INDIAN SUGAR EXPORT-BITTER OUTLOOK WITHOUT HIGHER SUBSIDIES -FINANCIAL EXPRESS 8TH AUGUST 2015

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HIGHER SUGAR EXPORT SUBSIDY IS A NECESSITY IN 2015-16, NOT AN OPTION.

TEJINDER NARANG

India is expected to produce 28 mill tons of sugar in the sugar year(SY 2015-16) commencing October 2015 with carry in of about 10 mill tons. Against total consumption of 24 mill tons this amounts to excess of about 14 mill tons lying in warehouses with huge sums blocked. Idea of building a buffer of 3 million tons prompted by industry through Government/FCI is found impractical and thus abandoned. Under such circumstances millers’ liabilities to banks will become terribly toxic.  Farmers’ arrears of –about Rs.19000 crore-- will also escalate. 

 Government is not remedying the core issue of arbitrary fixation of sugar cane prices (FRP/SAP) and absence of its linkages to market realization 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 Alcohol/ethanol/co-generation etc. does not compensate the gap in present day earnings of integrated mills.)  Before the sugar sector is sucked into vortex of doom, the Government appears to tackle this problem from the back end—that is, expanding the demand pull through sugar exports and thus anticipating better value realization in domestic market.

As per media reports GOI is contemplating export subsidy of Rs 5000 ($78)/metric ton (mt) for export of four million tons of refined/raw sugar during sugar year (SY) 2015-16 commencing October onwards. In value terms it means subsidy of Rs 2000 crores ($312 million) on projected exports of Rs 8960 crores ($1.4 billion) based upon current fob price of $350/mt of refined sugar.

Mills are currently realizing Rs 19000/mt ($297) for refined sugar export against production cost of Rs 31000/mt by debiting massive losses to company’s accounts and distributing distress to farmers. Net realization to mills with proposed export subsidy will go up by Rs 3000/mt—almost equivalent to prevailing domestic price of Rs 22000/mt. This may enable higher domestic accruals on pan India basis. Mills in UP are at a disadvantage in physical exports due to higher logistics costs than those in Maharashtra, Karnataka, Andhra and Tamilnadu. 

In the preceding two years the raw sugar subsidy authorised by the Government was Rs 3371 (2013-14) and Rs 4000(2014-15) per ton and this has been partially successful with export touching one mill tons of raw. Maharashtra government too has belatedly given Rs1000/mt as additional subsidy for mills in their states.  As in the past, the proposed subvention of Rs 5000/mt will be defrayed out of sugar development fund by increasing the excise duty. Full benefit of this support could not be availed by the Industry as notifications are delayed much beyond the start of sugar year which commences from October onwards.

To what extent this subsidy will be effective in evacuating stocks is the moot point, though such dispensations are violation of WTO.  Even if we forget WTO opposition for the time being, there is danger of further depression in the prices. Crude values will stay cheaper, especially with Iran’s entry in the world pool. The sentiment of bearishness may prevail with Indian announcement of shipping out at 4 mill tons at subsidized quotes. Further depreciation in Brazilian “Real” and some weakness in Thai “Bhat” cannot be ruled out. The silver lining for the bullishness is the virtual absence of end stocks with Brazil –the world’s largest exporter of 25-26 mill tons of sugar and lower carry in with Thailand.

               

Should the price realization (now $350 fob) goes up to $400/mt fob in coming months, will the government tinker with subsidy of Rs 5000/mt? Logically it should not, because millers will still be exporting at a loss. 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 million tons than to calibrate subsidy with market volatility. If necessary pre-audit clearance be obtained so that ad-hoc interventions could be prevented—either due to internal or external pressures. Conversely if the fob cost drops to $300/mt, the industry will have to remain content at fixed support of Rs 5000/mt.

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

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 the state of Maharashtra continues with its subvention of Rs 1000/mt, it will give a fillip to export. But surely WTO is going to cry wolf and hope the Government will have the guts to respond rightly to WTO that under disruptive global economic situation “terms and conditions” do not apply.

In the final analysis, this subvention is a patch work. If the Government continues to duck the primary issue of freeing the cane prices, banks will be gifted with higher NPAs of sugar mills. Banks will have to be recapitalised with large sums of printed /electronic money leading to erosion of purchasing power of the rupee—a case that fits best for the banana republics.  

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