The government on Wednesday took a raft of measures to choke sugar imports — including raising the import duty on the sweetener to 40% from the current 25% — and decided to scrap an excise duty on ethanol, meant for blending with petrol, to bail out a cash-starved domestic industry.

The decisions by the Cabinet would “significantly improve the adverse price sentiments in respect of sugar and would improve the liquidity in the industry, facilitating the clearing up of cane arrears of the farmers”, the food ministry said in a statement. The decision to raise the customs duty is aimed at preventing “any imports in case international prices of sugar were to depress further”.

Sugar mills have been hit by a sustained hike in cane prices fixed by states and a slide in domestic sugar prices to six-year lows, caused by a fifth straight year of surplus production in India through 2014-15 and a plunge in global prices. This has resulted in mounting losses for most mills for a fourth straight year and record cane arrears of Rs 21,000 crore.

The move to scrap the 12.36% excise duty on ethanol, a cane by-product meant for blending with petrol, would increase sugar mills’ net realisation mills by around Rs 5 per litre, said Indian Sugar Mills Association director general Abinash Verma. The decision “should incentivise some mills to divert ‘B’ heavy molasses or cane juice into ethanol, which will reduce some surplus sugar production from next year”, he added.

Since the country needs roughly 115 crore litres of ethanol to achieve the proposed blending of ethanol with petrol at 5:95 ratio in almost all states, barring a few exceptions, the decision to scrap the excise duty for the next season would theoretically improve the cash flow of mills by Rs 575 crore if the blending target is strictly enforced. However, the country could achieve less than a third of the blending target in 2014-15 fiscal, thanks to a delay in the finalisation of tenders by oil marketing companies, various levies on the bio-fuel by state governments and red tape.

While hailing the latest government moves, ISMA’s Verma, however, affirmed that the industry would be able to cash in on such decisions in the long run. To halt a slide in sugar prices and improve mills’ capacity to clear current dues, Verma sought a quick decision on the proposals to set up a strategic reserve by purchasing 10% of domestic production by the government at a price based on the cost of production, factoring in the fair and remunerative price (FRP) of cane.

“The immediate need to reduce the surplus of 3.5 million tonnes of sugar blocking almost Rs 10,000 crore of cash flows and the need to improve the current ex-mill sugar prices which are at its lowest in the last six years will not get addressed by the above decisions. We understand that the government is already planning to take a decision for the above,” he said.

Import curbs to hit refiners
Apart from raising the sugar import duty to 40%, the CCEA has also decided to withdraw the duty-free import authorisation (DFIA) scheme, under which exporters used to import permissible quantity of raw sugar at zero duty for subsequent processing and disposal. “Similarly, the period for discharging export obligations under the Advanced Authorisation Scheme (AAS) for sugar would be reduced to six months (from 18 month earlier) so as to prevent any possibility of any leakage into the domestic markets,” the food ministry said.

However, the decisions would hurt domestic refiners, including Shree Renuka Sugars, who used to imports raw sugar for refining and subsequent exports as well. Under the AAS, refiners will no longer be able to hold sugar for a reasonable amount of time and export when global prices turn attractive.