Interview with Director General, Isma

Prices of domestic sugar improved recently on fears of lower output due to inadequate rains. Exports are set to slow down, as Brazilian output prospects are seen improving. Abinash Verma, director general of the Indian Sugar Mills Association (Isma), shares his views on the domestic outlook with Ajay Modi in an interview. Edited excerpts:

We have seen a sudden rally in domestic prices. How has this impacted export prospects?
In the current year we had got permission to ship four million tonnes (mt) of sugar. Up to July-end, about three mt was despatched. Another 600,000 tonnes are yet to be despatched. With improved domestic prices and a fall in international prices due to improved Brazilian production in July, exports from India are no longer viable. Therefore, fresh buying is not seen. However, sugar will continue to physically move out against the contracts already finalised.

Does the current domestic rally look sustainable?

The rally has come due to an uncertainty triggered by the effect of low rainfall on sugarcane output (next year) in Maharashtra and Karnataka. However, the effects of the monsoon on domestic production would be clear by September. Considering that we have a surplus from the previous two years and have another certain surplus in the next sugar season, domestic prices should stabilise at the current levels.

The industry’s demand to decontrol sugar is yet to see light of the day. Isma must have made representations to the Rangarajan committee. What is the industry’s main demand?
The sugar industry takes an annual hit of Rs 3,000 crore in supplying sugar for the Public Distribution System. This burden should be borne by the government. Under the second control, the release mechanism, mills can sell sugar only as decided by the government. This restricts the industry from paying a better price to farmers, delays payments, causing cane price arrears and the unfortunate cyclical fluctuations in cane and sugar production. With unreasonably high cane prices fixed by the states and the Union government often suppressing sugar prices, mills continuously incur losses. Internationally, all producing countries have a direct link between the cane price and sugar price. Therefore, we have requested abolition of the release mechanism, removal of levy obligation, freedom to decide on sugar exports and imports, and a formula linking the cane price with sugar and by-product prices.

How has the levy sugar order passed by the Patna High Court earlier this year impacted the industry?
The government carries forward the unlifted levy sugar obligation of mills by two years, which means deterioration in quality, additional inventory cost on mills and blockage of cash flows. In case of permission to sell their old stocks, mills have to supply sugar from fresh production. In both the cases, previous years' prices are paid, adding to the losses of the mills. At present, 2.5 mt of sugar is reserved as levy sugar, blocking Rs 9,000 crore of working capital, reducing marketable sugar and putting pressure on market price. The court has ordered that levy sugar liabilities of mills would start with a clean slate every season from October, by which time mills would be paid at the new season's price. This will also reduce the burden of carrying levy sugar physically for over two years, give mills better liquidity, reduce working capital and ensure cane payments on time.

Ethanol blending has still not been implemented the way the government had planned. Is price the only factor or is availability also an issue?
In order to implement five per cent ethanol blending with petrol, the oil marketing companies require 100 crore litres of ethanol. Against 250 crore litres of alcohol/ethanol production every year only from molasses, 100 crore litres is consumed by the potable alcohol sector, leaving a balance of 150 crore litres for the fuel ethanol programme and the chemical industry's needs. Due to inadequate domestic demand, over 1.2-1.3 million tonnes of molasses were exported in the past two years. This could have produced about 30 crore litres of ethanol, sufficient to substitute two per cent of annual domestic petrol consumption in the country.

So, availability is not an issue at all. Uncertainty over returns from ethanol is restraining mills from committing full quantities. Ethanol is being sold at the provisional price of Rs 27 per litre while other products made out of molasses fetch Rs 34 per litre. Even the export price for ethanol is Rs 35 per litre. Recommendations of the Saumitra Chaudhuri Committee linking ethanol prices to petrol, should be accepted immediately, to make it attractive to supply more quantities.