Context: The sugar industry has run up large arrears with farmers for the supply of cane.
- Sugar mills in Uttar Pradesh alone have run up arrears of over ₹8,447 crore for 2019-20 for the cane that they had already procured and crushed last season.
- This year, because of the extended lockdown, millers’ cash flows have been hit by a sharp fall in the institutional offtake of sugar from food and beverage makers and hotels.
- Sugar industry is an important agro-based industry that impacts rural livelihood of about 50 million sugarcane farmers and around 5 lakh workers directly employed in sugar mills.
- India is the second largest producer of sugar in the world after Brazil and is also the largest consumer.
- Fair and Remunerative Price (FRP) of sugarcane is announced by the Central Government is decided on the basis of the recommendations of the Commission for Agricultural Costs and Prices (CACP) after consulting the State Governments and associations of sugar industry.
- Sugar production: In the normal sugar season (October-September) about 320 lakh metric tonnes (LMT) of sugar is produced, against a domestic consumption of about 260 LMT.
- This surplus sugar of 60 LMT in the normal sugar season put pressure on domestic ex-mill prices of sugar.
- De-regulation Of Sugar Sector: In 2013, the government decontroledl the sector.
- The decontrol focussed on the sugar side of the business.
- It allowed sugar mills to sell whatever quantity they wanted at a time and price of their choice.
- Supply of levy sugar at discounted prices to the government for distribution through PDS was also ended.
- However, the controls on the sugarcane side remained and it continues even today.
- Extended working capital loans with interest subvention to sugar mills under Scheme for Extending Financial Assistance to Sugar Undertakings
- Provided financial assistance through ‘raw sugar export incentive scheme’.
- Extended financial assistance of Rs.4213 crore to mills through banks under Soft loan scheme
- Facilitated supply of ethanol under Ethanol Blended Petrol (EBP) programme: The Ethanol Blending Programme (EBP) seeks to achieve blending of Ethanol with motor sprit with a view to reducing pollution, conserve foreign exchange and increase value addition in the sugar industry enabling them to clear cane price arrears of farmers.
- The Central Government has scaled up blending targets from 5% to 10% under the Ethanol Blending Programme (EBP).
- It allowed conversion of B-heavy molasses (which has more sugar content than C-Molasses and is typically converted into sugar). Molasses is also used for manufacturing spirit and alcohol among other products.
- The National Biofuel Policy 2018 envisages an indicative target of 20% blending of ethanol in petrol and 5% blending of biodiesel in diesel by 2030.
- A comprehensive performance based production subsidy has been extended @ Rs.4.50 per quintal of cane crushed payable to farmers against their cane dues contingent on mills undertaking export and supplying of ethanol.
Challenges for sugar industry
- Sugarcane pricing controls: Control and regulation of the domestic sugar market, is organized mainly through policy interventions like export duty, imposition of stock limit on sugar mills, change in meteorology rule etc.
- However, the government control of pricing is populist in nature and this often leads to price distortion.
- Mismatch between the sugar price and sugarcane price: High Fair and Remunerative Price (FRP) of sugarcane results in over-production of cane and sugar.
- If that in turn causes sugar prices to fall below cost levels, the mills incur losses, leading to delays/defaults in payments of farmers
- Sugarcane contributes for 70-75% of the cost of producing sugar.
- States like Uttar Pradesh have worsened the over-capacity situation with unrealistic State Advised Prices and capital subsidy schemes.
- Poor liquidity: It has stressed the liquidity position of the industry throughout the country leading to build up of cane price arrears.
- Lack of investments: Investor avoid sugar industry as it is grappling with sustainability issues.
- Exporting the surplus from India is not easy because of the burden of very high cost of sugarcane, pushing up the costs of sugar. For a comparison, Indian cane prices are 70-80% higher than that in Brazil.
- WTO subsidy issue: India’s domestic support for sugarcane and its export subsidies for sugar are of particular concern to Australia, which is why Australia has joined Brazil and Guatemala in initiating a dispute to challenge those measure at WTO.
- Without subsidies Indian exports are unviable as cost of producing sugar (thanks to high cane price) is way above the international sugar price.
- India has been allowed to continue with the subsidies till December 2023. The fear is what will happen post-2023.
- Poor performance of EBP: There is poor pricing of ethanol supplied for blending, periodic shortages of sugar and competing demand from potable alcohol sector.
Free up cane pricing: The Rangarajan Committee has suggested a formula to fix cane price factoring in the price of sugar and other by-products.
In case the cane price, arrived by the formula, drops below what the government considers as a reasonable payment, it can bridge the gap from a dedicated fund created for the purpose and a cess can be levied to build up the fund.
- Innovation: Improvement in yield and recovery continue to attract farmers to growing sugarcane despite ample supply and lower prices of sugar.
- A new variety of sugarcane (CO 238) was developed for use in Uttar Pradesh (UP). UP produces bulk of India’s sugarcane, its share in the country’s sugar output rose to 40 per cent from 25 per cent.
- This singular development effectively broke the sugar cycle and made India a consistently surplus sugar producer.
- Increasing Biofuels production: Government should invest in R&D and incentivise the adoption of modern technologies like 2nd generation Ethanol plants etc to increase the efficiency of its Ethanol Blending Program.
The obvious solution to the sugar industry’s woes lies in freeing both cane and sugar prices from the shackles of government control and allowing free market forces to dictate the demand-supply equation for sugarcane and its end-products. If the government bites this final bullet, the sector will become globally competitive and financially independent.