India’s sugar output is likely to shrink to a three-year low due to lower production in Maharashtra and elsewhere, and that, in turn, will provide support to sugar prices. It will be of some help to cash-strapped mills struggling to clear off the whopping $4.38 billion of cane dues owed to the farmers. But this will be temporary relief at best.
The problem of sugar glut is not going away any time soon simply because the supply far exceeds the demand, and exports invariably fall short of the targets because Indian sugar is expensive due to costly cane – the raw material – which leads to unsold inventories and unpaid dues to the growers.
To help financially stressed sugar mills, the Narendra Modi government has taken a series of measures like creating a three million tonne buffer stock, and providing soft loans to enhance ethanol capacities. The import duty has been raised to a whopping 100 per cent, export duty has been scrapped, and a modest subsidy is on offer to push export and somehow help dispose off the extra sugar that India doesn’t need. Yet, mills are sitting on huge unsold (sugar) stocks worth $11 billion or so, according to Indian Sugar Mills Association (ISMA).
It is obvious the Modi government’s measures are not working. Due to uneconomic pricing of cane, sugar mills are bleeding, yet the cane growers – the intended beneficiaries – are not happy because they are not being paid on time. India needs nothing short of a complete overhaul of its regulatory regime to make its sugar industry financially robust and compete successfully in both domestic and overseas markets.
Over the years, successive governments’ half-hearted attempts at deregulating the prices of sugar and its by-products, while retaining complete control over cane pricing, have ruined the financials of mills, resulting in mounting arrears to the farmers. Yet, the ad hoc approach to policy-making – guided by electoral math (the fate of as many as 60 Lok Sabha MPs is tied to cane growing voters spread over Uttar Pradesh, Maharashtra, Karnataka, Tamil Nadu among others) – continues, resulting in frequent demands for bailout by both sugar mills and cane farmers.
To deal with the present sugar glut, the BJP government’s latest move to hike floor prices of sugar by Rs 2 to Rs 31 per kg, with possible revisions, won’t be enough given the subdued demand condition and over-supplied markets. Besides, raising floor price will make Indian sugar more un-competitive and dampen export prospects. The current BJP government could come up with non-inflationary ways to help farmers without the need for populist hikes, which invariably encourage cultivation of water-intensive cane crop in water-deficit regions like Maharashtra.
The move to raise ethanol’s regulated price by 25 per cent and offer subsidised loans are well-intentioned but carry two major flaws. First, they will not help in dealing with cane and sugar over-production in the short run. Second, the measures’ success will depend upon continuance of high crude oil prices to keep oil marketing companies interested in blending ethanol with petrol. That’s not certain.
If crude oil prices fall sharply, oil marketing companies will be less interested in blending unless the government prunes down ethanol prices, which the sugar mills will resist.
Therefore, prodded by the incentive of regularly hiked cane prices, if the farmers continue to over-produce cane and the mills do so ethanol, and if the government doesn’t cut ethanol prices when the crude prices fall, two things will happen – either the oil marketing companies will reduce blending, which will make these new ethanol production capacities redundant, or they will incur losses. Neither of this situation is desirable but that’s where the central government’s policies on ethanol are heading.
The flawed cane pricing
It’s populism rather than smart economics that guides the fixation of cane prices in India. In contrast, the price of output – sugar and molasses – are determined by market forces. Moreover, the price of ethanol, another by-product, is fixed by the government. This regulatory hotchpotch has been at the root of India’s sugar mess.
Yet, successive Indian governments have been raising cane prices irrespective of the deficit or surplus in sugar output, with no reference to prevailing sugar prices. As a result, the fair and remunerative price (FRP) of cane fixed by the Centre has more than doubled in the last nine years from Rs 130 per quintal to Rs 275 per quintal. The state governments, in particular of Uttar Pradesh – India’s largest cane and sugar producing state – further raised its state advised price (SAP) for cane to Rs 315 per quintal in October 2017 while ignoring the Centre’s advice to follow the FRP.
The hikes in cane prices – now a matter of WTO dispute – maybe favourable to farmers, but they encourage over-production of cane, which the mills are mandated to buy. This erodes their margins and results in piling up of cane arrears, especially in times of surplus production that pushes sugar prices down. Unfriendly regulations for production and inter-state movement of by-products such as molasses add to the problem.
Market distortion doesn’t end with cane or its by-products. India’s Jute Packaging Materials Act, 1987 warrants that 20 per cent of the total sugar output be packed in jute bags that are three times costlier than polythene bags, and prone to bacterial contamination often leading to rejection of consignments by bulk buyers such as beverage makers, confectioners and pharmaceutical companies – which together account for 60 per cent of India’s sugar sales by value.
The way forward
In order to put an end to India’s sugar mess on a sustainable basis, linking cane prices with those of sugar and its by-products are urgently called for. This will also help make Indian sugar price competitive enough to withstand competition both in export and domestic market without the need for government intervention.
To deal with farmers’ opposition when cane prices are lowered in line with falling sugar prices, the Modi government may consider compensating the farmers directly on the basis of how much cane they have supplied to the sugar mills. Raising productivity and sugar recovery rates are other non-inflationary ways to help farmers without going for populist hikes in cane prices. India badly needs a gutsy leadership to resolve the regulatory mess created over the years to tame its sugar glut. Unfortunately, that’s not forthcoming.
The author is co-founder, director and head of agricultural and food at Indonomics Consulting, a policy research, advisory and advocacy startup. She also tracks India’s cane and milling sector for the client Sugaronline. Views are personal.