economics of sugar yojna-april-08

8/13/2019 Economics of Sugar Yojna-April-08

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2 YOJANA April 2008

JANA April 2008 IIIrd Proof

YE-4/08/3


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About the Issue

India is known as the original home of sugar and sugarcane. In global sugar

economy, the Indian sugar industry has achieved a number of milestones. It isthe second largest producer of sugar in the world. Sugar industry in India is well

developed with a consumer base of more than billions of people. This industry is

the second largest agro processing industry in India. More than 500 thousand people

are directly employed. Including farmers, and their family member, more than 45

million people of the rural population of India depend on sugar industry for their

livelihood. Its contribution to the Central and State exchequers is of high order. The

Indian sugar industry has been accounting for around 1% of GDP of the country in

the recent past.

Sugar production in India is concentrated in six states namely Maharashtra, Uttar Pradesh, Gujarat,Tamil Nadu, Karnataka and Andhra Pradesh which together account for 85-90% of sugar production in the

country. The Indian sugar industry is highly fragmented with over 450 mills and no single player having a

market share of over 5%. Around 60% of the mills are in the cooperative sector, 35% in the private and the

rest are in public sector. The sugar industry can be broadly classied into two sub-sectors, the organized

sector i.e. sugar factories, and the unorganized sector i.e. manufacturers of traditional sweetener like gur

and khandsari.

Over the years, the sugar production has uctuated noticeably. During the years of shortages, the country

turned a net importer. Thus the overall scenario has been that of marginal export of sugar. A High Powered

Committee of the Government of India studied the matter and has recommended total liberalization of sugar

sector to ensure steady and stable growth in production.

Recently, in a move to bring relief to the beleagured sugar mills, the Centre has announced a new scheme

extending these mills nancial assistance. As part of this scheme, sugar mills which have been facing a crisis

due to a production glut and low prices, will get interest free loans to help them pay the dues of the farmers

who supply them sugarcane.

This issue of Yojana discusses how to improve sugar economy. The experts debate how the sugar sector

can be put on a more sustainable path, helping both the industry and the farmers.


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ECONOMIC INDICATORSANNUAL INDICATORS

Units Nov

06

Dec

06

Jan

07

Feb

07

Mar

07

Apr

07

May

07

Jun

07

Jul

07

Aug

07

Sep

07

Oct

07

Nov

07

Dec

07

Jan

08

Feb

08

Prices

Wholesale price index

(All Commodities)

1993-94= 100 209.1 208.4 208.8 208.9 209.8 211.5 212.3 212.3 213.6 213.8 215.1 215.2 215.9 216.4 217 218.4

% change 5.49 5.68 6.38 6.34 6.61 6.27 5.45 4.52 4.71 4.14 3.51 3.13 3.25 3.83 3.91 4.58

Agriculture

Actual rainfall (All-India) Millimetres 50 12 2 30 32 27 48 153 259 299 194 75 - 16 19 19

Dev. from normal rainfall Per cent 33 -24 -92 32 14 -20 -31 8 0 -2 14 -22 - 1 -19 -14

Stock of Rice (Central pool) mln. tns. 12.1 12.0 12.6 14.0 13.2 13.5 12.6 10.6 6.7 - 10.65 - 11.15 - -

Stock of Wheat (-do-) mln. tns. 5.6 5.4 5.4 5.1 4.6 11.6 13.3 12.8 10.9 - 9.02 - 7.35 - -

Units 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

(Proj.)

Population(as on 1 Oct) in crores 101.9 103.8 105.5 107.3 109 111 112.2 -

GDPat current market prices (new series) Rs.crore 21,02,375 22,81,058 24,58,084 27,65,491 31,26,596 35,67,177 4145810 -

GDP:Per Capita (current prices) Rupees 20,632 21,976 23,299 25,773 28,684 32,224 36,950 -

Gross domestic savings (current prices) % of GDPmp 23.7 23.5 26.4 29.7 31.1 32.4 34.9 -

Gross domestic capital formation (cur. pr) 24.3 22.9 25.2 28.0 31.5 33.8 36.1 -

Central Govt. Gross Fiscal Defcit 5.7 6.2 5.9 4.5 4.0 4.1 3.4 3.2

Sectoral shares (of GDPfc at current prices)

