ARE SUGAR MILLS GOVT OF INDIA UNDERTAKINGS BUT MANAGED PRIVATELY?

This is an article from Business Line ePaper appeared on 2nd July, 2014
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ARE SUGAR MILLS GOVT OF INDIA UNDERTAKINGS, MANAGED PRIVATELY?

Tejinder Narang

PROLOGUE-- In April 2013, Government of India decontrolled sugar industry , except that sugarcane advisory price (SAP) will be fixed by state Governments to be paid by mills to farmers, while Fair Remunerative Price (FRP) remained an “indication” by Central Govt. Political “fixing” of SAP has become a monster for the industry because its defies market realities. The solution lies in taming SAP instead of uncalled for frequent and vague interventions by the Centre.

The current messy situation is the result of politically convenient SAP of Rs 280/qtl notified by Uttar Pradesh (UP) Govt—ignoring rationale of FRP of Rs 210/qtl, which is logically arrived at. Not to speak of SAP, UP mills have not paid full FRP to farmers

For last 25 years or even more, the trio of farmers, sugar mills and Government have played blame game amongst each other, devised ad-hoc solutions and the nation continues to pay a price for this imbroglio.

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On 23^rd June 2014, Indian Food Minister, after a high level meeting announced hike of import duty on white sugar from 15% to 40%, interest subvention on additional loan of Rs 4400 crores over and above already sanctioned amount of Rs 6600 crores with softer terms of repayment of 5 years (from the earlier decision of 3 years) for the sugar industry and readiness to recommend ethanol blending of 10% from present 5% to oil marketing companies.  Raw sugar export subsidy of Rs 3300/mt will continue till September 2014 (instead of September 2015).

Government as Santa Clause

All that industry wished was agreed by policymakers acting as Santa Clause, subject to mills furnishing a written “assurance”—an “assurance” only-- that they shall clear pending cane arrears of farmers which are around Rs 11000 crores while UP alone is Rs 5000 crores till May 2014

Inventory and arrears of 12 UP sugar mills 

Once in default always in default

Sugar inventory of major UP mills as on end March 2014 as reported in the media (see graphic above), is about Rs 11000 crores. Defaulting on cane arrears by the mills—even non- payment of full FRP-- to farmers for their cane already crushed and converted to saleable sugar and for (a) building pressure on political establishment (b) continuation of irrational and inappropriate WTO non-compatible subsidy disguised as incentive out of sugar development fund which lacks credibility and calibration to competition abroad or higher domestic values, (c) blocking imports by higher duty (d) hoarding sugar and (e) making the Government accomplice for pushing up market prices of sweetener, cannot be defended. When an entity prima facie is in a default mode by not honouring FRP, how can another dose of relief be considered??

Ascending inflation

News of steep upward revision of duty pushed domestic prices from Rs 32/kg to Rs 34/kg within three days. With 15% duty, landed price of Brazilian 150 Icumsa sugar ($510 cif) will be Rs 36-37/kg—saleable at Rs 38-39/kg. At 40% duty, Brazilian’s landed cost would be Rs43-44/kg. By October 2014 there is likely to be carry in of 7.5 million tons. Sending panic signal of increasing import duty is unwarranted? Is the industry/government view that they wish to escalate domestic price beyond intolerable level benchmarked to 15% to Rs 36-37/kg? This is more of Government and less governance.

NCDEX SPOT SUGAR PRICE IN DELHI IN JUNE 

The moot point is -- Why Government should be supportive of needless inflationary pressures?  Domestic inefficiencies beyond 15% are unthinkable. The argument that higher sugar price will enable squaring off arrears to farmers carries no surety because the market can plunge back to Rs 31 or less. Thus deficits to growers may still remain unpaid while duty stands at 40%. Restoration of duty to 15% will be the right approach for keeping inflation in check.

Written assurance not sufficient

There is no controversy over FRP of sugarcane of Rs210/qtl while SAP’s fixation is often ad-hoc, albeit may be debateable. Before any engagement with millers at least FRP to farmers should be ensured by the Government. It will be naïve to consider any “written assurance of payment of outstanding cane arrears” as sufficient and workable solution. Will Banks of mills be agreeable as co-signatory to this assurance? Not likely. If there is lack of compliance on assurance, what is the remedy and recourse?  None at all. It will be deemed a mockery of the written assurance by Government auditors.

Sugar corporates have assumed themselves to be Govt. of India undertakings or PSUs, for financial support by exploiting the name of “farmers”. Government has willy-nilly accorded that status with managements at private hands. This is an untenable state of affairs of private profits and public losses. A remedy for perpetual relief could be-- let union Government promulgate an ordinance that FRP will be the base price or National Sugarcane Price and divest states of SAP. Modi Government with absolute majority can do it. It will be the right governance, more governance and less of Government.