Financial Daily from THE HINDU group of publications
Tuesday, Dec 30, 2003
Agri-Biz & Commodities - Insight
The bittersweet saga of sugar
The time has come for all those involved in the integrated sugar economy to rise above sectional interests to help the industry get viable.
So it was pleasant to hear that the Finance Ministry has vetoed any hike in the statutory minimum price (SMP) for sugarcane this season to Rs 73 a quintal as recommended by the Commission on Agricultural Costs and Prices (CACP), which was duly backed by the Agriculture and Food Ministries.
What is particularly interesting is that even as the first quarter of the current sugar year (October 2003 to September 2004) is about to end, the Government is yet to fix the SMP, with the Finance Ministry not only objecting to any arbitrary hike in cane price but also plumping for a roll-back of the extant Rs 69.50 a quintal, hiked mid-season in the light of last year's drought, to the Rs 64.50 a quintal originally suggested for the 2002-03 sugar season.
That the Finance Minister, Mr Jaswant Singh, has displayed the political will to freeze the SMP on a political hot potato like sugar, on which many a State politician kisan leader pins his survival and fortune, speaks volume of the determination of the Centre to address the State-induced distortions in the economics of the sugar industry. This needs to be understood in the proper perspective because, after the telecom industry in the deregulated economy, it is the sugar industry which had emerged as an alarmingly litigation-laden sector, though the industry is not happy to settle policy matters through the judicial route every time it is faced with critical choices.
Now that the telecom industry players have called a truce by sinking their differences with the Government, and foregoing some revenue, the sugar industry too is hopeful that some semblance of balance will be restored in the industry.
Sugar is the second largest agro-based processing industry, next only to cotton textiles, and is predominantly located in the rural areas.
About 4.5 crore farmers, their dependents and a swathe of agricultural labourers are involved in sugarcane cultivation, harvesting and ancillary activities, which together form 7.5 per cent of rural population. The industry is seasonal as production of sugar is confined to 110-220 days a year.
India is also the largest producer and consumer of sugar in the world and the second largest producer of sugarcane after Brazil. But India's average yield at 10.27 per cent is also paltry by global standards, and the per capita availability of sugar at about 15.4 kg is quite meagre in comparison to the international average.
Currently, the sugar industry in India is dominated by the cooperative sector, which accounts for more than 55 per cent in terms of the number of factories, installed capacity and production. Six States Maharashtra, Uttar Pradesh, Tamil Nadu, Karnataka, Gujarat and Andhra Pradesh account for over 90 per cent of total sugarcane and sugar production in the country with Maharashtra alone accounting for 30 per cent of India's total sugar production.
Interestingly, over the last six years, the past vicious cycle of shortage and surplus was overcome with the country entering into a phase of surplus and even glut in sugar production, thanks to the emergence of efficient and modern sugar mills, mostly in the private sector in spite of "constricted" policy of the Government.
In the last four years the carryover stock of sugar in the country has been hovering at around 10 million tonnes, which resulted in hefty carry-over costs, insurance charges and a storage problem.
With the SMP announced by the Centre not being followed by the cooperative sector, the so-called custodian of farmers, Maharashtra, the citadel of sugar cooperatives with efficient sugar mills, today presents a dismal spectacle with "factories not having losses numbering 19, factories whose capital base is eroded by less than 50 per cent numbering 34, factories whose capital base is eroded by more than 50 per cent numbering 34, and factories with negative worth numbering 56 out of 202 registered cooperative mills," according to latest official statistics.
The Report of the Standing Parliamentary Committee on Civil Supplies and Public Distribution, tabled in winter session on sick sugar industry and sugar development fund, cited submission of a representative of the NCSFS who said that "our cost of production is Rs 1,400 per quintal for an industry on an average, whereas we get Rs 1,100 per quintal and below the price. We lose Rs 300 per quintal. That is why the entire capital of the sugar industries is being wiped out. That is why they are becoming sick."
