Sugar is the second largest agro-based industry in India. The industry provides employment to about two million skilled and semi-skilled workers besides those who are employed in ancillary activities, mostly from rural areas. Though the industry contributes a lot to the socio-economic development of the nation, it is plagued with a number of problems such as cyclical fluctuations, high support prices payable to farmers, lack of adequate working capital, partial decontrol and the uncertain export outlook.
Despite the problems, the industry has good growth potential due to steady increase in sugar consumption, retail boom and diversification into areas such as power generation and production of ethanol. In addition to this, strong possibilities exist for counter trade, if the Government designs and develops sugar industry-oriented policies. With this background, an attempt has been made to examine the problems and prospects of sugar industry in India.
Sugar Industry in India is well developed with a consumer base of more than billions of people. It is also the second largest producer of sugar in the world. There are around 45 million of sugarcane growers in India and a larger portion of rural labourers in the country largely rely upon this industry. Sugar Industry is one of the agricultural based industries. In India it is the second largest agricultural industry after.
Forced by the severe domestic shortages and abnormally high sugar prices since beginning of 2009, the Government of India (GOI) took several measures to relax import restrictions to augment domestic supplies. On February 17, 2009 the government relaxed the norms for duty free imports of raw sugar under the advance licensing scheme (ALS) exempting future export commitments from actual user conditions for raw sugar imports during February 17, 2009, the government allowed mills to import raw sugar at zero duty under the open general license (no future export commitments).
The government also allowed select State Trading Enterprises (STEs) to import white sugar at zero duty. Subsequently, on July 31, 2009, the government allowed duty free imports of white sugar by traders and processors until November 31, 2009. Through a series of notifications the GOI has extended the duty free imports of raw sugar and white sugar up to December 31, 2010.
The GOI has also exempted imported sugar, both raw sugar and white sugar, from the levy sugar obligation and the market quota release system, applicable to domestic sugar. With the sugar prices easing, there is an increasing pressure from the local industry to re-impose the import duties on white and raw sugar, and reverting back to the old import policy regime. Currently, the GOI does not allow exports of sugar and or provide any export incentive (transport subsidy) for sugar.
Sugarcane Production and Pricing Policy:
The Government of India (GOI) supports research, development, training of farmers and transfer of new varieties and improved production technologies (seed, implements, pest management) to growers in its endeavour to raise cane yields and sugar recovery rates. The Indian Council of Agricultural Research (ICAR) conducts sugarcane research and development at the national level.
State agricultural universities, regional research institutions, and state agricultural extension agencies support these efforts at the regional and state levels. The central and state governments also support sugarcane growers by ensuring finance and input supplies at affordable prices.
The GOI establishes a Minimum Support Price (MSP) for sugarcane on the basis of recommendation by the Commission for Agricultural Costs and Prices (CACP) and after consulting State Governments and associations of the sugar industry and cane growers.
Last year the GOI announced a new system of Fair and Remunerative Price (FRP) that would links the cane price with sugar price realization by the sugar mills. Several state governments further augment the MSP/FRP, typically by 20-25 per cent, due to political compulsions rather than market pricing.
Sugar Production and Marketing Policy:
The GOI levies a fee of Rs.240 ($5.33) per ton of sugar produced by mills to raise a Sugarcane Development Fund (SDF), which is used to support research, extension, and technological improvement in the sugar sector. The SDF is also often used to support sugar buffer-stocks operations, provide a transport subsidy for sugar exports, and provide an interest subsidy on loans for the installation of power generation and ethanol production plants. In March 2008, the GOI enacted the Sugar Development Fund (Amendment) Bill, 2008 that enables the government to include the use of the funds for debt restructuring and soft loans to the sugar mills.
The Government of India follows a policy of partial market control and dual pricing for sugar. The local sugar mills are required to supply 20 per cent of their production to the government as ‘levy sugar’ at below-market prices, which the government distributes through the Public Distribution System (PDS) to its below-poverty line population at subsidized rates.
Mills are allowed to sell the balance of their production as ‘free sugar’ at market prices. However, the sale of free-sale sugar and levy sugar is administered by the government through periodic quotas, designed to maintain price stability in the market.
On March 12, 2009 the central government advised the state government to impose stock and turnover limits on traders to prevent hoarding of sugar. Khandsari sugar has also been brought under the ambit of stockholding and turnover limit from July 17, 2009. Most state governments imposed stock and turnover control orders in their respective states.
On August 22, 2009, the government imposed stock holding limits on large consumers (food and beverage companies) who consume more than 1.0 ton of sugar per month. Initially these consumers were asked to maintain stock necessary to meet not more than 20 days requirements; which were further lowered to 10 days requirements in February 2010.
These limits are effective up to Sept 30, 2010. With the improvement in domestic sugar supplies, there is growing pressure from the domestic sugar mills and traders to remove these stock limits.
In May 2011, the government allowed futures trading in sugar, and three national exchanges have been given permission to engage in sugar futures trading. However, in May 2009, the government suspended futures trading in sugar until December 2009, which has been subsequently extended till September end 2010.
Sugar Decontrol in India:
The Government of India has launched economic reforms in 1991 and process of liberalisation, privatization and globalization was started to give a new thrust towards different segments of Indian economy. Naturally, Sugar industry is also crying for sugar decontrol since long in the changed scenario.