Agriculture & allied % of GDPfc 23.4 23.2 20.9 20.9 18.8 18.3 17.5 -

Industry 26.2 25.3 26.4 26.1 27.5 27.6 27.9 -

Services 50.5 51.5 52.7 52.9 53.7 54.1 54.6 -

Prices (Annual Average)

WPI of All commodities (wt 100.00) Apr 1993=100 155.7 161.3 166.8 175.9 187.2 195.5 206.1 -

CPI-IW General index: India Jul 2001=100 95.93 100.07 104.05 108.07 112.2 117.2 125.0 -

Agriculture: Production

Foodgrains mln. tns. 196.8 212.9 174.8 213.9 198.4 208.6 216.1 219.1

Cereals 185.7 199.5 163.7 198.3 185.2 195.2 201.9 204.6

Rice 85.0 93.3 71.8 88.5 83.1 91.8 92.8 93.1

Wheat 69.7 72.8 65.8 72.2 68.6 69.4 74.9 75.6

Pulses 11.1 13.4 11.1 14.9 13.1 13.4 14.2 14.6

Oilseeds 18.4 20.7 14.8 25.2 24.4 28.0 23.9 26.4

Sugar cane 296 297.2 287.4 233.9 237.1 281.2 345.3 365.0

Industry & Energy

Index of industrial production (wt 100)

(Annual Average)

Apr 1993=100

% change

162.7

5.1

167.0

2.6

176.6

5.8

189

7.0

204.8

8.4

221.5

8.2

247.1

11.5

-

-

Commercial energy production MTOE # 230.9 237.9 246.9 259.2 272 281.4 -

Electricity generation by public utilities bln. kwh 501.2 517.4 532.7 565.1 594.5 617.5 662.5 -

External Transactions

Exports US $ mln. 44147 43958 52823 63886 83502 103075 126246 124160($)

Imports 50056 51567 61533 78203 111472 149144 190438 191566($)

Forex reserves 39554 51049 71890 107448 135571 145108 191924 291250 @

Foreign direct investments in India (net) 4031 6125 5036 4322 5987 8901.0 21991 -

Portfolio investments in India (net) 2760 2021 979 11356 9311 12494 7004 -

Rupee exchange rate Rs / USD 45.61 47.55 48.30 45.92 44.95 44.28 45.29 39.93 @

Investments (CMIE CapEx database) Mar 01 Mar 02 Mar 03 Mar 04 Mar 05 Mar 06 Mar 07 Dec 07

Project investments

outstanding* (as on)

Rs.crore 14,28,449 15,12,975 14,10,828 15,28,611 19,73,426 28,12,111 44,77,398 55,34,374.96

project count 4,539 6,108 7,196 9,070 9,822 10,050 12,725 14,144

Indicators: Monthly

Note: (a)% change is year on year (y-o-y) basis; (b) # MTOE: Million Tonnes of Oil Equivalent; (c) Total value of foreign currencies held by Govt. of India (excl. gold & SDRs); (d) @ as on 29th

Feb 2008; (e) ($) Apr 07 - Jan 08; (f) * It is the sum total of the project costs of all the outstanding (Live) capital expenditure projects happening in the country. These projects may be under announced

or under-implementation stage.

Source:i3(i-cube) at Planning Commission, New Delhi, Centre for Monitoring Indian Economy (CMIE)


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UGAR HAS an age

old association with

this country. India

is believed to have

pioneered production of

sugar from sugarcane around the

4th century CE. In fact, the English

word sugar is believed to have

originated from the Sanskrit word

sharkara. Alexander the Greatssoldiers, after their visit to India,

are reported to have marveled at

the production of honey without the

intervention of bees !

Sugar is used by mankind as

a sweetener of food and drinks.

As an additive in food products,

it is also valued for its qualities

of feel, texture & preservative

nature. It is a major source of

energy with 1 kg of sugar capable

of yielding as much as 3900

KCal. In its crystalline form, it is

produced primarily from sugarcane

and to a lesser extent, from sugar

beet. Sugarcane is cultivated in

tropical / semi-tropical climates in

countries like Brazil, India, China,

P Rama Babu

The author is Managing Director, E.I.D.-Parry (India) Limited.

ECONOMICS OF SUGAR

The

Indian

sugar industry

is green and

will be

increasingly

valued in

future

The Path Forward

Thailand, the Caribbean islands,

etc. Sugar beet, on the contrary,

is grown mainly in the temperate

regions like Europe, Japan, etc.

