Move to help mills cut losses, lower cost of production n Capacity additions and greater investments in sector likely
The sugar industry is expected to gain at least R4,200 crore a year once the government implements its decision to partly deregulate the sector. Sugar industry executives say the move will help mills cut losses and reduce the cost of production, apart from enabling them to pass on the gains to farmers through timely payment for cane purchases as well as reasonable prices for the raw material.
The Cabinet Committee on Economic Affairs on Thursday approved a proposal to free mills from supplying subsidised sugar for state-run welfare programmes — known as levy sugar — and abolish the release order mechanism through which the government dictates how much sugar mills can sell in a particular period, in line with the recommendations of a panel set up by Prime Minister Manmohan Singh last year. Although complete deregulation of the sector is still awaited — decisions on whether to link sugarcane rates to its by-products or de-reserve the cane area meant for each mill, among others, are yet to be made — Thursday's decision started the process of reforms in the R80,000-crore sugar sector that hasn't seen any foreign investment for years now.
Analysts said rough calculations indicate Shree Renuka Sugars may save as much as R100 crore from the scrapping of the levy system while Bajaj Hindusthan may rake in R130-140 crore more, Balrampur Chini Mills R80-85 crore and Mawana Sugars around R40 crore. At present, mills are mandated to sell 10% of their output to the government for the public distribution system at cheaper rates that cover just around 70% of their cost of production.
Balrampur Chini Mills managing director Vivek Saraogi didn't wish to comment on the specific impact of the move on his company. A Bajaj Hindusthan spokesperson said they are waiting for the notification of the decision to be able to comment.
Mills and co-operatives are expected to gain as much as R3,000 crore a year from the abolition of the levy system while the scrapping of the release order mechanism will yield another R1,200 crore, mainly by lowering of inventory costs, Indian Sugar Mills Association director general Abinash Verma said. For the government, however, the subsidy burden will rise from R2,600 crore a year to roughly about R5,300 crore.
Despite a fall in the Sensex on Friday, shares of sugar companies rose for a second straight day. DCM Shriram Industries gained 8.87%, Balrampur Chini Mills 3.24%, Shree Renuka Sugars 2.40%, Dwarikesh Sugar Industries 2.64%, EID Parry 1.83% and Bajaj Hindusthan 0.70%. Wholesale prices of M-30 and S-30 varieties gained R50 each in Delhi on Friday to settle in the range of R3,300-3,400 and R3,275-3,375 per quintal.
Verma said since the decision will be made effective from the beginning of the current sugar season through September, mills will be able to improve their margins and erase losses from 2012-13 itself. At present, the government offers roughly R19 per kg to mills for levy sugar compared with the ex-factory price of around R30. The Centre further subsidises sugar to supply to the poor through ration shops at R13.50 per kg, and it requires around 2.7 million tonne of sugar a year for its welfare programmes.
Asked if the latest decision will help attract investments, Verma said that although some foreign investors may still look for the rationalisation of cane pricing, others will be tempted to go for capacity additions and investments looking at the long-term prospects of the sector.
In October last year, the expert panel chaired by Prime Minister's Economic Advisory Council chairman C Rangarajan had submitted the report and also suggested the linking of sugarcane price to the rates of its byproducts, and recommended that 70% of ex-mill prices of sugar and each of its three major by-products — bagasse, molasses and press mud — be paid to farmers for cane supplies. The benchmark price fixed by the Centre, also called the fair and remunerative price (FRP), be the minimum price for cane purchases, it added.