The Hindu Business Line : Too much sugar in the system

The sugar industry is starting a new season sitting on surfeit. Unless the basic discrepancies in raw material and product prices are addressed, there can be no sustainable solution to the issue of cyclical boom and bust that the industry goes through, with the attendant problems of delay in payment to farmers and expense for the Government, says R. BALAJI.

Problem of plenty... A bittersweet scenario for the sugar sector.

As the 2007-08 sugar season starts, the Indian sugar industry faces a problem of plenty on an unprecedented scale. It is starting sugar production even as it has in stock over 112 lakh tonnes, equal to about half year’s consumption in the domestic market; the sugar mills are expected to produce another 300 lakh tonnes of sugar during the season against an annual consumption of about 200 lakh tonnes.

When it ends the season next summer, after allowing for the domestic market’s needs, it would have a full year’s surplus requirement of sugar — a bittersweet scenario for the industry.

Sugar prices have hit a low of Rs 1,220 a quintal ex-factory, a drop of over Rs 500 in the last one year. Sugar prices do not cover the raw material and cost of production of sugar, complains the industry. Adding to its woes is that there is no succour in the international markets, where too the situation is similar — high production and low prices.

The industry’s immediate concern is to tide over the situation. Unremunerative sugar prices mean a funds crunch and delay in payment to the farmers for their sugarcane.

Support by way of ‘strategic stock’

The sugar manufacturers are pushing for ways to get the surplus out of the system to support realistic sugar prices. The immediate step, they say, would be to create a strategic stock, a market intervention mechanism, through an independent agency that would buy up the surplus and hold it in stock or sell it and absorb the loss to share it on a proportionate basis among the sugar mills; a control on sugarcane price while ensuring a viable price for the farmer; and a clutch of relief measures on levies, which the Government has now allowed.

Whatever the immediate support measures, the only realistic option is to arrive at a balance between the sugarcane price and sugar prices. Any other external support would only be a solution for the moment. Of course, a strong point of argument is that the income for sugar mills also comes from cogeneration and distillery. But these are not without costs to the sugar mills and come with their own set of issues.

The industry feels that unless the basic discrepancies in raw material price and product price are addressed, there can be no sustainable solution to the issue of cyclical boom and bust that the industry goes through, with the attendant problems of delay in payment to farmers and expense for the Government.

Last season, the Government announced a number of support measures, in addition to creating a 50-lakh tonne buffer stock that would mean an outgo of nearly Rs 600 crore, and export subsidies of over Rs 1,350-1450 a tonne of sugar. This was after banning sugar exports in 2006, when international prices were high and conditions ideal for exports.

The objective at that time was to dampen prices in the local markets. The Government has announced a loan package equal to the excise paid by the sugar mills.

Committee after committee

But balancing sugarcane price and sugar prices is something on which the Government has been dragging its feet for over a decade, during which it has constituted three committees to address the industry’s woes.

Even now the Government has launched the familiar exercise — a committee to look into the industry’s problems and suggest long-term measures for its development.

First, it was the Mahajan Committee in 1998, which submitted its recommendation on a long-term policy framework for the industry. Next, the Tuteja Committee in 2004 had its say on the revitalisation of the sugar industry. Now the Kelkar Committee is in the process of interacting with the industry for feedback on the policy measures needed.

Inconsistent policy

Glut and low prices — this appears a seemingly routine situation for an agriculture commodity.

Except that this is aggravated by the policy of the Central and State Governments, a policy that has been consistently followed over the years despite its inherent inconsistencies.

Pushing up the price of sugarcane to keep the farmers happy and controlling the price of the product, sugar, to keep the consumers happy. A move based on political considerations more than economic ones.

What is ignored is the link between the two, the sugar mills taking the brunt of this mismatch by bearing the high cost of sugarcane, and losing on low sugar prices.

This marks the start of a vicious cycle: when the mills are affected, their payment capacity is affected, sugarcane arrears mount, the farmer is affected, sugarcane and sugar production falls, sugar prices mount and the consumer is affected. All this comes back to the Government in the form of an industry seeking the Government’s support and subsidies to help support sugarcane payments.

Meanwhile, the industry continues to make its demand for a market-driven system. The sugar industry has represented to all the committees stressing the need for realistic cane pricing linked to the price of sugar.

The ultimate objective of the recommendations is to do away with the controls — move towards decontrolled, market-driven industry solutions. What is needed is a consistent national sugarcane pricing formula linked to sugar prices. The arbitrary and politically motivated system of sugarcane pricing that aggravates the imbalance has to go.

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