It is also produced in syrup form

from sources like corn (High

Fructose Corn Syrup or HFCS) in

countries like the U.S.A..

India is the largest consumerof sugar in the world with annual

consumption of about 19 million

MT. It also happens to be the

second largest producer of sugar,

next to Brazil, with production in

the sugar year 2006-07 crossing

28 million MT. Global production

from cane as well as beet is around

170 million MT currently.

About 80 % of global sugar

production is from sugarcane. It

has been clearly established that

sugarcane is the cheapest source of

sugar; the cost of sugar production

through the cane route can be as

low as 40 % of that of sugar from

the sugar beet route. One of the

major producers of sugar through

INDEPTH

S


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the beet route, the EU, has already

begun cutting down on production

realizing the futility of competing

with cane. Increasingly, therefore,

sugarcane would be the route

for sugar and related products

manufacture.

The bulk of the Indian

sugarcane cul t ivat ion

and hence, location of

the sugar mills, is in the states

of Uttar Pradesh, Maharashtra,

Tamil Nadu, Karnataka, Andhra

Pradesh, Gujarat, Punjab, Haryana

& Bihar. The annual production is

in the range of 300 to 350 million

tons of sugarcane out of whichabout 30 % is used for gur and

chewing purposes and the balance

for producing sugar. Sugar

production during 2006-07 was a

little over 28 million tons second

only to Brazils production of about

33 million tons. Uttar Pradesh with

30 % and Maharashtra with 27 %

of the sugar production top the

nine states. While Bihar, Punjab &Haryana are at the other end of the

spectrum with less than a million

tons of production per annum, the

balance states produce in excess of

1 million tons each per annum.

Production growth over the last

half century has been a little under

5 % CAGR with typical cycles

of 4 to 7 years. Of the total of

about 450 mills in the country, over60 % are either in the co-operative or

government sector and the balance of

about 40 % in the private sector. The

states of Maharashtra, Karnataka

& Tamil Nadu have relatively

larger share of co-operative mills.

However, over 50 % of the output

is accounted for by the private mills

and the share of the private sector

has been steadily increasing.

The average land holding of

cane farmers is very small and

fragmented. The bulk of the

holdings are reported to fall between

1 and 4 hectares. Around 50 million

farmers, including indirect labour,

are believed to be dependent on this

crop. It is also very labour intensive

in terms of cutting labour required

for harvesting cane. Indian farm

productivity ranges from 40 tons

per hectare to 110 tons per hectare

against the global average of about

64 tons per hectare; however, even

within India, States like Tamil Nadu

have farms reporting harvests in

excess of 120 tons per hectare.

Sucrose content wise, it ranges

from 9 to 11 % with an overall

national average of about 10 %.

The cost of sugarcane is as

high as 70 % of the value of the

sugar produced by the mill. Farm

productivity and sucrose content of

the cane are, hence, critical factors

which impinge on the economics

of operations. Sugarcane is alsohighly perishable with the sucrose

content dropping drastically

beyond 24 hours from the time of

cutting. In fact, perhaps owing to

the rather un-economical land size

& populist pressures, Indian cane

prices are probably the highest in

the world. Paradoxically, Indian

domestic retail sugar prices are one

of the lowest in the world thanks

to the paranoid reluctance of the

Government from letting them rise

to their natural levels.

Every ton of sugarcane can

produce about 100 kgs of sugar on

an average as also about 45 kgs of

molasses and 300 kgs of bagasse.

Alternatively, the sugarcane juice

can be converted directly into about

70 litres of alcohol in lieu of the

sugar and molasses. The Indian

Government has now decided

to permit millers to convert the

sugarcane juice either into sugar and

molasses or directly into alcohol.

Demand

Domestic demand for sugar

is about 20 million tons with

average annual growth rate of about

3.5 % (against the world average of

about 2.2 %). India is the worlds

largest consumer of sugar; total

global demand is in the region of

160 million tons. Unlike Brazil

which exports over half of its

production and Australia whichexports over 70 % of its production,

the bulk of Indias production

is consumed domestically with

occasional imports or exports of

a few million tons to tide over

decits/surpluses.

Increasing GDP and changing

life styles and food habits are

driving down the demand for gur

in India with a proportionateincrease in demand for sugar.

