COMMENT – India’s sugar conundrum – caught between surplus and subsidy

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Photo by Haifsa Rafique on Unsplash

For the sugar season which has started, the annual production is estimated to be 326 lakh tonne, without any diversion towards ethanol, and the season has started with opening stock of 107 lakh tonne.

Thus India’s sugar stock at the end of the season is estimated to be a whopping 433 lakh tonnes. Domestic consumption of sugar is around 260 lakh tonnes. That leaves the country with an excess sugar stock of over 70 lakh tonnes.

Early this month, Union Commerce and Industry Minister Piyush Goyal announced that the central government is not considering an extension of its export subsidy for the 2020-21 sugar season. The sugar industry reacted strongly. The industry warned of a ‘vertical collapse’ in the sector due to excessive stock, whose ramification can be felt in the years to come.

Modus operandi

This is how it works. At the start of the (October-November) sugar season, the industry draws up its balance-sheet and takes into consideration the expected production, the carry forward stock of last season, minus domestic consumption and exports, if any.

This sugar balance-sheet determines the availability of sugar for the next season. In case of unusually high stock, ex-mill prices remain low for the present season as well as for the upcoming season, which result in liquidity crisis for the sugar sector.

The obvious solution to correct this surplus inventory crisis is to promote export of sugar. Sugar mills export both white as well as raw (unrefined sugar which is brownish in colour) sugar.

Even If 50 lakh tonnes of sugar is shipped out of the country, the opening stock would reduce to around 100 lakh tonnes, providing the mills a healthy inventory as well as liquidity from exports. 

However, the mills are reluctant to export sugar without a government subsidy. Their reluctance is because of the gap between cost of manufacturing and the current price of raw sugar in international markets.

Sugar contracts at international markets are trading at Rs 21-22 per kg, while the domestic cost of production is at Rs 32 a kg. This price mismatch has ruled out any export prospects as this would lead to further loss for the mills.

Problem of plenty

Ironically, mills are facing this problem at a time when Indian sugar has made its mark in the international markets. Last season, India has reported record sugar export of 60 lakh tonne, of which 57 lakh tonne have already left the the country. The remaining consignment is expected to leave by the end of December.

Other than the traditional markets of Bangladesh, Malayasia and Sri Lanka, Indian mills have also shipped their produce to newer countries like Iran, China, South Korea and Somalia.

India has been giving incentives for sugar exports as the country has been consistently producing excess sugar for several years. In October 2019, of the 6 million tonnes of quota given for export by the government, the industry exported 5.9 million tonnes of sugar in 2019-20.

The record export level last season was possible only because of the subsidy programme offered by the central government. Mills were promised a transport subsidy of Rs 10.448 per kg of sugar exported. This subsidy had helped mills bridge the difference between production costs and international prices.

To add to the industry’s woes, last season’s exports haven’t really helped mills generate enough liquidity. The central government is yet to release the export subsidy due to the mills and the total due is as high as Rs 6,900 crore. Individual mills had taken loans to facilitate exports and now they have to pay interest to the banks. Unpaid interest of Rs 3,000 crore to maintain buffer stock has also hit the balance sheet of mills hard.

The Covid-19 pandemic has further delayed the release of subsidy, which has led to many mills not having sufficient liquidity at the start of the season.

Global attention

India holds quite a pivotal position in the global sugar industry. The ruling out of any extension of the subsidy scheme by minister Goyal is because the international sugar scenario is currently stable. Last season a delay in India’s export subsidy scheme had seen sugar prices rallying, and the benefit was largely drawn by Brazil, the largest sugar manufacturer of the world.

Indian exporters as well as buyers in the global sugar market are keenly awaiting India’s export policy announcement. Even after more than a month into the new sugar year, which started on October 1, India hasn’t signed export contracts as there is no clarity about the export subsidy that was extended for the past two years.

As a second Covid-19-induced lockdown looms large over Europe, Brazilian mills are considering diverting 48 per cent of their cane towards sugar production, much higher than the earlier 35 per cent they were planning to. This might play havoc with international prices of sugar next year threatening to increase the gap between international prices and India’s domestic cost of production.

Ethanol diversion

The government is also keen that Indian sugar mills divert sugar production to making ethanol, the fuel additive to reduce India’s crude import bill. Last month, the central government announced a Rs 1-3 per litre rise in the procurement price of ethanol. This is the second signal given by the government to mills to divert cane towards production of ethanol rather than sugar.

Currently India blends a little over 5% ethanol into its petrol retail sales. The target of a 10% ethanol blend can only be met nationwide if cane- producing states are allowed to blend more than 10%, possibly close to 20% to compensate for lower blending rates in other states. It is simply not efficient to transport fuel ethanol long distances to non-producing states, burning diesel in the process.

So, even though the sugarcane industry is generally supportive of ethanol and believes it could help resolve the sugar surplus, in 2020 the impact of ethanol will remain fairly limited. The current blending rate will be no more than 5.3% to 5.7% 2.6 billion litres, corresponding to no more than 600,000 tonnes of sugar equivalent.

The industry has estimated that this year, nearly 20 lakh tonnes of sugar will be diverted towards producing ethanol. Last year, the central government had announced an interest subvention scheme for mills to augment production of ethanol.

But diversion to ethanol, although a much-needed move, will require time to materialise. With the present capacity, mills can produce 426 crore litres of ethanol, which would require diversion of 15-20 lakh tonnes of sugar.

The government’s move to encourage mills towards ethanol production is certainly welcome, But it would require more capital and time. For the current season, however, if export of sugar is not made viable through subsidies, not only will India lose its market share, sugar mills in the country will face a debilitating liquidity crunch. 

Shekhar Ghosh is a communications consultant and and former journalist, who has edited and written for publications such as like Business India, Business Standard, Business Today and Outlook.

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