What the sugar industry can realistically expect

Harish Damodaran New Delhi | Updated on November 25, 2017 Published on June 16, 2014

Sugar mills may seek a rise in import duty and the ethanol blending level for petrol

There are three major ‘policy supports’ sugar mills would expect from the Centre in the Budget and after. Two of these seem feasible, while the third isn’t easy to implement.

Import duty

The first one is an increase in import duty on sugar from the existing 15 to 40 per cent. The industry wants this in view of depressed global prices, an appreciating rupee, and ex-factory sugar realisations dipping from ₹34.5-35 to ₹31-31.5/kg in Uttar Pradesh (UP) between October 2012 and now.

The Centre may not be averse in granting this request only because it is now giving mills an incentive of ₹3,300/tonne for exporting raw sugar out of the country.

There is no sense, therefore, in nullifying its impact by allowing in cheap imports.

The second policy support could be by way of making oil marketing companies (OMC) to blend 10 per cent ethanol in their petrol, as against the current 5 per cent.

Doubling the mandatory blending level is again feasible because the OMCs are now paying over ₹45/litre for petrol to refineries on a landed cost basis. This is more than the ₹38/litre that sugar mills are realising on ethanol, working out to ₹43-44 at the depots.

Simply put, mandating 10 per cent blending will require no subsidies and, hence, no cost to the exchequer. Mills will, however, gain because of an assured market from OMCs that will help increase realisations on their sales of rectified spirit and extra neutral alcohol to liquor and industrial chemical makers.

Rangarajan formula

Dispensing with State Advised Prices (SAP) and introducing a revenue sharing model where mills pay a minimum 70 per cent of their average realisations from sugar and primary by-products (molasses, bagasse and press-mud) is something the C Rangarajan Expert Committee had recommended.

While sugar millers may want this to be implemented, it is unlikely the Centre would want to go ahead.

The reason is purely political: If the Rangarajan formula is used, the cane price at current realisations will not be more than ₹235-240/quintal. This is as opposed to the SAP of ₹280/quintal fixed by the UP government, which requires ex-mill sugar prices to go up to at least ₹37/kg.

Given the Bharatiya Janata Party’s huge political stakes in UP today, it is unlikely the Centre would seek to force any cane price rationalisation formula that would entail lower realisations for farmers (though it is indirectly happening now in the form of arrears in payments).

The Centre will, instead, be less averse to higher realisations for mills, which is possible through a hike in import duty and enhanced mandatory ethanol blending in petrol.

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Published on June 16, 2014
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