The sugar industry is currently facing a serious financial crisis.
Improper government policies are what have caused this malice.
What is the overall crisis about?
Glut - Sugar output is estimated to have surged by nearly 10 million tonnes in the 2017-18 sugar season (Oct 2017 to Sept 2018) to 32.2 million tonnes.
While this is already way above the demand of around 25 million tonnes, the estimated output for 2018-19 is slated to be even higher at 35 million tonnes.
Notably, this spike is largely because of the government’s recent pro-cane grower’s stance with an eye on the forthcoming general election in 2019.
Stress - Excess supplies have dragged ex-factory sugar prices below production cost, leading to cane price arrears of about Rs 180 billion.
The bulk of these are accounted for by sugar mills in Uttar Pradesh due to the relatively higher cost of state’s mandated procurement price.
As the glut in the market is likely to depress prices further, banks have moved the sugar sector to the “caution list”.
This would make it harder for them to borrow and resultantly only make the possibility of recovery grimmer.
How did this come up?
The genesis of the sugar sector’s woes is rooted in the overproduction of both sugarcane and sugar, and the consequential meltdown of sugar prices.
But, instead of dis-incentivising additional cane production, the government is taking measures which would enhance more cane cultivation.
The recent sharp hike of Rs 20 a quintal in the “Fair and Remunerative Price” (FRP) for cane (floor price fixed by the centre), is an example.
Mandatory additional payment for sucrose recovery in excess of 10% and cash dole of Rs 5.50 per quintal of cane used by the mills, also further production.
Also, permitting direct conversion of cane juice into ethanol, instead of using only the by-products for this purpose, might encourage more cane production.
Fiscal incentives for setting up more distilleries, and creation of a 3 million-tonne sugar buffer are some other misguided policies.
This aside, the government has also doled out an elaborate package of sops to the sugar factories to continue their operations.
What is the way ahead?
The solution lies in letting the production of both sugarcane and sugar move in tandem with overall market demand (including exports).
The way to achieve this objective is outlined explicitly in the report submitted by the Rangarajan Committee on sugar deregulation in 2013.
The revenue-sharing formula for cane pricing mooted by it can help strike the needed balance between supplies and demand and also establish a buffer.
This mechanism also seems fair to both cane growers and sugar producers as it envisages sharing 70 to 75% of the revenue earned by the mills with farmers.
Nonetheless, the transparency in the assessment of the sugar factory revenues is vital to make this system a success, which could prove challenging.
