Kunal Bose / Jul 17, 2012,
Business Standard
The finance ministry’s chief economic adviser, Kaushik Basu, also a member of the C Rangarajan committee on sugar, made an inspiring observation some months ago that the goal was to realise the potential of the Indian sugar industry, on the lines of Brazil. Unlike in India, where the fortunes of cane crushing mills, chained by dispensable controls, are linked to the infamous sugar cycle, factories and the farming community in some major sugar producing countries have prospered in an open business environment. This undeniably encouraged Basu to say, “We are serious about sugar de-control... I’m keeping my fingers crossed. Things will happen.”
The Director General of Indian Sugar Mills Association (Isma), Abinash Verma, remains unrelenting in his legitimate demand that an exception not be made of sugar, where the public distribution subsidy is borne by factories. At a 10 per cent levy on sugar production, which the government buys at less than 70 per cent of production cost, the industry has a subsidy burden of about Rs 3,000 crore. The government cannot any longer shy away from the fact that while it is running a subsidy bill of over Rs 100,000 crore on food items, it continues to oblige sugar factories to make available the sweetener for the ration shops at hugely below production cost. Verma wants this procurement to be done by way of government agencies floating tenders and factories competing to get the business.
The principle of equity and the realisation that the country’s second largest agro-based industry, on which depends the well-being of over 50 million farm families, will do better without the government interfering in its work in more than one way, provoked Basu to be so vocal about de-control. Unpaid cane bills running into a few thousand crores at regular intervals are incontrovertible proof that the present dispensation is not working.
Cane is a cash crop. Besides remunerative prices for cane, mills settling bills in time is what encourages farmers to stay with the crop and not move their land to wheat or maize. “But we will be wrong in believing that doing away with the levy, which though will leave a good amount of money with the factories, will be the panacea for all the ills of the sugar industry. I hope the Rangarajan committee recommends a formula establishing a linkage between cane and sugar prices. Sugar prices should also factor in realisations from ethanol (derived from molasses) and electricity (generated by burning the by-product bagasse),” says former Isma president Om Dhanuka.
Broadly, farmers should get a lump sum payment at the time of leaving cane at the factory gate and thereafter the combined realisation from sugar, ethanol and electricity will decide the final payment to them. For the system to work without leaving scope for political outcry, farmers should at all times be assured of getting a premium over the minimum support prices (MSP) for cane. This is the only way to get them permanently hooked on to growing cane.
Cane price fixing got distorted with governments in some states making it a practice to load a big premium on centrally fixed MSP. This, no doubt, is done to placate farmers without, however, a care for the harm it inflicts on the sugar economy. The challenge, therefore, will be to get all the constituents on board for a smooth transition to a new cane price fixing mechanism under which rewards for farmers will move in tandem with sugar prices. In the past, buffer stocking in times of bumper supply, as is the case this season, to be hopefully followed in 2012-13 (October to September), helped factories with the financing cost of the official stockpile getting shifted from the industry to the government. How big should the buffer be? “It could easily be two million tonnes (mt) or even more, considering the next season will open with stocks of over nine mt and Isma’s estimate of 2012-13 production is 25.1 mt, linked to a recovery rate of 10.18 per cent. As a buffer on government account will give some financial relief to factories, they are legitimate in their demand that their bank loans are restructured as has been done for textile mills,” says Dhanuka.
Given the right set of policies, the industry has the potential to become a sustainable supplier to the world market and live down the present image of a wild card entrant in the export arena. The government removing the cap on sugar sales abroad and putting the commodity under open general licence are helping the cause of exports. At the same time, the government has to ensure exports stay within “comfort level,” meaning the domestic market is not impacted by shortages at any point.
As it would happen, on the heels of export liberalisation, short-term weather-related supply issues from Brazil’s centre-south region, accounting for 90 per cent of that country’s production, vigorous Chinese imports for stockpile replenishment, uncommon dryness in the US lifting corn prices and monsoon concerns in India have combined to lift white sugar to around $650 a tonne and raws to close to 23 cents a pound.
