the fob cost drops to $300/tonne, the industry will have to remain content at a fixed support of R5,000/tonne.

The conditions attached to such grants are the registration procedures insisted upon by the Directorate General of Foreign Trade (DGFT), which retard the speed of trading. The argument advanced is that the government needs an official feedback of the total tonnage exported, which is baseless. Most of the major ports today are on the EDI (Electronic Data Interchange) system and all details of quantity shipped out, prices and destinations can be instantly accessed. For greater effectiveness, the DGFT involvement should be dispensed with.

If the government is serious in implementing this policy, its notification (and not pronouncement) should come out before the model code of conduct for Bihar elections is enforced. If Maharashtra continues with its additional subsidy , it will give a fillip to exports. But, the WTO is going to cry foul for sure andthe government must have the right response.

This subvention is just patchwork. If the government continues to duck the primary issue of freeing up the cane prices, banks will have higher NPAs from unpaid sugar loans. They will then have to be recapitalised, leading to erosion of the purchasing power of the currency.

The author is a grains-trade expert

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