COMMENT – Sucre Bleu! The bitter aftertaste of Indian sugar industry

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A farmer in India's Maharashtra state transports sugarcane. Photo/IAC

It may well be called a problem of plenty!

Sugar output in India, the world’s second-largest producer after Brazil, is expected to increase by 17.69 per cent to 32.01 million tonnes during the season beginning October 2020 on likely higher availability of sugarcane for crushing.

However, the positive development has failed to amuse private sugar mill owners as they worry about surging cane payment arrears, a crippling lack in demand due to the lockdown and hence bleak profits in the months ahead.

The industry has literally been caught between the devil and the deep sea. On one hand, sugar mills have huge cane arrears to be paid to the farmers and on the other sources of revenue have dried up in the last two months. The problem with higher output is that millers also end up with higher arrears.

While there is immense pressure to pay farmers, the liquidity of the mills needs to improve.  Sugar sales have been hit by the closure of malls, mithaiwalas, restaurants, cinema halls, etc. To top it, ethanol sales too have plunged as oil marketing companies are not lifting stocks.

India’s consumption of sugar per year is between 26 and 27 million tonnes, and this trend is declining every year, thanks to the country’s health consciousness. That leaves almost 5 million tonnes of surplus sugar. To be honest, no one has any confirmed clue what to do with surplus sugar. 

India could export, but…

Sure, we could export, but India’s excess sugar production also determines the global sugar prices, and exports thus become economically non-viable. In fact, what little exports we do, have to be incentivised by the government.

India has the potential to export to major Indian Ocean markets due to freight competitiveness with respect to key competitors, Brazil and Thailand. However, due to the increasing emergence of destination refineries, key markets are importing greater share of raw sugar, and India’s competitiveness for raw exports is relatively lower.

Currently, India’s competitiveness is higher in markets, where share of white sugar imports as percentage of cumulative imports is higher. India would thus need to build the capability to produce raw sugar and refined sugar of international quality standards, in order to leverage the export opportunity.

Last year, the central government made three key policy interventions to help Indian sugar industry and sugarcane growers. It approved higher price for ethanol, it permitted export of 60 lakh tonnes of surplus stocks of sugar and sanctioned the creation of a buffer stock of 40 lakh tonnes of sugar for one year.

The move would have improved the liquidity of sugar mills, reduce sugar inventory and facilitate timely clearance of cane price dues of farmers and reduce sugarcane price arrears of sugar mills. Alas, the lockdown blues put paid to this booster shot.

Root causes of troubles

However, these still do not address the root causes of the industry.’s troubles. The primary issue is the problem of plenty. Unlike other crops, sugarcane prices are fixed by the government and every sugar mill is legally bound to procure whatever quantity of sugarcane is produced within the catchment area earmarked for them.

The assured income, which is higher than most other crops, is an incentive to the farmer to cultivate more, thereby adding to the existing glut in sugar production.

The second is that the higher the price of the raw material (sugarcane), the lower the price competitiveness of Indian sugar in the global market. The export of surplus sugar thus means an additional subsidy burden on the government.

Even the export subsidy is not without risks. While the government states that under the World Trade Organisation (WTO) rules, the provision to announce subsidy on export of agri-products is open to India till 2023, other WTO members are not convinced.

The recent trend of blending petrol with ethanol for fuel requirements, however, is likely to hold the industry in good stead. Ethanol contributes nearly 10-15 per cent of the sugar mills’ turnover for integrated sugar mills. Remunerative ethanol prices will encourage sugar mills to enhance the supply of ethanol for blending, thereby supporting their revenues, profitability and improving their ability to pay sugarcane farmers.

Will reduction in acreage work?

To deal with such problem of surplus, the government’s think tank, NITI Aayog recently recommended reduction of sugarcane cultivation acreage by 300,000 hectares. The normal area under cane cultivation is 4.8-4.9 million hectares. In the last three years, it has gone up to 5.1-5.2 million hectares.

This higher acreage has resulted in the country harvesting cane in the 360-400 million tonnes range. Indeed, reducing acreage might help issues of surplus sugar production, inventory burden, huge costs associated with buffer stocks, incentive-driven export and not the least, water-guzzling nature of the crop. 

But the lucre of sucre is unlikely to lead into any acreage trimming. A large number of sugar mills are directly or indirectly owned and controlled by politicians. Lack of adequate political would most likely ensure that status quo continues. The only long-term hope for the industry is an increase in domestic demand and a hefty increase in sugar prices.

Both seem unlikely until the Covid-19 pandemic ends. 

Shekhar Ghosh is consulting editor, Indoasiancommodities.com. He has edited and written for publications like Business India, Business Standard, Business Today, Outlook and many other international publications. He can be reached at shekhar.ghosh@indoasiancommodities.in.

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