Sugar mills in Tamil Nadu, which are already reeling under losses due to falling sugar realisation and high cane costs, are now fighting a battle for survival against Karnataka and Maharashtra, which are dumping lower priced sugar in the State.

Tamil Nadu’s mills are on the brink of a collapse due to three reasons. First, the ad-hoc pricing of sugarcane by the State Government has made sugar production in the State unviable. Second, mills in the State are losing out to cheaper sugar from neighbouring States due to imposition of value-added tax (VAT) on locally produced sugar. Third, with banks unwilling to lend, sugar mills which are sitting on huge piles of inventory may find it hard to sustain operations.

Cane pricing

Sugar producers in TN have been mandated to pay an adhoc premium of ₹450 for a tonne of sugarcane, over and above the FRP (fair and remunerative price) of ₹2,200 for a recovery rate of 9.5 per cent. In contrast, mills in Maharashtra pay farmers only the FRP and recovery- linked premium. Irrational cane pricing has put TN sugar mills at a disadvantage.

Further, the imposition of a 5 per cent value-added tax (VAT) on sugar by the state Government has added to the misery of sugar mills. “Imposition of VAT has wiped out sugar mills in the State. The survival of mills in the State has come under question now,” says Palani G Periasamy, President, South Indian Sugar Mills Association (SISMA).

“Even if we adjust the cost of transporting sugar from Maharashtra to Tamil Nadu, which is about ₹1.5 per kg of sugar, the neighbouring States still enjoy advantage of at least ₹3 per kg, compared to local mills,” explains A Vellayan, Chairman, EID Parry.

According to industry sources, nearly half the sugar sold in the State has come from neighbouring States.

Kerala, which was an important market for TN sugar mills, has not been spared either. Large quantities of sugar from mills in Maharashtra and Karnataka have made their way into Kerala, depriving TN mills of their business.

Ballooning inventory

Tamil Nadu produced about 1.1 million tonnes of sugar last year. Almost 60-70 per cent of the sugar produced so far is lying as inventory in the warehouses. Sugar producers are now strapped for cash as they have already exceeded their working capital borrowing limit and banks are unwilling to lend more.

“The sugar industry in Tamil Nadu is approaching a big crisis. Our working capital borrowing window has been exhausted. Unless we are able to sell the sugar produced, it will be very difficult for us to make payment to farmers,” says Periasamy.

Sugar producers in the State have made several representations to the Government to abolish VAT. “We have already appealed to the state Government to abolish VAT and salvage the industry from the crisis” he adds.

In addition, higher VAT on other by-products such as alcohol has only made things worse for sugar mills. TN mills currently pay 14.5 per cent VAT on alcohol, while mills in adjoining States pay a central state tax of just 2 per cent. SISMA has also made a plea to the state Government to rationalise the alcohol policy. “Due to higher VAT on domestic alcohol, mills in other States enjoy a cost advantage of almost ₹5 per litre of alcohol,” says Periasamy.

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