Sugar industry pleads for freedom from control

Constrained by various regulations on pricing, sales and stock holdings, the industry asks why it can’t be free like others, writes Dilip Maitra

It’s a bitter truth: even though 21 years have passed after India embarked on major economic reforms, the Rs 80,000 crore sugar industry in the country is still being controlled by the government.

Being the only controlled industry in the country, sugar manufacturers want freedom from archaic regulations stifling their growth and survival. To press for their demand, the industry, through its representative body Indian Sugar Mills Association (ISMA) has made several representations to the government, mostly in vain. The industry is complaining that it is making losses and sitting on a huge pile of stocks as the trade and the sugar mills are under various government controls.

“With bumper sugar production in the current sugar year (November 2010-October 2011) and restrictions on traders to hold stocks, sugar mills in the country are holding a sugar stock worth Rs 30,000 crore,” said ISMA President Narendra Murkumbi, who is also the Managing Director of Shree Renuka Sugars Ltd, one of the top five sugar producers in the country.

According to ISMA, since the stock limit for sugar traders is only 500 tonnes as per government law, there is a huge stock pile with the sugar mills which don’t have adequate storage capacity and cash-flow to manage surplus inventories. “This has led sugar mills to resort to distress sale of sugar, which is only bringing down the prices,” said Murkumbi.

The retail price of sugar at around Rs 30 per kg, according to him, has remained stagnant in the last six months and is also hovering below last year’s levels. ISMA has requested the government to abolish the traders’ stock-limit as it serves no purpose in the current scenario.

On regulations like sugar production, cane price and sale by mills in domestic markets, CII National Committee on Sugar Chairman Ajay Shriram said the Centre’s policy should be streamlined to the best advantage of farmers and the industry. “To ensure a buoyant growth for the sugar sector, a complete liberalisation of the same is a must,” Shriram said. “Unviable sugar price with no linkage to cane price makes it difficult to give remunerative cane price to farmers,” he added.

Wide fluctuations

Controls and unfriendly government policies have already hit the sugar industry in the past as sugar production has undergone wild gyration. As can be seen from the chart, the country’s sugar production that had hit a peak of 283 lakh tonnes in 2006-07 after a steady climb, has declined in the following years and in 2009-10, it was almost 100 lakh tonnes lower than the peak. “Sugar mills’ inability to pay remunerative prices drove sugarcane farmers away to other cash crops,” pointed out Davangere Sugar Co Ltd MD S S Ganesh who also heads ISMA’s Karnataka chapter.

Another piece of regulation affecting the industry is the mandatory government levy quota of 10 per cent of production, for which the government pays only Rs 1,700 a quintal while the average cost of production of sugar is Rs 2,700 a quintal. ISMA has urged the government to do away with the levy quota system completely, buy sugar at market prices and provide subsidy directly to the poor consumers who get subsidised sugar from the PDS.

“Direct procurement will cost the government only Rs 2,500 crore, which is a negligible amount in the total food subsidy bill of Rs 70,000 crore,” argued South Indian Sugar Mills Association Secretary V Govinda Reddy. He said that the plight of the Karnataka sugar mills is even worse as there is a glut of sugar with a 49 per cent increase in production in the current sugar year.

During the year the two new sugar factories came into production in the state which also witnessed bumper cane production and rising sugar recovery. All these added to the glut, and because the stocks are high, banks have tightened their purse strings to lend money, Reddy pointed out.

Unrealistic policies

Strangely, even on the free sale sugar, the government decides how much each mill would sell every month through a monthly regulated release mechanism. In our country, sugar mills have no freedom to plan their sales and cash flows and the problem is multiplied by the burden of carrying large stocks of sugar due to the monthly release mechanism.

“We don’t see any purpose in regulating sales of free-market sugar. It neither influences price nor the supply. Moreover, sugar is not an essential food item that needs to be controlled so much,” said Murkumbi. Yet another restriction on the industry is in the form of regulated exports. In the years of surplus production, exports provide an outlet for the industry to reduce stockpiling on time. But it is the government again which decides when to allow exports and how much. Most of the time the government takes long time to announce the quota and the quantity is less than what is required, ISMA pointed out. At present the government has allowed sugar exports of 5 lakh tonnes, which is too little, considering the surplus production, ISMA feels.

The industry, in fact, is asking the government to raise the export limit to 10 lakh tonnes as the international price is ruling high. The Chandigarh-based integrated sugar manufacturer Rana Sugars Ltd MD Rana Inderpartap Singh has urged immediate doubling of the limit.

“We want the Centre to permit 10 lakh tonnes of sugar export to cash in on high rates of sugar in global markets,” he said. “At current global rates, sugar exports fetch Rs 38 per kg while in domestic market rates are hovering around Rs 28 per kg. So, the sugar companies can get additional Rs 10 per kg,” he added. He is of the view that the exports won’t affect the domestic price as the sugar mills are holding large unsold stocks and the current sugar year is expected to see output at 240 lakh tonnes, 27 per cent more than 190 lakh tones in last sugar year.

Use as fuel

Sugar producers also urged that the government should quickly decide on the ethanol pricing formula for blending it with petrol and diesel. This will help industry getting better price for its molasses which is used to make ethanol.

Traditionally, molasses, a by-product of the sugar industry, has been used in India to produce industrial spirit and alcohol. However, with modern technology, molasses has been effectively used to produce bio-ethanol for blending with petrol as a fuel. Brazil and USA are the two largest producers and consumers of fuel-ethanol in the world and Japan, China, Thailand, European Union etc, have also embarked on plans of ethanol blending with petrol (EBP) programmes.

Since India is a large producer of sugar and also a huge importer of petrol, the EBP initiative can reduce India’s dependence on fuel imports and also provide a cleaner, cheaper alternative. In this respect, to workout the pricing formula for buying ethanol, an expert panel under Dr Saumitra Choudhuri, has recommended in March 2011 that the price of ethanol must be linked to the price of petrol.

ISMA thinks that if the pricing formula is accepted and implemented, it will help oil marketing companies save around Rs 12 per litre of blended fuel.

source: deccanherald