About 70 per cent of the sugar

demand is from institutions

including confectionery units,

soft drink plants, etc. while the

rest of the volume is accounted

for by households for direct

consumption.

CONTROLS THE INDIAN

WAY

The Indian industry has been,

traditionally, a regulated one

arising out of a sound rationale.

On the one hand, the sugarcane

industry has been the precursor to

the much touted contract farming

system which is in fashion today.

Given the thousands of farmers

with miniscule individual land


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holdings on the one side and the

relatively large and dominant sugar

mill owners on the other side, our

forefathers perceived a distinct

imbalance in the negotiating

strengths of the two parties. The

distinctive sweet tooth that most

Indians have, the deeply rooted

cultural importance of sugar and

the need to make sugar, as a source

of organic energy, available at

affordable prices to the Below the

Poverty Line (BPL) consumers

were factors which drove the need

to protect the consumer from un-

affordably high prices for sugar.

The vulnerability of the interests of

the small farmer and the common

consumer thus drove the need for

creation of checks and balances by

the Indian Government, leading to

various legislations and controls

under the Essential Commodities

Act (ECA).

Essential Commodities Act

As a developing nation emerging

from the brink of poverty, thecountry needed to ensure that the

poor were assured the availability

of cheap and good quality of

essential food items; sugar was

included as one such item under

this rigorous Act of Parliament.

The Act gave the Government

sweeping powers not only to

regulate distribution, storage and

pricing of levy sugar but also gaveit widespread powers for punishing

the offenders. The Act spawned

subsidiary Orders / Rules like the

Sugar Cane Control Order, Sugar

Control Order, etc. which covered

the gamut of sugar production,

starting from sugarcane to the

levy of a cess on sugar sales for

the creation of a fund for the

development of the industry.

Among other things, the Act

facilitated the following:

a. Statutory Minimum Price for

Cane (SMP): Based upon various

parameters like cost of cultivation,

yield, etc., the minimum sugarcane

price to be paid by any miller toa farmer was announced each

year by the Central Government.

Considering the relatively long

duration of a year of this crop,

this step encouraged the farmer

to grow sugarcane with the

Government backed re-assurance

on cane price. The Government

went even further to ensure that

the farmer was paid a share of anyadditional prots on sugar sales

of the miller, beyond a stipulated

level which covered the miller

costs and a decent prot, under

Section 5A of the Sugarcane

(Control) Order, 1966. This is

one of the laudable provisions

incorporating a mechanism for

fair sharing of returns on agri-

products between the grower and

the processor.

b. Quotas for sale of sugar: A

free sale and a levy sale quota

have been in vogue. These quotas

are announced by the Government

every month for each mill taking

into account the anticipated

demand for sugar in the ensuing

months. While the free sale portion

could be sold by the mills into theopen market at market determined

prices, the levy sale could be sold

only to agencies managing the

public distribution system and at a

pre-determined levy price which

was intended to cover the cost of

production alone. The levy price

has generally turned out to be not

only much lower than the market

price but, sometimes, even lower

than the cost of production itself,

as is the case currently.

c. Command Area for Cane:

In the interest of ensuring

guaranteed market access and

price recovery for the fa rmer

as also to prevent poaching ofcane between warring millers,

the Government chose to dene

an area of about 15 kms radius

from each mill as the Command

Area. Farmers could choose

to register their commitment to

supply cane with the mill within

whose Command Area their farm

fell. The command area concept

also served as an assurance of raw

material availability to the miller,

encouraging investments in mills.

The actual area to be declared as

Command Area, however, has

been a contentious issue.

d. Controls on By Products:

M a n y o f t h e s u g a r m i l l s

generate Electricity out of the

waste bagasse as also alcohol

out of the by product, molasses.While, traditionally, mills had

generated power to meet in-house

requirements, they are gradually

investing in new equipment which

is helping them generate a surplus

for export into the grid. Molasses

and alcohol have been sensitive

issues given the fact that their end

product, potable liquor, falls under

the state subject and accounts

for a signicant portion of state

government revenues. Concerns

of illicit brewing have also led to

stringent controls on movement

and sale of molasses.

