Bitter glut

The Rs.7,000-crore bailout package for the sugar sector comes as a relief to farmers, who are in genuine distress, but experts say such measures will not help in the long run.

Sugar cane farmers with their produce, a file picture.

India’s sugar industry is not just a source of income and sweetener for millions, it is a key ingredient in the country’s politics. An Rs.80,000-crore labour-intensive industry that is spread across the country, sugar cultivation and its value chain are a main source of employment in large tracts of rural India. In several regions, voting patterns depend on the treatment given to the sugar sector.

In the past year, the sugar industry has been plagued by a glut in production that has led to distress in the farming sector as mills are unable to pay farmers for the oversupply. It became increasingly evident that the situation needed to be addressed, failing which the road to the 2019 general election would not be sweet at all. A Rs.7,000-crore bailout package for the sector was announced in early June, proving yet again that sugar would always get preferential treatment. On the flip side, analysts said, farmers were in genuine distress and needed the bailout but these “band aids” were not a long-term solution.

At almost 32 million tonnes in 2017-18, the supply has created approximately Rs.22,000 crore in pending arrears for sugar cane farmers in the country, according to the Indian Sugar Mills Association (ISMA). With the situation rapidly deteriorating, government intervention was required. In May 2018, just ahead of the Karnataka Assembly elections, the Bharatiya Janata Party-led Central government allocated Rs.1,540 crore towards clearing arrears. This included a production-linked subsidy of Rs.55 a tonne of sugar exported. Karnataka is one the top sugar producers in the country.

The bailout package, announced by the Cabinet Committee on Economic Affairs, reimburses farmers for their produce on a quarterly basis. The clincher is that the money will be credited directly to their bank accounts. The package includes a fixed minimum selling price of white (refined) sugar of Rs.29 a kilogram (prices had dropped to Rs.23-24 in recent months owing to the overproduction). It provides for the creation of a buffer stock of three million tonnes for one year at an estimated cost of Rs.1,175 crore to the exchequer. The stock will be kept in 500 sugar mills across the country.

The package includes Rs.4,450 crore worth of soft loans that will be granted to mills to increase their ethanol-producing capacity. The ethanol is to be blended with petrol, which will help in reducing oil consumption. The government would bear an interest subvention of up to Rs.1,332 crore over a period of five years with one-year moratorium on these loans, which will be sanctioned by banks over a period of three years.

“This would help diversion of sugar to ethanol production during surplus years to reduce excess inventories,” the committee said in a statement.

Political observers said that the sugar distress was the main reason for the BJP’s setback in the byelection held in Kairana in Uttar Pradesh in May. In the run-up to the 2017 Uttar Pradesh Assembly elections, the BJP’s chief ministerial candidate, Yogi Adityanath, had promised that farmers would be paid within 14 days of selling sugar cane and that all cane would be bought by the mills. However, he did not keep the promise and observers believe it cost the party in the byelection.

The bailout package’s timing and intentions may be questionable, but the package is necessary to help debt-ridden farmers, analysts said. But only short-term measures had been announced to tide farmers over, a commodity analyst based in Mumbai said. “Hopefully, the money will be credited soon.”

“We need far more long-term and stable policies,” said Shyam Prasad Gurye, a director of the AK Sugar Cooperative in Kolhapur. “Most farmers will take whatever payment is made just to recover costs, pay loans and earn a livelihood. That is unfair. Sustainable measures are required as the industry is volatile,” said Gurye, who owns eight hectares of sugar cane.

According to the ISMA, unless the price is Rs.35 a kg at the gate (mills paying farmers) there will be little relief. Sugar, unlike rice, wheat and cotton, is not procured by the government at a minimum support price (MSP). Instead, sugar cane farmers sell their produce to sugar mills at the government-notified fair and remunerative price (FRP).

