Having fixed a record sugar sales quota of 24.5 lakh tonnes for March, higher than the expected demand of 20-21 lakh tonnes, the government has now warned mills of strict action if they offload stocks below the minimum sale price (MSP) set by it.
In a letter to cane commissioners of producing states on March 20, reviewed by FE, the food ministry said some mills were found to be selling sugar at a discount. It stressed that the MSP of Rs 31 refers to the ex-factory price of sugar and any attempt to sell below this price by either giving an upfront discount or including the goods and services tax (5%) or transportation charges in it will invite penal action. The ministry believes a strict compliance of its directive will improve mills’ realisation and help them clear cane dues. Cane arrears exceeded a staggering Rs 20,159 crore as of February 22 ( a record for this time of the year), spelling trouble for the government ahead of the general election.
The ministry, however, seems to have justified the reintroduction of the quota system (in June 2018 after a gap of five years) in the letter, saying the move was aimed at improving “the liquidity position of the sugar mills enabling them to clear cane price arrears of the farmers”. This suggests the licence raj, the efficacy of which has always been questioned, is here to stay.
The letter says: “It is requested that sugar mills of your state may be advised to strictly adhere to directives of the government regarding the MSP of white/refined sugar and action may be taken for violation of sugar price control order 2018….”
The ministry’s letter comes amid reports that some mills were selling at a discount due to high quota for March and, in few cases, to undercut competition. In a recent letter to the food secretary, the Indian Sugar Mills Association said: “The intention behind announcing a high monthly quota of 24.5 lakh tonne for March 2019 may be to allow mills to get better revenue and cash flows from more sales of sugar. However, if the market requires around 20-21 lakh tonne, mainly because there were extra quotas in the previous two months, there is no way that the mills would be able to sell more than what the market could want.”
Since the minimum sale price of Rs 31 per kg hasn’t offset the wide gap between the cost (Rs 36-37 per kg) and earnings of sugar mills due to exorbitantly high cane prices mandated by the Central and state governments, selling at steeper losses (by offering discounts) could only stoke a downward spiral of the market prices of the sweetener. The food ministry’s letter says: “It’s clarified that the minimum sale price of white/refined sugar fixed by the government is the ex-mill price of sugar and is exclusive of goods and services tax and transportation charges; and it is only a floor price below which no sugar mill can sell white/refined sugar at factory gate in the domestic market.”
FE had last week reported that in four of the nine months through February, mills and co-operatives have sold more (in the range of 5% to 23%) than the quota allocated to them and in the remaining months, they have sold less. Mills are barred from selling more than the quotas and are liable to penal action for any violation, although no action has been initiated so far. This has brought to the fore the food ministry’s inability to enforce the very quota system it had lobbied hard to bring back last year.