Electricity generation, too,

has traditionally been perceived

as a state activity and strictly

monitored and controlled. The

liberal provisions of the recently


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promulgated Electricity Act have

been like a breath of fresh air to the

industry but their implementation

has been tardy, at best, in most

states.

e. Exim Controls: Given its strong

concern for the food security of thecountry, the Central Government

has also actively used its export-

import policy as a tool to regulate

the inow of imports and exports

out of the country with the stated

objective of protecting the end

consumer. The cyclical nature

of Indian sugar production has

necessitated frequent Government

interventions through changes in theduty structure as also bans on imports

/ exports of sugar. Sudden changes

in the Indian Governments exim

policy impact the global scenario

dramatically since India is the single

largest consumer and second largest

producer of sugar in the world. The

credibility of the Indian exporter

has also been poor owing to the

impromptu bans resorted to by the

government which have often come

in the way of the exporter honouring

his commitments.

Crop characteristics

Sugarcane is a long duration crop

(about a year) and farmers would

not be enthused to cultivate the crop

unless there is reasonable certainty

of a decent return on their investmentand effort. As mentioned earlier,

sugarcane is also highly perishable

and needs to be processed within

a maximum of 24 hours failing

which the process of reversal of the

sucrose content sets in. The farmer,

therefore, needs the assurance of

prompt off-take by a miller; he also

needs to be located close to the mill,

with minimum transport time for the

cane. The rationale for a strong bond

between the farmer & the miller is

thus born.

The fact that farmers tend to

flood irrigate sugarcane fields

is rightly held against the crop,

considering the scarcity of goodquality water the world over. In

countries like India, however,

imprudent use of water is a fall-out

of irregular availability of power

as also the policy of giving free

electric power to farmers, both of

which induce them to have their

electric pumps running day long.

Both precious subterranean water

as well as costly electric power aresquandered away in the process. A

good portion of the fertilisers used

by farmers are wastefully leached

away & salinity risks increase.

Some of the crop is also subject

to decay owing to the practice of

flooding. Studies have clearly

proven that sugarcane yields can

actually rise with calibrated supply

of water and fertigation throughmodern drip irrigation systems.

India can ill afford ood irrigation

& needs to shift quickly to more

sustainable techniques.

Considering the relatively longer

duration of this crop, questions

are also raised as to its economic

viability vis--vis other crops, some

of which can be raised in two oreven three cycles within a year.

Once again studies have proven

that the returns to the farmer from

sugarcane is far superior to that

of other crops, despite its longer

annual cycle.

SMP Vs SAP

The Central Government

declares a national SMP for cane

every year deriving it on a very

logical basis which includes factors

like cost of cultivation, potential

earnings from alternative crops,

etc. Over the years, however,

most of the state governments

have indulged in one-upmanship

by declaring individually higher

State Advised Prices (SAP) for

sugarcane, superseding the logically

derived uniform SMP across the

country. While the powers of the

State Government to declare such a

populist & irrational SAP has itself

been a matter of dispute, the millers

&, inevitably, the farmers too have

suffered in the process. Given the

fact that any such articial increase

in the SAP is not recovered from

the end consumer sugar price, the

miller ends up being squeezed.

Since the bulk of the cost (70%)

is the cane price & very little

margin is left after accounting

for conversion cost, this leads

to nancial sickness of the mill,

setting off the vicious cycle of cane

payment arrears, reduced cropacreage, fall in sugar production

and, hence, increased sugar prices

in the market. Un-witti ngly,

therefore, the State Governments

end up creating the very disease

which they are forced to cure

subsequently at considerable cost

and suffering to the farmers, the

millers as also the tax payer.

Infation & WPI

Historically, the Government

has been sensitive to market

prices of sugar, deeming it to be a

signicant contributor to ination.

This sensitivity has been translated

into the relatively steep weightage

of 3.60 % for sugar in the Wholesale

Price Index (WPI), apart from a

weightage for sugarcane. Hence, at


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YOJANA April 2008 9


the rst sign of inationary trends

in the economy, sugar prices are

one of the rst things which the

Union Finance Ministry monitors.

Intervention happens through

modulation of the sugar release

quota, thus preventing the market

price from rising beyond a point.

The Government has failed to

realize that, while on the one hand,

most of the cane producing states

are imposing ever higher SAP

for sugarcane, on the other, it is

articially preventing market prices

from rising to their natural levels.

