The government on Thursday decided to allow interest-free loans worth Rs 6,600 crore to the cash-strapped sugar industry, mainly to clear cane arrears, food minister KV Thomas said on Thursday. However, the relief package cleared by the Cabinet Committee On Economic Affairs (CCEA) is lower than the amount of R7,200 crore recommended by an informal group of ministers headed by agriculture minister Sharad Pawar earlier this month.

Mills will have to repay the loans in five years, with a moratorium on repayment in the first two years. The total interest subsidy of R2,750 crore will be borne by the Sugar Development Fund (SDF). Earlier, the informal panel had recommended that banks lend R7,200 crore, equivalent of the excise duty paid by mills over the last three years, and the 12% interest burden will be shared by the Centre and SDF.

Assuming Uttar Pradesh sugar mills — hit the hardest due to what they call the state’s arbitrary fixing of cane rate when sugar prices are subdued — will get roughly 30% of the bailout package, the interest-free loans will benefit them by less than R2 on purchases of a quintal of cane. Coupled with an incentive of R11.03 per quintal in the form of a waiver of purchase tax, entry tax and society commission, as announced by the Uttar Pradesh government recently, there would still be a huge gap between the viable cane rate of R225 per quintal, which the industry says is in sync with the Rangarajan panel formula for cane pricing, and the state advised price (SAP) of R280 per quintal for 2013-14.

“The loans, which will be used to pay cane price of farmers, will ensure timely payment to farmers to that extent at least, including the clearance of past cane arrears of R3,000 crore. It’s a wonderful gesture by the central government for the farmers and the industry at the same time. It will help the industry reduce around R500 crore in interest burden annually over the next five years. The industry eagerly waits for the government’s help to reduce some of the surplus sugar stock as well as to take immediate steps to rationalise the cane-pricing policy. Those can further help the sugar sector come out of the current financial crisis,” said Abinash Verma, director-general, Indian Sugar Mills Association.

Mills across the country have to pay as much as R3,200 crore in cane arrears, with Uttar Pradesh alone accounting for roughly 75% of the dues.