The real issue, of course, is the high cost of cane mandated by the Central government—states like Uttar Pradesh add to the Centre’s Fair and Remunerative Price (FRP) to arrive at their State Advised Price (SAP)—that has no relationship with the market price of sugar.
Chances are, the next time the government talks about what it has done for farmers, it will talk of how it will raise the interest subvention to another Rs 6,000 crore of loans for 142 more sugarcane mills; right now, the 6% interest subvention has already been given for Rs 6,139 crore of loans to 114 sugar mills to create additional capacity to produce ethanol for sale to oil PSUs to mix in the petrol. Apart from the fact that such ‘packages’ don’t really resolve the industry’s problem, there is also a controversy over their size. In the past, as well as this time around, the size of the ‘package’ includes the loans which get the interest subvention while, since the loans are to be repaid by the industry, only the interest subsidy should be calculated—in the current case, that’s Rs 368 crore per year for five years and another Rs 360 crore if the additional Rs 6,000-crore scheme is approved.
The real issue, of course, is the high cost of cane mandated by the Central government—states like Uttar Pradesh add to the Centre’s Fair and Remunerative Price (FRP) to arrive at their State Advised Price (SAP)—that has no relationship with the market price of sugar. In the last two years (see graphic), ex-mill prices of sugar fell by over a sixth, but the FRP rose by 13%. Between FY10 and FY19, the FRP rose a little over two times while the ex-mill price rose by a mere 2%. Not only is the price of the raw material fixed, under the law, mills have to buy all the cane grown in the area allocated to them; an industry where the raw material price is fixed at artificially high levels while the price of the end-product—sugar—is low is asking for trouble.
Also, while the mills pay farmers over six months from October to March, they sell their produce—sugar and its by-products—over 14-16 months. So, when mills delay payments, this is only to be expected; yet, the government vilifies the mills, files warrants against the owners and even arrests the managers almost routinely. And while the government likes farmers to believe that it is its threats to various mill owners and a plethora of ‘packages’ that makes mills pay their dues, this is hardly the case.
The reality is that the arrears keep mounting till the came comes in by the end of March; after that, the dues no longer mount, and since mills keep getting paid for their sugar and other products, they start clearing the dues. The cycle of mill arrears (see graphic) makes this clear. In 2012-13, for instance, arrears rose from Rs 7,840 crore on January 1 to Rs 12,702 crore on March 31, and then fell to Rs 3,201 crore in September. As the new crop started coming in, these rose to Rs 6,750 crore by January 1 the next year and further to Rs 18,648 crore by March 31…the same cycle repeats itself every year.
At an aggregate level, if you don’t factor in the time factor—ideally, this must be done, but the idea is to keep the example simple—mills buy around Rs 90,000 crore of sugarcane every year, so their production costs are around Rs 120,000 crore. What they earn from the 25-26 million tonnes of sugar they sell—another 5-6 million tonnes of production can theoretically be exported, but Indian cane costs 50-60% more than that in exporting nations—is around Rs 90,000 crore, assuming an ex-mill sugar price of Rs 30 per kg and by-product sales that are around 15% of the sugar sales. What this huge shortfall does, and more so if you take the sequencing of the inflows and outflows, is to destroy the balance sheets of the mills, making it difficult for them to even get loans to carry on business. Indeed, in some cases in UP, where the mills expanded dramatically in response to tax breaks announced by the state government—and later withdrawn by the next one—the problem is even more severe.
In this context, the Central government has done well to increase the amount of ethanol that oil PSUs have to buy from sugar mills to ‘dope’ the petrol they sell. While the permissible level was 10% till some time back, this has now been increased to 20%. Right now, the sugar industry sells around 260 crore litres of ethanol and the ‘package’ agreed to can increase this by around 200 crore litres more—assuming the additional Rs 6,000 crore package is approved—in another 2-3 years; setting up extra capacity to produce ethanol gives a return of just 7% or so, so the 6% interest subvention was given to make it viable for industry to invest in ethanol capacity.
Assume the mills can sell an extra 100 crore litres of ethanol next year; based on the conversion ratios, this equals to around 1.6 million tonnes of sugar. Based on the price of Rs 52 per litre of ethanol produced from ‘B’ category molasses, the mills will earn an extra Rs 4 or so per kg of sugar, or Rs 640 crore; as more molasses are converted into ethanol over time, especially with the 20% doping rule, the mills will earn more.
All of this is good news, but as is obvious, even an aggressive pace of selling ethanol is not going to cover the increasing gap between costs and earnings. If this is not fixed, the rising-dues-rising-arrests-farmer-protests dance will continue—and get bigger over time since exceptionally lucrative cane prices will ensure more production—till the sugar mills are not able to service bank loans, and this is getting tougher now thanks to the stricter RBI norms.