More importantly, such price control

measures have primarily benetedthe institutional buyers of sugar

rather than the common man on

the street ! The recent AC Nielsen

study has clearly established that

over 70 % of the sugar produced

in mills is ultimately destined for

institutional customers who use it

as an ingredient in various food

products like confectionery, soft

drinks, sweetmeats, etc. Even forthe balance 30 % direct consumers,

sugar comprises barely 1 % of

the monthly food budget. Thus,

increased sugar prices will not

really pinch the common man or

drive inationary tendencies.

Mil l e r a s a p r o d u c e r o f

Intermediates

Unlike other food grains whichare most often meant for direct

consumption, sugarcane is one crop

which is processed by a miller to

create products which are themselves

intermediates in the manufacture of

other products. While the bulk of

sugar is consumed by institutions,

molasses and alcohol too are

intermediates in the manufacture

of alcohol & downstream products

like potable liquor, acetic acid, etc.

Electric power, though it can indeed

be consumed di rect ly wi thout

any further processing, virtually

becomes an intermediate by virtue

of the extensive grid required

for distribution and the State

governments continued vice-like

grip on generation and distribution

capacity.

The combination of a large

raw material cost component and

inability to recover cost increases

from end product prices owing to ill

conceived Government interventions

as well as the intermediate nature ofthe end products, has left the miller

submerged in nancial crises and

losses for most of the time. The

2007 KPMG report on the industry

clearly establishes that even the

listed companies in the industry

(whose performance is superior to

the co-operatives which account for

the bulk of the industry) have not

been generating economic returnson investments. Such chronic

illness, obviously, does not permit

investments in long term initiatives

like R&D.

Molasses, Alcohol, Ethanol

Potable alcohol or liquor, is a

state subject under the Constitution

and under the guise of managing

the potable alcohol production

and sales, most state governments

have set up a plethora of rules

and controls which have been

strangling the industry. Movement

of molasses into or out of some

states is so tightly regulated that this

valuable by product is virtually sold

for a song, sometimes at prices as

low as Rs. 100 per MT.

If the sugar mill chooses to value

add, by converting the molasses

into alcohol, once again, the state

government intervenes, placing

restrictions on movement of alcohol

out of and into the state. Pressure

is also exerted on the mills to

produce only that grade of alcohol

(rectified spirit or extra neutral

alcohol) which can be utilized for

liquor production. Mills are rarely

allowed to produce the chemical

grade of alcohol (denatured spirit)

which could expand their product

range and give them the exibility

to optimize their returns depending

upon the relative market prices of

different types of alcohol. Since

liquor attracts very high state

excise duties and taxes, the state

governments obsession with the

product is understandable. But,

once again, the state government

ends up driving prices of molasses

and alcohol down since the controls

effectively eliminate competition

for purchase, limiting the sugarmills market to a few powerful

liquor units in each State. Needless

to state, such a scenario is also the

breeding ground for mercenary

lobbies which ultimately inuence

State policies too.

In recent years, the Central

Government has rightly sought to

promote ethanol manufacture for

blending with petrol to reduce the

import bill while also reducing

pollution. This initiative, regrettably,

has not taken off at all owing to the

State Governments reluctance

to permit mills to manufacture

anhydrous ethanol. This could be

due to a combination of factors

including their apprehensions about

reduced liquor production and


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10 YOJANA April 2008


consequent loss of revenue as also

the impact of the powerful lobbies

which have a vested interest in the

status quo.

Electricity Generation

To be fair to the Government,

it cannot be said that the co-

generation units of sugar mills are

given step motherly treatment.

However, considering the severe

power shortages the states and the

country as a whole are facing, there

is an urgent need to pro-actively

encourage power generation

through such a renewable ,

environment-friendly source.

Many of the proposals of the Union

Ministry of Renewable Energy

sources as also the revolutionary

Electricity Act remain only on

paper.

Cyclicality

The sugar industry, historically,

has passed through cycles of 4 to

7 years of growth and depression.While some of this is caused by

natural, agro-climatic factors

like the failure of the monsoon,

pest attack, etc., the bulk of the

cycles have been caused by policy

interventions for inuencing the

market price of the end product,

sugar. Since the cane price

accounts for over 70 % of the

sugar price, the impact of anysqueeze on the end market price

impacts the farmer most. The

Governments misplaced efforts

to help the consumer ends up not

only giving un-intended benets

to the institutions who consume

70 % of the product but also

strangling the farmers who are

supposed to be on their priority

list. The depressing stories of

mills cane payment arrears and

the Governments schemes for

bailing them out are inevitable

consequences which place the

industry in a bad light.