Business Standard
The finance ministry’s chief economic adviser, Kaushik Basu, also a member of the C Rangarajan committee on sugar, made an inspiring observation some months ago that the goal was to realise the potential of the Indian sugar industry, on the lines of Brazil. Unlike in India, where the fortunes of cane crushing mills, chained by dispensable controls, are linked to the infamous sugar cycle, factories and the farming community in some major sugar producing countries have prospered in an open business environment. This undeniably encouraged Basu to say, “We are serious about sugar de-control... I’m keeping my fingers crossed. Things will happen.”
The Director General of Indian Sugar Mills Association (Isma), Abinash Verma, remains unrelenting in his legitimate demand that an exception not be made of sugar, where the public distribution subsidy is borne by factories. At a 10 per cent levy on sugar production, which the government buys at less than 70 per cent of production cost, the industry has a subsidy burden of about Rs 3,000 crore. The government cannot any longer shy away from the fact that while it is running a subsidy bill of over Rs 100,000 crore on food items, it continues to oblige sugar factories to make available the sweetener for the ration shops at hugely below production cost. Verma wants this procurement to be done by way of government agencies floating tenders and factories competing to get the business.
The principle of equity and the realisation that the country’s second largest agro-based industry, on which depends the well-being of over 50 million farm families, will do better without the government interfering in its work in more than one way, provoked Basu to be so vocal about de-control. Unpaid cane bills running into a few thousand crores at regular intervals are incontrovertible proof that the present dispensation is not working.
Cane is a cash crop. Besides remunerative prices for cane, mills settling bills in time is what encourages farmers to stay with the crop and not move their land to wheat or maize. “But we will be wrong in believing that doing away with the levy, which though will leave a good amount of money with the factories, will be the panacea for all the ills of the sugar industry. I hope the Rangarajan committee recommends a formula establishing a linkage between cane and sugar prices. Sugar prices should also factor in realisations from ethanol (derived from molasses) and electricity (generated by burning the by-product bagasse),” says former Isma president Om Dhanuka.
Broadly, farmers should get a lump sum payment at the time of leaving cane at the factory gate and thereafter the combined realisation from sugar, ethanol and electricity will decide the final payment to them. For the system to work without leaving scope for political outcry, farmers should at all times be assured of getting a premium over the minimum support prices (MSP) for cane. This is the only way to get them permanently hooked on to growing cane.
Cane price fixing got distorted with governments in some states making it a practice to load a big premium on centrally fixed MSP. This, no doubt, is done to placate farmers without, however, a care for the harm it inflicts on the sugar economy. The challenge, therefore, will be to get all the constituents on board for a smooth transition to a new cane price fixing mechanism under which rewards for farmers will move in tandem with sugar prices. In the past, buffer stocking in times of bumper supply, as is the case this season, to be hopefully followed in 2012-13 (October to September), helped factories with the financing cost of the official stockpile getting shifted from the industry to the government. How big should the buffer be? “It could easily be two million tonnes (mt) or even more, considering the next season will open with stocks of over nine mt and Isma’s estimate of 2012-13 production is 25.1 mt, linked to a recovery rate of 10.18 per cent. As a buffer on government account will give some financial relief to factories, they are legitimate in their demand that their bank loans are restructured as has been done for textile mills,” says Dhanuka.
Given the right set of policies, the industry has the potential to become a sustainable supplier to the world market and live down the present image of a wild card entrant in the export arena. The government removing the cap on sugar sales abroad and putting the commodity under open general licence are helping the cause of exports. At the same time, the government has to ensure exports stay within “comfort level,” meaning the domestic market is not impacted by shortages at any point.
As it would happen, on the heels of export liberalisation, short-term weather-related supply issues from Brazil’s centre-south region, accounting for 90 per cent of that country’s production, vigorous Chinese imports for stockpile replenishment, uncommon dryness in the US lifting corn prices and monsoon concerns in India have combined to lift white sugar to around $650 a tonne and raws to close to 23 cents a pound.
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