New law: No major impact
The concept of `complete decontrol' seems some distance away as the Government is expected to retain its partial control over the industry by continuing the essential commodity status of sugar.
IN EARLY May, the Lok Sabha passed the amendment to the Essential Commodities Act which will allow the Government to streamline the policy regarding the release mechanism for sugar. It will enable adequate monthly releases to address the industry's key problem of inventory pile up.
A significant number of producers had secured court orders over the last two months to offload their excess sugar after the Centre refused quotas for open market sale.
Only levy sugar release was allowed but this has no demand from the public distribution system. Levy sugar is offered at around Rs. 1,150 a quintal while the free market price is around Rs. 1,015. The Government denied free sale quotas to more than 100 mills after they had secured special quotas from the courts.
With the new law, the court orders have lapsed and the mills will now have to approach the Centre for fresh quotas. Sugar prices jumped by Rs. 250-300 a quintal on passing of the amendment in Parliament.
N. Muthuraman, Head, Corporate Ratings, Crisil, said, "This announcement will not affect the industry in any big way. Sugar today is more market driven than regulator driven. It will provide a minimal reprieve to the industry".
The estimated production during the current season is a record 19-19.5 million tonnes. The industry produced 16.47 million tonnes during October 2002-March 2003 against 16.02 million tonnes earlier. After allowing for domestic offtake of 7.84 million tonnes in the first half (8.12 million tonnes), the stocks with mills as on March 31, 2003 are at 18.54 million tonnes against 18.61 million tonnes.
Vivek Saraogi, managing director, Balrampur Chini Sugar Mills, said, "We would like to see the outcome after 15 days what really will be the price impact. One must understand that the real purpose is to liquidate the surplus from the high level of production over the next 15-18 months. For this what is needed is a fair and square release mechanism".
Total decontrol far away
A significant issue is the decontrol of the sector and a report by Crisil says that if the industry has to benefit from decontrol, the development and stabilisation of an alternative pricing mechanism such as futures trading and rationalisation of sugarcane pricing would be necessary pre-requisites.
In fact, the concept of `complete decontrol' seems some distance away as the Government is expected to retain its partial control over the industry by continuing the essential commodity status of sugar, says the report.
A quarterly release mechanism was announced in the 2001-02 budget but led to prices crashing as stocks were off-loaded in a month. The Government reverted to the monthly release mechanism.
According to Mr. Saraogi, decontrol and release mechanism have to be understood in their proper perspective. "Does decontrol mean no levy sugar or does it mean no release mechanism? Even the expert committee (Mahajan Committee) felt that the release mechanism was good for the sector. Also, you cannot do away with it during a surplus time or you will end up killing the farmer and the whole sector".
Sugarcane pricing is one vexing issue which has not yet been addressed. Cane prices need to be rationalised to increase the mills' profitability and to strengthen export competitiveness.
At present, sugarcane prices are under the control of both the Central Government which levies a statutory minimum price (SMP) and State governments which levy a State advised price (SAP).
According to Crisil, the Central Government has been gradually increasing SMP over the past few years and it is the politically driven SAP that has contributed to the woes of the sugar producers so far. Not only has the SAP been consistently higher than the SMP, it has also varied across States thereby creating an unfair advantage for some producers. Rising cane prices amid stable to declining sugar prices have been responsible for the closure of several mills.
On the positive side, though, there is an opportunity in exports. Incentives and the easing of restrictions should enable producers to increase their presence in the international market, especially in neighbouring sugar-deficit nations. While exports may not be as remunerative as domestic sales, they can help reduce the growing inventories and save on carrying costs. During the first half (October 2002-March 2003) of the current season, India exported 9.84 lakh tonnes of sugar against 5.06 lakh tonnes a year ago.
The Government offers oceanic freight subsidy where expenses incurred on transporting the produce are reimbursed. Also individual States are offering subsidy on exports. For example, Maharashtra offers Rs. 1000 a tonne over and above the freight subsidy.
Mr. Saraogi felt exports needed a proper support mechanism. ``Things like the ocean freight subsidy and the like need to be followed up. The Government needs to decide whether or not it wants to support the farm sector and if so, it has to be a wholehearted effort. One has to only look at the EU to see the level of support the farm sector enjoys."
Crisil believes that effective utilisation of by-products such as bagasse and molasses would be another critical factor impacting the sugar producers' overall viability in future.
Mr. Muthuraman said, "The business is becoming more dominated by integrated plants. Processing cane into sugar is essentially a `no-profit-no-loss' business. What lends viability to the business is the allied products bagasse and molasses. By-products have a major impact on companies. Balrampur Chini, for instance, has added 40 MW of co-gen power and is now adding 20 MW more". Greater use of alcohol doped petrol would have a cascading effect on the prices of molasses and ethanol thereby strengthening the bottomline of sugar producers.
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