According to the Cabinet Committee, the FRP for sugar cane has been determined on the basis of the recommendations of the Commission for Agricultural Costs and Prices and after consultation with State governments and other stakeholders. The recommended FRP has been arrived at by taking into account various factors such as cost of production, overall demand-supply situation, domestic and international prices, inter-crop price parity, terms of trade prices of primary by-products, and the likely impact of the FRP on general price levels and resource-use efficiency.

Ex-mill sugar prices need to be Rs.35 or above for mills to be able to pay the FRP, the ISMA said in a press note. The Cabinet Committee said that the “government will put in place a mechanism to ensure that the retail prices of sugar are kept fully under control. At present, this would be done along with imposition of stock holding limits on sugar mills.” It added: “Stock holding helps the government regulate the amount of sugar released in the market. This helps in controlling sugar prices.”

It has been estimated that excess production has already pushed sugar prices down to Rs.3,100-3,200 a quintal, ex-factory (one quintal equals 100 kg). The FRP for sugar cane for this season is Rs.255 a quintal, but most States have announced a State advised price (SAP) in the range of Rs.300-325. With the current level of sugar prices, mills are not able to cover even their costs. Sugar mills are not in a position to pay farmers and meet other costs, including wages.

“None of the measures are new. Every government does it,” said Vijay Jawandhia, leader of the Shetkari Sanghatana based in Wardha, Maharashtra. The veteran farmer and activist said that whenever there was a sugar glut, four measures were taken immediately: Increase the import duty, give subsidies for exports, give interest-free loans, and support farmers directly.

Jawandhia said that sugar farmers did require help, but added that the bigger problem was preferential treatment given to the crop compared with others, as a result of which farmers opted to grow cane and added to the glut. “These lopsided policies have got us in this situation,” he said. He pointed out that every possible subsidy, from seeds to fertilizer, was handed out to the sugar sector. Infrastructure such as canal and drip irrigation with subsidies was also given. “Obviously, everyone wants to be a sugar farmer.”

Sugar is a commodity that is caught in a vicious pattern of boom and bust, which is determined by crop outcome. According to the commodity analyst, the cycle is such that when there is oversupply in a year the prices tend to fall and mills are unable to pay farmers. The following year farmers plant less, leading to lower production and therefore high prices. Encouraged by high prices, farmers plant more acreage the next year, and the cycle continues.

The ideal production figure is around 25 million tonnes for domestic consumption and exports, according to an expert. The Directorate of Sugar and Vegetable Oils said that production was 20 million tonnes in 2016-17, compared with 25 million tonnes in 2015-16, leading to higher prices, which were the reason for the rise in area under cultivation and production in 2017-18.

Jawandhia said that other factors, such as the neglect by the government in buying pulses, had also led to the crisis. According to a report, the inability of the government to lift the massive tur production last year resulted in farmers going back to planting cane. Maharashtra farmers were encouraged in 2016 to shift from cane to tur to combat the water shortage (“Distress in abundance”, Frontline , May 26, 2017). But owing to the excess stock and lack of commitment from the government, farmers went back to sugar cane. Maharashtra is the second highest producer of sugar after Uttar Pradesh and is partly responsible for the current glut.

Last year, the Centre doubled sugar import duties to 100 per cent and abolished the export duty to check sliding domestic prices. It also asked the mills to export two million tonnes of sugar. However, the export market was not an option owing to a slump in prices there as well.

The solution lay in long-term measures proposed by the C. Rangarajan Committee report, the analyst said. These include an overhaul of the sugar control orders, harvesting and supply of sugar cane to mills in an ordered manner for better recovery of sugar, providing technical and other support to farmers by mills, addressing the trust deficit between farmers and mills, and introducing an intermediary mechanism to ensure fair prices and timely payment.

A study by Crisil, an analytical company, said: “Worryingly, with the supply surplus situation anticipated to continue into 2019 as well, a further build-up in arrears cannot be ruled out. The offer of financial support to mills for setting up distillery capacity is unlikely to find many takers, given the financial situation of the industry.”