26 MAR, 2012, NIDHI NATH SRINIVAS, ET BUREAU
Ronald Reagan once said we must not look to the government to solve our problems. Government is the problem. India's farmers and sugar factories couldn't agree more.
For the last six months, they have been battling with the worst kind of government meddling in the guise of non-tariff barriers. There is an oversupply of sugar this year, which is weighing down heavily on local prices, hampering mill cash flows and piling up payment arrears to farmers for sugarcane.
The government accepts that export is the only solution for ensuring mills and farmers break even and has allowed 2 million tonne to be shipped. But the policy is designed to hobble business at every step.
Since the objective is to increase domestic prices by draining excess supply from the country, all 500 mills will gain from it. It doesn't matter which mill actually exports.
Instead, in a misguided desire to be equitable, the food ministry has allocated every mill some quantity to export. Mills in the hinterland, such as those in Uttar Pradesh, have no interest in export.
Yet they have been given an export licence. The upshot of slicing the pie so finely is that most mills don't have enough quantity to make even one cargo. It takes 2,600 tonne to form one train rake to move sugar to port but only 40 companies have quota higher than that.
Mills are paralysed because they don't have enough room to move. Taking the quota raj further, the food ministry has allowed licences to be traded.
Ostensibly that sounds fair: if a mill can't export, let it sell the allocation to another who can. In reality, this policy has killed the business opportunity. Working backwards from current world market prices after deducting logistics and fobbing costs and adding duty drawback, mills in south India and Maharashtra should earn about Rs 29,000 from every tonne exported.
Instead, they are getting Rs 25,000 to Rs 26,000 per tonne as they or their merchant exporters have to buy licences from the other mills who don't wish to export. Compare this to what the non-exporters are earning (Rs 28,500 per tonne net in UP and Rs 27,000 in south India) and you can see why exporting is a waste of time.
Government has created a farcical situation where rent-seeking has been allowed to sabotage the opportunity itself. The fundamentally flawed policy is backed by procedures that equally defy logic.
Before issuing export permit, the food ministry is checking that the mill has no cane arrears for last season (when the express purpose of exports is to clear arrears); submitted all statistical information regularly to the sugar directorate; has not defaulted in supply of levy sugar; has enough sugar for the current year's requirement; and that all levy sugar is packed in 50kg jute bags.
Daunted, even the most cash-strapped mill doesn't want to touch exports. Not surprisingly then, 70% of the already allowed quantity will remain unshipped by March end.
That is Rs 4,000 crore worth of cash flow denied to the industry. Even if the food ministry allows another million tonne to leave, actual export will be in dribbles.
Meanwhile, cane arrears have crossed Rs 8,400 crore, a world record. This staggering figure has also surpassed India's own all-time high of Rs 5,600 crore in April 2008.
By end of the season, at least Rs 10,000 crore of farmer money may well be locked up in dues, triggering an acute farm credit crisis and worsening tensions between farmers and industry.
The biggest time bomb is ticking away in UP, where arrears have touched Rs 3,354 crore, and will be Akhilesh Yadav's first real test as chief minister.
Farmers are becoming restive and will definitely demand action from the Samajwadi Party, which portrays itself as a messiah of the state's sugar industry. Putting pressure on mills to pay farmers will be pointless until their cash flows improve. Cash flows won't increase until exports drain away excess supply and sales pick up pace in the entire country.
In other words, to keep his poll promises, Akhilesh Yadav will have to ensure that Krishi Bhawan urgently overhauls its sugar export policy. Will he succeed is anyone's guess. More distressing is what this indicates about the government's current mindset.
Most sectors are suffering from a policy paralysis. The rest are paralysed by policy. Either way industry and agriculture are left immobilised. Sugar is just one victim.
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