If this is the admission of a representative of a cooperative sector, which does not pay the SMP, the position of the organised mills in the private sector, which had to comply with the SMP even in the face of persistent arrears for past procurement, is indubitably unenviable.
That the cancer of state-advised sugarcane price was wreaking havoc on the sugar industry's capacity to pay was well recognised.
Whereas the total price payable for cane purchased during 2002-03 sugar year up to end-August 2003 by mills was Rs 13,808.11 crore, the mills had paid only Rs 11,476.27 crore, leaving arrears of Rs 2,332 crore, as per the admission of the Minister of State of Consumer Affairs, Food and PDS in a written answer in the Rajya Sabha on December 11.
The sugar industry hits the nail on the head when it contends that periodic hikes in cane prices in spite of a sluggish market has diminished the capacity of producers to pay cane-growing farmers on time, leading to mounting arrears.
The politicisation of sugarcane operations is bound to price out Indian sugar from the global market even if the Government extends sops to promote sugar exports, as the malady remains the inveterate distortion of state advised prices (SAP).
No doubt, the Centre set apart Rs 678.06 crore as assistance to the Governments of Uttar Pradesh, Uttranchal, Bihar, Punjab and Haryana to help in clearing the arrears of sugarcane price of the private sugar factories in these States for the 2002-03 sugar season.
The first sugarcane package announced earlier in July 2003 for the five States was contingent, among others, upon the respective State Government undertaking not to declare state-advised price in future either formally or informally.
But the political leadership of these States had not mustered the nerve to go for this package by putting a freeze on SAP as they mistakenly consider that "if sugarcane grower is not paid the proper price, we will lose this or that State, regardless of the damage such thinking wreaks on the fundamentals of the sugar industry," according to sugar industry circles.
It is small wonder that the representatives of Indian Sugar Mills Association (ISMA) while deposing before the House Panel in a written note on the payment of cane price stated that liberalisation of sugar sector without prior or concurrent liberalisation of sugarcane sector will result in serious aberrations. They said that as long as it is mandatory on the mills statutorily to pay a certain price of sugarcane, the responsibility of the administrator is automatically crucial for maintaining prices at corresponding specious levels.
In the last four years, the country has been passing through a glut with immense carryover stocks in every new sugar season. The sugar prices plunged to levels far below the levy price fixed by the Government, seriously diminishing the capacity of the sugar industry to discharge its obligation for payment of cane prices.
As is the practice the world over, cane price payments are made on a staggered basis since sugar is produced within a span of five-six months but its sales are spread over one year and even higher in order to ensure its supply at reasonable prices.
The Mahajan Committee which went into this subject first favoured advance payment of a minimum 80 per cent of the advance price or SMP, whichever is higher, within 15 days of supply of cane by the growers, with the remaining amount of the advance price being payable before the end of the sugar season and the difference between the advance price and the final price within a fortnight of the announcement of the final price.
While in some States like Gujarat, Maharashtra, Karnataka, Tamil Nadu and Andhra Pradesh this system has been working well, this needs to be followed suit by other States.
Not only would this help in alleviating the astronomical arrears burden under which sugar mills have been groaning but it would also be supplemented by total abstinence from arbitrary hikes in SMP by over-zealous political saviours of sugarcane growers.
Now that the Finance Minister favours rollback of SMP on cane the time has come for all those involved in the integrated sugar economy to rise above their sectional interests to help the industry to get viable and desist from dissipating its entrepreneurial energy on fighting unhelpful State or Central government policy-induced distortions that only stymie its very survival.
The votes of politicians could not be based on parochial sections like cane growers who, in any case, are not the beneficiaries of the so-called support price; neither are the sugar mills which have seen their operations going haywire in a backdrop of sluggish market, underpinned by over-production and consequent glut, which do not fetch them the fair price or returns on the sunk cost, they had been saddled with.
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