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Bitter state of the sweet sector
The Indian Sugar Mills Association (ISMA) established in 1932 is among the oldest industrial associations. 260 sugar mills from the country, both from the public and private sectors, are members of ISMA. How effective is ISMA in the formulation of the sugar policy?

The association maintains a strong database for the sugar industry and has been successfully lobbying with the government for the decontrol of the sugar industry that started in the late 1970s.

ISMA has also been successful in achieving a mandatory five per cent blending of ethanol with petrol. This has increased to ten per cent in some states.

Abinash Verma, Director General, ISMA, made a powerful presentation on the present crisis in the Indian sugar industry. He pointed to Tamil Nadu mills suffering the worst. In a recent comprehensive presentation in Chennai Verma provided rich material on the present status of the sugar industry. Highlights:

•    Sugar production over the last five years (including estimate for the current season) is consistently in excess of consumption. In the current year, for instance, production is estimated at 248 lakh tonnes.

•    Average domestic sugar prices have been falling steeply. From the peak of Rs 31.48/kg in 2012-13 to around Rs 22/kg today.

•    Cane price fixed by the Central government increased from Rs 1450/tonne for 2011-12 to Rs 2200/tonne for 2014-15. This price has been computed by the Centre as fair and remunerative to the farmer factoring cost of production, insurance, transportation of cane to factory gate and an element of profit.

•    Five state governments fixed state-advised prices that are much higher than the FRP fixed by the Centre.

•    Sugar mills have been unable to generate enough cash resulting in mounting arrears of payment for cane procured from the farmers. These arrears shot up from Rs 8577 crore at the end of 2011-12 to Rs 19,250 crore as at the end of March 2015.


Tamil Nadu’s precarious position

The position is precarious in Tamil Nadu, the fourth largest sugar producing state after Maharashtra, Uttar Pradesh and Karnataka. Over the last three years the state has been recording a steep decline: cane area dropped from 3.35 lakh ha in 2011-12 to 2.55 lakh ha in 2014-15; number of cane farmers dropped from 4.25 lakh to 3.25 lakh in this period. Cane production dropped from 353 lakh tonnes to 217 lakh tonnes. Yield per ha also dropped from 105 tonnes to 85 tonnes with recovery also declining from 9.33 per cent to 9 per cent. Cumulatively, sugar production declined from 24.43 lakh tonnes to 13 lakh tonnes.

In these four years sugar production of Maharashtra, the largest producer that accounts for close to 40 per cent of production increased from around 90 lakh tonnes to 100 lakh tonnes. UP produced 69.74 lakh tonnes in 2011-12 and 67 lakh tonnes in the current year. Karnataka recorded an increase from 38.72 lakh tonnes to 45 lakh tonnes.

Over this period cane price paid increased from Rs 1900/tonne to Rs 2450/tonne on an average. In contrast, average ex-mill price of sugar dropped from Rs 2880/tonne to Rs 2500/tonne.

High cane prices, un remunerative sugar prices and poor ethanol blending...

Verma described the situation as a crisis with average cost of production at Rs 3277 - far higher than the average ex-mill price estimated at Rs 2500. He described the condition as far more disturbing for mills in Tamil Nadu due to the following factors:

1.    The unreasonably high cane prices mandated by the state at Rs 2650/tonne with 9.5 per cent recovery. But average recovery in Tamil Nadu is lower at 9 per cent.

2.    Average ex-mill sugar price is un-remunerative at Rs 2500/quintal.

3.    Mills in Tamil Nadu resisted to pay state-advised prices and had offered to pay Rs 2450/tonne of cane. Even this entails sizeable losses.

4.    Tamil Nadu levied a five per cent VAT on sugarcane from November 2014. But there is no CST on sugar for inter-state movement making it disadvantageous for the state.

5.    TN also levies a 14.5 per cent VAT on rectified spirit/extra-neutral alcohol. Against this, there is only a two per cent CST on RS/ENA procured from other states. This makes TN distilleries uncompetitive.

6.    The high tax on molasses also makes it un-remunerative to produce ethanol that can be a good alternate route to divert a portion of sugar production to ethanol.

7.    The tariff for bagasse-based power supplied to TANGEDCO is much lower at Rs 3.67 to Rs 4.15 per unit against Rs 6.07 to Rs 6.27 per unit in Maharashtra.

Verma pointed to ethanol blending at present at just three per cent against the mandatory five per cent for the nation; there is potential to blend up to 10 per cent.


Brazil model will help...

Brazil has been a leader in using a high percentage of ethanol as automobile fuel, massively reducing consumption of petroleum fuels. Such a course will make sense for India spending precious foreign exchange on import of crude. There is big potential to cut production of sugar in the secondary and tertiary extraction from molasses and divert this to produce ethanol. But this needs a tax incentive. Lack of this incentive forces distilleries in Tamil Nadu not to produce ethanol. The 12.5 per cent excise duty on ethanol could be moderated and even eliminated to encourage production of ethanol,instead of sugar suggested Verma.

This will bring in twin advantage: to meet the problem created by over production of sugar entailing huge costs on mounting stocks. Second and more important: the ethanol produced, which can be as high as 130 crore litres, can reduce substantially consumption of petrol based on imported crude.

Verma was logical and was well-armed with data. Sadly, despite its long years of experience the sugar industry has been extremely poor in effectively putting forth its strengths. Obviously, with such large numbers of sugarcane farmers, political parties bend backwards to please this constituency. Price distortions have been allowed to persist right from 1978 with the sugar mills content with passing on the burden to the consumer and by improving returns through alcohol and co-generated power.

ISMA had bothered to make a presentation in this manner perhaps for the first time in Chennai metro. Sugar barons of the state had not bothered to do this despite the severe crisis suffered. Tamil Nadu’s finances are not in great shape with a debt burden of over Rs 2 lakh crore and high revenue deficits. The subsidy burden is again extremely high. To plead at this juncture for more subsidies appears unrealistic.

IE has been suggesting sugar barons and the South Indian Sugar Mills Association (SISMA) for frequent interactions with media to project its point of view. It is welcome that it has done this through ISMA.

With a large constituency of cane farmers numbering over three lakh forming a large vote bank, the government would not be keen to lower cane prices, especially when elections are due in a year.

But the crisis is real and serious. There is real danger of the sugar industry, developed in the state over the last four decades of getting priced out.  Like the fertilizer industry of the state that once flourished but is now terminally sick, the sugar industry can also face extinction.

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