The Hindu Business Line : Set sugar industry free

AS IN DEVELOPED economies, India's policy-makers have been particularly sweet to the sugar sector, given perhaps the direct and indirect involvement of politicians. In good times or bad, regardless of whether there is a glut or a shortage, the sugar industry is projected as being in a state of crisis, deserving of state patronage. To say that the country's sugar industry is now in a mess would surely be an incorrect generalisation, primarily because several private mills are doing rather well. But, without doubt, a large number of units, especially those in the cooperative sector, are in a bad shape. After four years of burdensome stocks and falling prices that caused financial stress, many have been affected in the last two seasons because of a drop in cane availability and falling sugar production due to drought-like conditions, especially in Maharashtra, traditionally the largest sugar producer. From being an exporter until early 2004, India has turned into a sugar importer.

The latest in the series of sops for the influential sugar sector is Nabard's loan restructuring scheme. The scheme follows the Finance Minister's promise, in his last Budget speech, of providing a financial package for revitalising the sugar industry. An innocuous caveat in the debt deal states that the package will be subject to such conditionalities as a State government guarantee for mills financed by cooperative banks, observance of good governance norms, reduction in management and operational costs and so on. Herein lies the rub. Many units have a poor track record of governance and cost control. How the new scheme will be implemented or the conditionalities enforced remains to be seen.

Mere restructuring of debt is not likely to help the mills turn the corner. The basic issue is more structural than financial. Fragmentation of processing units and sub-optimal crushing capacity result in poor scale economies. Profligacy and inadequate internal control systems further strain the enervated businesses. Consolidation of capacities and rigorous management control over costs are required. The Centre is committed to total decontrol (abolition of levy and free-sale quota) of the sugar industry by October 1. Barring a few private sector initiatives, there is nothing to suggest that the industry is gearing itself for the new regime. The core issues of industry structure, cane pricing, cost control and marketing do not seem to be on anyone's agenda.

Ironically, the sugar industry in Uttar Pradesh and Maharashtra provide a study in contrast. While a number of cooperative mills in Maharashtra are mired in debt and sinking, huge investments are flowing into UP's private mills for massive capacity expansion and integration. They have recognised the importance of scale economies. Firm sugar prices since early last year have considerably improved the top- and bottom-line of many mills. Given the robust income growth in the country, the sugar industry can look forward to happy times. The period of handholding is over. The industry deserves freedom to plan and do business as it deems fit.

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