Sugar Industry is seeking freedom at least from the mandatory supply of the Sugar by the industry at below cost for state-run welfare programmes – also known as the levy obligation – and the monthly sale quota. These apart, the government also decides the minimum price the mills have to pay for sugarcane purchases periodical limits on stocks large buyers can hold to thwart hoarding. The sector has been under the government control since 1940s.
The Sugar Industry is facing problem between high cane prices-often used by state governments as a tool to get the political support of the farming community-and low sugar sales realisation. The cash-strapped sugar industry has also renewed its calls this year again (2011-12) for lifting the government control over the sector. Surplus sugar stocks for a second straight year have kept domestic prices subdued for more than six months now despite a 17% hike in cane prices in the largest producing state of Uttar Pradesh and to a large extent in other states.
Present Regulatory Framework for Sugar:
The Sugar mills are mandated to sell 10% of their output to the government for its public distribution system around 60% of their cost of sugar at current prices. The government’s control over how much sugar mills will sell in the open market each month compounds their worries as a failure to complete sales with in the month could result in a conversion of the unsold quantity into the levy quota. The levy obligation alone cost $2,500 crore to $3,000 crore a year to the sugar mills.
Composition of the Committee:
The Government of India has constituted in January, 2012 six-member committee under the chairman-ship of Dr. C. Rangarajan, chairman. Economic Advisory Committee to the Prime Minister to look into all issues relating to de-regulation of the sugar sector. It has been assigned to give its recommendations to the Prime Minister at the earliest.
Other members on the panel include the Chief Economic Advisor, Dr. Kaushik Basu; the Chairman of Commission for Agricultural Costs and Prices, Dr. Ashok Gulati; Secretaries of Agriculture, and Food and Public Distribution, Secretary EAC, Dr. K.P. Krishan; and the former secretary of Food and Public Distribution, Mr. Nanda Kumar, currently a member of National Disaster Management Authority.
The Committee has been empowered to involve such experts, academics as required as special invitees. The food ministry would provide the necessary support to the committee in discharging its functions.
Actually in late 2010, the Prime Minister had set up a four- member committee under Dr. C. Rangarajan to look into the issue of linking cane prices to the sugar rates. “In a sense, the present committee is an extension of the earlier committee, and may look into all issues relating to the sugar sector.”
“The industry welcomes the constitution of such a committee consisting of several experienced senior economists and government officials. It expects for some positive outcome quickly, which will be in the interests of both the farmers as well as the industry.” Various controls and dwindling returns on sugar sales bled their viability and that is why Sugar industry is demanding for decontrol.
Rationale of Sugar Control:
(i) Present L. P. G. environment has created conducive environment for sugar decontrol.
(ii) It is in accordance with the policy of the government to reduce subsidy in public distribution mechanism.
(iii) Levy quota pricing is irrelevant because cost of sugar production is increasing on continuous basis.
(iv) Most of the sugar units are non-viable due to levy quota burden and restrictions on open market sale quota etc.
(v) Sugar mills are facing resource crunch and they also need funds for their expansion and modernization programmes. Survival of sugar units will be at stake in case decontrol is not there.
Prospects of Sugar Decontrol under Present Scenario:
The timing of demand for decontrol of sugar sector is quite appropriate. Sugar output during this season is expected at 25-26 million tonnes (mt). This, along with opening stocks of 6.1 mt, can more than take care of domestic demand of 22-23 mt. With no major festivals, November to March is usually a lean period for local consumption. But for farmers sugar realizations during this period matter, as they determine the cane price mills can realistically afford to pay.
This is also a time when supplies from Brazil dry up, with the new crop there due for crushing only from early April. All this provides a window of opportunity to free the industry – from levy obligations, controls on how much sugar any mill can sell in the open market in a month, and stocking limits – and also open up exports. Sugar prices are firming up now in the sugar market.
Problems of Sugar Industry:
(i) It is characterized by instability in recurring imbalance between the demand for and supply of sugar in the country.
(ii) It is a totally agro-based industry. The manufacturing plant is merely an extraction unit. Sugarcane forms about 2/3rd of the total manufacturing cost of sugar.
(iii) Sugar mills are facing tough competition from gur and khandsari producers who try to corner major chunk of sugarcane from the farmers.
(iv) Poor yields of cane per hectare, low recovery of sugarcane; uneconomic size of sugar units increase the cost of production and force them to become uncompetitive in the international market.
(v) Organized cane suppliers and manufacturing units generally exploit the small cane growers as they do not have sufficient bargaining power.
(vi) Growing obsolescence and old machineries have forced the large number of sugar mills to become sick.
(vii) The Sugar industry has been delicensed since August 1998 but government still regulate the free sale quota and export volume of the sugar to regulate the domestic price scenario.
(i) Government should formulate the policy of area demarcation for cane supplies. It will prevent unhealthy competition among sugar factories in enticing growers to supply their cane at bargaining prices.
(ii) Sugar factories should be allowed to develop their own cane areas for improving their internal cane supplies.
(iii) Sugar factories should formulate their own cane drawl programme based on registration of cane on an area basis.
(iv) Sugar Factories should be required to pay more incentives for early maturing cane varieties to encourage more production in early months of crushing.
(v) Optimum utilization of the by-products should be ensured to improve viability of the mills.
(vi) Import of raw sugar should be allowed on systematic basis to avoid shortage of sugar.