Indian sugar business has four prime stakeholders—farmers, sugar mills, consumers and the government. Despite deregulation of sugar industry in 2013, the government commands the most dominant force of intervention amongst other three stakeholders. The only policy of sugar is to have “policy of change” triggered by market volatility and pressures exerted by other constituents. The fear of hurting sugarcane farmers remains politically alive.
On pan-India basis we have an “installed crushing capacity” of 33 million tonnes (mt) from 716 mills in private/public and co-operative sector as on January 31, 2016, while actual output this year is 20.3 mt. There are only six surplus sugar states in India—namely Haryana, UP, Uttarakhand, Maharashtra, Tamil Nadu, and Karnataka—out of total 27 states. Massive movement of the commodity has to take place through length and breadth of the country.
Sugar Mills nurse a grievance that farmers get preferential treatment from government for cane pricing. Mills claim that they are also exposed to market risk on account of price volatility. The answer is—all businesses have inherent market risks—of profit and loss. However, oddity of this business is whether sugar is sold at Rs 40 per kg or Rs 30 per kg—sugarcane price must be increased, annually.
Internationally, India is the most “expensive” producer of cane at Rs 3 per kg. Thailand and Brazil produce it at Rs 2 per kg. At the same time, the government has given umbrella protection to mills with 40% import duty. Refineries are also permitted duty-free raw sugar import with export commitment. Surprisingly, numbers of sugar factories are growing and sugarcane production is also well sustained except when weather related issues arise. Thus, the current business model appears to be viable.
FRP/SAP
Mills complain that annual increase of FRP (Fair Remunerative Price) of sugarcane by the government is more than the MSP (minimum support price) of wheat/paddy. MSP of wheat/paddy is hiked by 47% in eight years; sugarcane price is raised by 97% in nine years. Sugar farmers are, thus, beneficiaries of better return of 50-60% than grain growers.
Comparison of MSP of grain crops with FRP is incoherent because wheat/paddy are 5-6 months crops—sown each year both in rabi and kharif seasons, while sugarcane is harvested after 12-18 months and is sown once in three years. FRP is fixed basis recovery of 9.5% sucrose, but with special varieties of cane, sucrose recovery has now improved to 11.5% or more. Additionally revenue accrued from disposal of molasses, bagasse, power generation, etc, also provides cost compensation to mills against FRP/SAP. However, fixation of SAP (State Advisory Price) arbitrarily by states—UP, Uttrakhand, Panjab, Haryana and Tamil Nadu—higher than FRP is devoid of any rationale except vote bank politics.
Sugar industry rightly maintains that FRP is not linked to local market prices. A study of the FRP versus average mills price reveals that from 2009-10 to 2012-13, cost of production was below the market price—thus profitable. During 2013-14 to 2014-15, mills suffered losses due to poor realisation from the market. But after 2015-16, mills have operated profitably due to scarcity of cane in Maharashtra/Karnataka that depressed Indian sugar output to 20.3 mt against demand of 24 mt. Payment of 75% of sugar revenues to farmers and balance 25% to mills is deemed an acceptable mechanism (Rangarajan committee formula) which requires full transparency in accounting systems and procedures. Some states (Maharashtra and Karnataka) have agreed for 75/25 formula—but it needs a central legislation.
Higher cost of sugarcane may in some cases compel mills to understate recoveries and for making short or delayed payments to farmers without interest whatsoever. This is evident from outstanding payments of more than Rs 12,000 crores to farmers, even though industry has seen substantial profits in the last two years. Farmers remain at the mercy of millers and cannot agitate because farmers have to sell cane grown in the reserved area to select mills.
Imports and exports
Another positive feature is that the government is responsive to pressures of the sugar industry on imports and exports. Import duty is adjusted or waived to fill the supply gap. Duty is hiked if there is surplus to prevent cheaper imports. When the supply exceeds demand—there is excess availability—the government is not averse to subsidising exports to assist millers and farmers irrespective of WTO obligations.
In sugar season 2008-09 and 2009-10, 6.5 mt of duty free imports were authorised. In April 2017, duty free import of 0.5 mt raw sugar is permitted. That helped refineries to mitigate shortages. Now, a proposal to increase duty from 40% to 60%—the bound rate—is under consideration due to sharp descent in sugar prices overseas to 13c/lb ($300/mt) from 22c/lb ($505/mt), thus threatening cheaper imports with 40% duty, which may pare local prices. This will assist stability in local prices. This decision may be anti-consumer, but is certainly pro-farmer and pro-industry. The 4 mt of opening balance on October 1, 2017 is a well below the three-month norm of annual consumption of 24 mt.
When sugar production plus the opening balance escalated in sugar seasons of 2012-13, 2013-14, 2014-15 and 2015-16, the government “incentivised” sugar export by offering subsidy of Rs 3,300 to Rs 4,000 per mt, pushing exports of 5mt in these four years. Another example of industry getting ample support from the government.
Indian Government has been very dynamic in pursuing policies consistent with the requirements of the sugar market to avoid shocks to the millers and farmers. Industry is also expected to respond in equal measure and with promptness to clear arrears of farmers.