Column: Sugar buffer will be bitter

By: | Updated: April 29, 2015 5:26 AM

Centre must address the cane politics of states, or the demand-supply mismatch will remain

India’s sugar production is set to touch 27 million tonnes (mt), with a carry-in stock of 9 mt. This indicates a total availability of 36 mt versus a local demand of 23 mt. Exports in the first six months of the sugar season are sluggish (not exceeding 0.2 mt) despite a subsidy of R4,000/tonne and an additional proposed subsidy of R1,000 by the Maharashtra government. The market is bearish though some containerised business is reported. Supply and demand are grossly mismatched. The sugar mills’ arrears to farmers are about R20,000 crore on all-India basis and the issue is how these can be squared up by official intervention.

In mid-April, after meeting all stake holders, the Union food ministry agreed to refer a proposal for building a buffer of 3 mt of sugar to the PMO for consideration so that market values escalate and assist mills in recouping losses. By scuttling the chance to adopt a curative option—of reforming the steep State Advisory Price (SAP) mechanism for purchase of sugarcane by mills and linking the pricing of cane to reasonable, market-determined methods—this idea of stocking 3 mt of sugar is akin to converting a tumour into a cancer. The entire concept is unworkable ab initio.

The finances of all 500 sugar mills are stressed and stretched. By acquiring pro-rata stocks of the mills, the controversy centred around the banks (lenders) right of first charge will flare up. Thus, there is no guarantee that the farmers’ arrears will be paid. The matter could, once again, get tied in litigation.


Considering the acquisition cost of R30,000 per tonne for a total of 3 mt of sugar, it entails an upfront investment of R9,000-10,000 crore and a carrying cost of R1,200-1,300 crore per annum.  Where will these funds be sourced from? If the sugar development fund (SDF) is the targeted coffer, then it is public money that is not meant for official hoarding. Besides, SDF may not have the money anyway. Will the purchase price be calculated state-wise or a “one price fits all” formula be applied? Can the food ministry afford to procure above the marked-to-market price or at a fixed price (say, about R30,000 per tonne), which could be minimum cost of production?

Where will this sugar be stored? Since the movement of commodity involves additional expenditure, the stock shall perhaps remain in the warehouses of the mills. For facilitating paperwork, these stocks may notionally be hypothecated to the government with oversight of inspectors or excise agencies. But the material possession will nonetheless remain with the millers. Thus, a single-point accountability will be lacking. The state of affairs will be similar to that in the case of  processed/custom-milled rice of FCI stocked with the rice mills on behalf of the government. Will the food ministry become an extension counter for managing surpluses of the industry and the mess created by the state governments?

Large scale leakage of sugar in the market cannot be ruled out which implies double payment to the processors. Market prices will slide down even faster. Next year, it could perhaps be 4 mt that the government must stock, again in the same arbitrary manner because consumption is artificially estimated and production of sugarcane incentivised.

It is a far cry from the decontrolled regime for sugar that was made effective in April 2013—the industry must remember that it had unshackled itself from government control after many years of lobbying and campaigning. The Modi-led government has been championing the ideal of “less government, more governance”. The sugar-buffer idea militates against that.

The alternative is to export 3 mt of raw and refined sugar by aligning prices with world market. But the dilemma is that the subsidy on raw sugar has not been fully effective due to fluctuating prices. Low crude prices, and therefore, low ethanol values, and depreciation of the Brazilian real are inhibiting factors for aggressive export from India. Even if export of 0.5 mt is achieved, the problem of surplus remains. In the absence of bulk exports, conversion of molasses to ethanol will also result in lower sugar production, provided this can be profitably absorbed by OMCs (oil-marketing companies). But these two options—exports and ethanol—cannot give neither immediate nor long-term relief to the industry.

The agenda, therefore, should focus on getting it right on SAP. The Centre is unable to do it because the decision to fix sugarcane price rests with states. The recommendations of the Rangarajan committee report have been conveniently ignored and the 70:30 formula is also not being followed (Karnataka, though, has tried it out). It is against all rationale that sugarcane pricing be kept hostage to political interests when the price of the end-product of cane processing is driven by dynamics of domestic and international market. In this milieu of utter confusion, judicial activism can help. The industry should hire a competent consultancy and present thread-bare these contradictions in front of Supreme Court? Why be forced to survive on the crutches of the government every year?

Let the apex court advice on whether an SAP should be fixed or the Centre’s fair and remunerative price (FRP) is to be adhered to instead of choosing short-term quick-fix solutions that tie all stakeholders in knots.

The author is a grains trade analyst

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