To say that the sugar sector in Tamil Nadu is in dire straits is an understatement. Almost all the 43 sugar companies in the State (25 in the private sector and balance in the co-operative/public sector) are steeped in losses.

Most of them have even turned non-performing assets (NPAs). Such is their financial woe that eight mills in the private sector and one in the public sector could not crush cane this season. Many more are unlikely to crush next season.

The State’s sugar output which was to the tune of 24 lakh tonne in 2011-12 sugar season (October- September) dived to 7 lakh tonnes in 2017-18 and is likely to remain so this season as well. If this situation continues, Tamil Nadu will soon be erased from the country’s sugar map.

Ironically, sugar companies are least responsible for their precarious condition.

Let down by Rain Gods

The Rain Gods let them down badly. In five out of the last seven years the North-East Monsoon played truant. The scale of rainfall deficiency ranged from 16 per cent in 2012 to as high as 62 per cent in 2016.

Drought conditions hurt the sector in two ways. It reduces the sugarcane yield which leads to lower output per acre and also hurts sugar recovery (the extent of juice that the cane offers when crushed). That precisely happened. Sugarcane production fell from 254 lakh tonne in 2011-12 to 81 lakh tonne in 2017-18 as yield per acre fell from 40 tonnes to 25 tonnes. Sugar recovery in the State earlier averaged 9.5 per cent as against 10.5 to 11 per cent in Northern Karnataka, Maharashtra or now in Uttar Pradesh. Lack of rainfall has lowered the recovery rate further. As against the recovery rate of 9.35 per cent in 2011-12, it was 8.64 per cent in 2017-18 season.

Lower yield and poor recovery are a double whammy that no sugar company can manage. Lack of cane hits the capacity utilisation. In the last two seasons the capacity utilisation averaged just over 30 per cent. That added the sugar production cost by ₹4 per kg. Fall in recovery further pushed production costs by another ₹8 per kg.

Thus production cost of sugar in Tamil Nadu was ₹46 per kg as against the all-India average of ₹34. With a sale price of ₹31 per kg ex-factory, the shortfall that mills face is ₹15 per kg. As lower cane availability also reduces molasses output and co-generation of power, they could re-coup only ₹7 per kg from by-products leaving a gaping hole of ₹8 per kg.

In the last three seasons cumulative effect of this shortfall has grown to almost ₹2,000 crore leaving the industry in deep distress and in need of a life line.

Ironically, the sugar mills in Tamil Nadu have been reminded of the lines ‘Water water every where. Nor any drop to drink’ (The Rime of the Ancient Mariner by Samuel Taylor Coleridge). There are a slew of relief measures that are available for the sugar sector.

This include soft loans for the mills to pay the cane price, subsidy of ₹1,000 to ₹3,000 towards transport cost from factory to the port for exports, a direct subsidy of ₹138 per tonne of cane, interest subvention for buffer stock created and soft loans for setting up ethanol capacity.

That apart, it has also re-introduced monthly sales quota that regulates the quantity of sugar sold in a bid to keep the retail price at ₹31 per kg.

But none of them work for the TN sugar mills as these measures have been designed to tackle the massive sugar surplus the country is facing (the industry is expected to close the 2018-19 season with a historically high stock of 125 lakh tonnes) and not to mitigate the effect of a scarcity they face. Large surplus typically depresses retail sugar prices, inhibits mills’ ability to pay the cane price leading to huge cane arrears that the government abhors.

For TN mills soft loans are out of question as most of them are NPAs and they are not eligible for it without a State government guarantee that is not forthcoming. Similarly export transport subsidy is of little use as the mills have no exportable surplus.

The direct subsidy is available only if the mills meet all directives of the government including export quota announced for each mill. Since TN mills are not exporting, they are ineligible for it. Buffer stocks too do not help as they have no surplus sugar to spare.

Finally the monthly sales quota, put in place to ensure too much of sugar does not enter the market and depress the price, is meaningless as the mills do not have enough sugar to dump in the market. And it ends up limiting them from selling adequate quantity and improving their cash flow.

State-specific relief

What is needed is a State-specific relief not a ‘one-size-fits-all’ solution.

Soft loans push the mills (who are eligible to avail it) deeper into debt. A one-time grant could help ease the burden. After all, part of the problem is due to the high sugarcane price announced by the government to please its vote bank. Such grants could well be tied to the mills pushing the farmers to embrace micro-irrigation.

Only 10 per cent of the State’s sugarcane acreage is under drip-irrigation. For a State that is water starved, this is pretty low.

The other option is to allow the sector to die in Tamil Nadu. After all, sugar production in other States have risen sharply to meet the country’s needs. But the flip side is that it will lead to rendering as many as 1.5 lakh rural people unemployed and hit the livelihood of 5 lakh farmers.

Also, TN which accounts for close to 10 per cent of nation’s sugar capacity is critical for the Modi government’s ethanol game plan. Thus, saving the sector seems to be the only plausible option.