Wednesday, April 29, 2015




Tejinder Narang
INDIA’S SUGAR production is to touch 27 million tons with carry in stock of 9 million tons that indicates total availability of 36 million tons vs local demand of 23 million tons. Exports in the first six months of the sugar season are sluggish (not exceeding 0.2 million tons) despite subsidy of Rs 4000/mt and additional proposed subsidy of Rs 1000 by Maharashtra Government, market is bearish through some containerised business is reported. Supply and demand are grossly mismatched.  Mills’ arrears of sugarcane to farmers are about Rs 20000 crores on all India basis and the issue is how these can be squared up by official intervention.  
In mid- April 2015 after meeting all stake holders, Union Food Ministry agreed to refer a proposal for building a buffer of 3 million tons of sugar to PMO for consideration so that market values escalate that might assist the mills in recouping losses.  By shielding and denying the curative option of reforming the steep hike in SAP (State Advisory Price) of sugarcane and instead linking it to reasonable market determined price, the stocking of 3 million tons is akin to converting the infection into cancerous virus. The entire concept is unworkable ab-initio.
Finances of all 500 sugar mills are stressed and stretched. By acquiring pro-rata stocks of the mills the controversy of first charge by the banks on the movable assets will flare up.  Thus there is no surety that farmers arrears will be paid. The matter could be litigated as usual.
 Considering acquisition cost of Rs 30000 per ton for total of 3 million tons, it entails upfront investment of Rs 9000-10000 crores and carrying cost of Rs 1200-1300 crores per annum.  From where funding will be sourced? If SDF (sugar Development Fund) is the coffer, then it is the public money that is “not” meant for official hoarding. And SDF may not have the desired money anyway. Will the purchase price be calculated state wise or “one price fits all” formula applied? Can the Food Ministry afford to procure above the marked to market price or at a fixed price (of say at about Rs30000 per ton) which could be minimum cost of production?  Transparency will be missing if stocks are purchased above the market value.
 Where will this sugar be stored? Since double movement of commodity involves additional expenditure, the sweetener shall remain in the warehouses of the mills. For facilitating paperwork, these stocks may notionally be hypothecated to the Government with oversight of official inspectors or inspecting/excise agencies. But the possession remains with the millers. Single point accountability will be lacking. The state of affairs will be similar to the processed/custom milled rice of FCI that remains stacked with the rice mills on behalf of the Government.  Will the Food Ministry become an extension counter for managing surplus stores of the industry and the mess created by the State Governments?
Large scale leakages of sugar in the market cannot be ruled out which implies double payment to the processors. Market prices will slide down with greater pace. Next year it will be four million tons that Government may have to stock in, again in an arbitrary manner because consumption is artificially articulated and production of sugarcane is incentivized.
 It is fry cry from the decontrolled regime that was made effective in April 2013 and from which the industry unshackled itself after many years of lobbying and campaigning. When BJP has been championing less of Government and more of governance, the idea of buffer militates against that principle.
The alternative is to export 3 million tons of raw and white sugar by aligning prices with world market. But the dilemma is that  subsidy on raw sugar has not been fully effective due to depressing and fluctuation prices (see chart). Low Crude prices and therefore low ethanol values; and depreciation in Brazilian Real are the inhibiting factors in aggressive export from India. Even if export of half a million tons are attained, 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 immediate and long term relief to the industry.
The agenda should be setting the SAP right. Central Government is unable to do it because the decision to fix sugarcane price rests with States. Rangarajan report rests in peace and formula of 70: 30 ratios is also not being followed despite initial introduction in Karnataka. How can price of sugar cane be political when end product is driven by dynamics of domestic and international market?  In this milieu of utter confusion, judicial activism can help. Why not the industry hires a competent consultancy to bring thread bare the contradictions and file a PIL in Supreme Court? Why attempt to survive on the crutches of the Government every year?
Let the Supreme Court advice the principle of fixation of SAP or FRP, instead of conceiving short term quick fix solutions, which tie all stakeholders in intricate knots. It may take a little time but it could be a lasting resolution. 


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