The Hindu Business Line : Sweet news for farmers

Between 2004-05 and 2006-07, Uttar Pradesh (UP) will see as many as 28 new sugar mills commissioned. These factories will together have the capacity to crush almost 200,000 tonnes of sugarcane daily (tcd). If brownfield expansions are included, the extra capacity created in these three years would work out to well over 300,000 tcd.

What does this mean in real terms? For one, UP's aggregate crushing capacity, which was below 400,000 tcd before 2004-05, would cross 700,000 tcd by the end of this season — a 75 per cent jump in just three years! At an average Rs 150 crore per factory, it involves an investment of Rs 4,200 crore in greenfield projects alone and roughly Rs 6,000 crore, if one also factors in expansion of existing mills.

This is indeed an investment boom, of the sort last witnessed in the 1930s, when the then colonial government imposed a 185 per cent duty on sugar imported from Java (Indonesia). That had resulted in the number of sugar factories going up from a mere 29 in 1931 to 137 by 1937, with those in the UP (United Provinces) alone increasing from 15 to 75. It is, thus, history being repeated in a State whose hinterland has attracted precious little industrial investments since the 1980s, during Rajiv Gandhi's time.

But will this turnaround, even if confined to sugar, have any impact beyond the monies invested and new capacities created? Every new sugar mill generates direct jobs for 800-1,000 people, half of whom are employed during the crushing season, for 150-160 days of the year. The 28 factories would, thus, directly employ around 25,000 people. In addition, there is indirect employment for the many engaged in transporting cane from the fields to the factories and providing assorted goods and services to the mills (and its workers).

Benefit for farmer

The most important beneficiary, though, will be the farmer. If all the mills were to crush an extra 300,000 tpd for 150 days of the year, they would consume additional cane of 45 million tonnes. Considering average yields of around 60 tonnes per hectare in UP, the mills will require to bring in another 7.5 lakh hectares of cane area under their command. Half of this may come from existing cane-growers, who, instead of supplying to gur and khandsari-making units, would now sell at a higher price to sugar mills. The rest will have to come from fresh land brought under cane.

Either way, given an average holding of one hectare, 7.5 lakh growers will stand to benefit through increased demand for cane. If the direct and indirect off-farm employment opportunities are counted, one is talking of a million or so families in the UP hinterland seeing significant income increases during the coming years. In fact, during this season alone, factories in UP are expected to make cane payments of over Rs 8,000 crore, against Rs 4,300 crore in 2003-04.

How has all this taken place? One reason is to do with the country's sugar output falling in two successive seasons (2003-04 and 2004-05). This has coincided with two international developments: the European Union phasing out subsidies on sugar exports and the largest producer, Brazil, diverting cane for manufacturing ethanol in view of skyrocketing oil prices. Their combined effect has pushed up both domestic and global sugar prices, boosting sentiment in the commodity.

Why only UP?

But why has this stimulated massive capacity additions only in UP and not Maharashtra or Tamil Nadu? Are there factors that particularly favour UP? One can identify at least three of them. The first is the existence of sufficient gur replacement potential in UP where, till recently, 40-50 per cent of the cane grown was going to kolhus (gur manufacturers) and small crushers. In Maharashtra, by contrast, virtually the entire cane was being utilised by sugar factories. There was, hence, limited scope for new mills to come up and exploit the `gur frontier' by drawing more cane.

The second factor is company-specific. Sometime in late 2003, Mr Shishir Bajaj's Bajaj Hindusthan Ltd (BHL) took a calculated gamble to set up four mills in western UP. This was a canal-irrigated tract with plenty of water and cane, and just a few entrenched factories around since the 1930s, while undertaking intermittent capacity expansions.

Betting on a recovery in sugar prices — from the rock-bottom levels at that time — Mr Bajaj's audacious move upset the cosy equilibrium among the area's mills, lording over large reserved cane areas. The rivals had no option but to respond by making new investments. And respond they did.

Here, a third factor came into play: the 2004 Industry Promotion Policy of Mr Mulayam Singh Yadav's State Government. The sops offered included a 10 per cent capital subsidy on investment, remission of stamp duty and registration charges on land purchase, reimbursement of transport cost from the mill up to 600 km from the State's border, remission/reimbursement of purchase tax on cane, and exemption of entry tax on sugar and administrative charges and trade tax on molasses.

Importantly, these incentives were to be given for five years provided a company invested a minimum Rs 350 crore and for 10 years in case of investment of Rs 500 crore and above.

Moreover, the factories had to commence production within three years from the date of the Policy's announcement, that is, by March 31, 2007.

Attracting investment

While the Policy was alleged to have been drafted to suit BHL, it has also prompted investments by a host of other players in the State. Of the total of 200,000-tcd greenfield projects to be commissioned between 2004-05 and 2006-07, BHL's share is only 65,000 tcd.

The rest is accounted for by Mr Dhruv Sawhney's Triveni Engineering & Industries (24,500 tcd), Mr Raj Kumar Adlakha's Uttam Sugar Mills (19,000), Mr Ajay Shriram's DCM Shriram Consolidated (16,000), Mr Vivek Saraogi's Balrampur Chini Mills and Mr Gautam Dalmia's Dalmia Cement Group (15,000 each), Mr Rana Ranjit Singh's Rana Sugars (13,500), Mr Vijay Goel's Dhampur Sugar Mills and Mr Gautam Morarka's Dwarikesh Sugar Industries (7,500 each), Mr Siddharth Shriram's Mawana Sugars (6000), Mr Gurmit Singh Mann's Simbhaoli Sugar Mills (4,000) and Mr Vijay Chauhan's Parle Biscuits (3500).

It is a moot point whether these investments will end up creating excess capacities as those in the 1930s did. The outlook for sugar is not as rosy as it was a few months back. World prices have considerably eased from their historic highs of May-June. The Centre's untimely move to ban exports in July, when realisations were good, is bound to aggravate the situation of surplus, resulting from a rebound in both domestic and global production.

But the revival in UP's sugar industry is still a positive development, auguring well for the State. While micro-credit and e-governance are, no doubt, commendable initiatives, it is only good old agro-industries such as sugar, dairy, poultry, oilseeds and food processing that can provide lasting solutions to rural unemployment and the growing rural-urban divide. Hopefully, Mr Nitish Kumar will now be able to replicate in Bihar what Mr Mulayam Singh has managed for UP.

More Stories on : Sugar | Insight | Agricultural Policy

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