The Uttar Pradesh government could soon announce a hike in incentives for sugar mills beyond R20 per quintal for cane purchases in the marketing year that started on October 1. The additional sop would be made available if average ex-factory prices of sugar and other cane by-products drop below certain levels, sources aware of the government’s thinking told FE.

As part of its measures to persuade cash-starved sugar mills to start cane crushing and avoid distress sales by farmers, the UP government last month decided to form a panel, headed by the chief secretary, to determine the exact subsidy amount beyond the R20 per quintal already announced.

Although UP has kept the state-advised price (SAP) for mills to puchase cane unchanged for a third straight year through 2014-15 at R280 per quintal, the SAP is still 27% higher than the benchmark price set by the central government.

As per the arrangements, UP mills now need to pay farmers R240 per quintal in the first tranche within 14 days of cane purchases this year.

A subsidy of R11.40 per quintal — including society commission, purchase tax and entry tax — will be offered on cane purchases and up to R8.60 will also be provided later if prices of sugar, molasses, bagasse and press mud fall below R3,100, R390, R167 and R26 per quintal, respectively, between October 1 and May 31.
Of the remaining R20 per quintal, the expert committee will decide how much of subsidy the government will provide and how much the mills have to bear in case the average prices of sugar and the other by-products decline below the above-mentioned benchmark levels during the October-May period, the sources said.

Last month, the UP government was forced to announce incentives after sugar mills had threatened to suspend operation in 2014-15, as returns from sugar sales had failed to match the “arbitrarily” high cane prices fixed by the state government.

Mills were yet to pay Rs 1,206 crore for cane purchases in 2013-14 as of November and only 23 of the 95 private mills in the state started operations by then, according to latest data. More mills are expected to start cane crushing in the coming days once their usual maintenance work is over. A dozen of the 23 co-operatives also started crushing until last Thursday.

Having incurred a loss of Rs 5.50 on sale of each kilogram of sugar last year, the Uttar Pradesh Sugar Mills Association had also served a notice to the state government conveying its inability to crush cane in 2014-15. It had said unless the state kept its last year’s promise of firming up a formula linking the price of cane to its by-products and offering a financial assistance of Rs 9 per quintal of cane, even clearing cane arrears of around Rs 5,000 crore this season would be a herculean task.

Mills in the state incurred losses to the tune of Rs 7,250 crore in the three years through 2013-14. Banks, after reluctantly agreeing to offer mills working capital loans in 2013-14 following assurances of relief by the state government, have again started refusing to provide loans, further complicating the situation for the industry.