The Government’s decision to create a sugar buffer stock of four million tonnes (mt) for a year would not only help industry financially, but also improve the demand-supply situation in the domestic market, said rating agency ICRA in a statement on Thursday.

“According to our estimates, the closing sugar stocks for sugar year 2018-19 (October 2018-September 2019) would be high at around 14.5 mt. The direct impact of this move by way of compensating mills for the carrying cost alone would translate into a higher profit before tax margin by about 1.5-1.8 per cent. This apart, the buffer stock creation would result in some improvement in the demand-supply situation in the domestic market in turn resulting in support to sugar prices, although the quantum of the increase cannot be ascertained at this moment,” said Sabyasachi Majumdar, Senior Vice President and Group Head ICRA Ratings.

“These factors would also improve liquidity position of the sugar mills, thus supporting the cane payments to farmers,” he said.

While clearing the buffer stock scheme the Union Cabinet on Economic Affairs said it would cost the exchequer Rs 1674 crore. “The reimbursement under the scheme would be met on quarterly basis to sugar mills which would be directly credited into farmers’ account on behalf of mills against cane price dues and subsequent balance, if any, would be credited to the mill’s account,” the official statement said.

“The domestic sugar production in sugar year 2019-20 is likely to decline by 14 per cent YoY to around 28.2 mt from 32.9 mt in the current season - driven by the lower production in the key sugar-producing states like Maharashtra and Karnataka. We expect the sugar consumption to increase to 26.5 million tonnes in sugar year 2019-20 and the production is likely to outstrip consumption by around 1.7 mt,” Majumdar said.