As brought out earlier, theprole of the industry has driven

the Government into all kinds of

regulations aimed at protecting the

farmer and the consumer. Sugar and

sugarcane are politically sensitive

all over the world whether it be

India, Brazil or Thailand. The moot

question, however, is whether, in

India, these controls have beneted

the target segments or have stood in

the way of progress.

THE POSITIVES

This is one crop which can be

deemed to be a Kalpavriksham.

Every part of the stick of sugarcane

is valuable and not a portion of

it is wasted. While sugarcane

juice can be converted into sugar

and / or alcohol, the fibre in

it can be converted either intovaluable electrical energy or as

raw material for manufacture

of paper and related products as

also innumerable other alcohol-

based products . Sugarcane is

also a robust crop, relatively free

from diseases. It requires limited

care and nurturing. Socially, in

countries like India, a large number

of small farmers are dependent

upon this crop and many workers

bene fit from the employment

generated at the time of cane

harvesting.

The crop, thus, is a virtual boon

to any tropical country since it

addresses food and fuel security

with the added advantage of being

green, as a source of renewable

energy which is environmentally

friendly. India is fortunate that it

is one of the few tropical countries

which can grow such a multi-

purpose crop economically.

Exit of the European Union

The single major factor which

is presently inuencing the globalsugar trade is the decision of the

EU to cut down on its subsidies

for Beet sugar production. This

has effectively reduced the EUs

export to the world, primarily South

Asia and Africa, to the extent of

about 5 million tons of sugar. This

development combined with the

logistical advantage enjoyed by

raw sugar vis--vis rened sugar,give India a distinct advantage in

meeting the demand for sugar in

South Asia.

Spiralling Oil Prices

The other aspect which is

significantly impacting on the

global sugar business is the

dwindling crude oil reserves

and consequent rise in crude oil

prices. In the recent past, crudeprices have even touched $ 100

per barrel. Prices of petrol,

as a result, have also been on

the up-trend and countries are

increasingly concerned about the

dis-proportionately high costs

of fuel. Alternative, renewable

sources of energy are being

aggressively explored and ethanol

produced out of sugarcane has beenfound to be one of the most viable

substitutes for petrol. Brazil, with

its large sugarcane crop acreage,

has wisely pushed for ex fuel

automobiles and about 50 % of

its sugarcane juice is now diverted

for ethanol production reducing

its dependence on imported crude

/ fuel. Sugar mills in Brazil

are building in flexibility to


11/52

YOJANA April 2008 11


switch from sugar production to

ethanol production to optimize

realizations. The sugarcane

crop, thus, is an invaluable asset

for India, with its potential for

production of ethanol which can

be blended with petrol to reduce

the countrys dependence on highpriced oil imports.

Rise of BRIC nations

Spurred by large consumption

bases, un-tapped resources and

relatively lower costs, developing

countries like Brazil, Russia, India

and China (BRIC) are recording

significant growth rates in their

GDP which could lead to a shiftin the balance of global economic

power. The rapid increase in the

GDP is also expected to lead to

a substantial increase in demand

for sugar in these countries. The

potential for the Indian sugarcane

industry, therefore, is not just for

exports to South Asia but also for

domestic consumption itself.

Investment AvenuesInvestments in commodities

are the flavour of the day. The

next boom in value is expected to

be in the Commodities market and

globally, hedge funds and other

investors are shifting more of their

funds to the Commodities market.

The development of organized

futures trading mechanisms for

sugar are not only leading to a moreliquid futures market for hedgers

and speculators but also improving

price discovery and raising sugar

prices to new levels. Both the

Indian farmers and millers will

benet through this development.

THE PATH FORWARD

The Indian Sugar industry will

have a rosy future, if its potential

is fully developed and it is allowed

to bloom. It is one of those rare

industries whose products are likely

to have continued, sustained &

increasing demand into the future

whether they be sugar, power,

alcohol or other related chemicals.

More importantly, since they arebased upon a renewable source like

sugarcane, the industry is green

and will be increasingly valued in

the future. Earnings from Carbon

credits would be one of the more

immediate and visible forms of

value. Indias good fortune in

being climatically suitable for

cultivating sugarcane needs to be

exploited for maximum benet tothe country. The Government and

the industry need to address certain

aspects of the business to create

this future and enjoy the benets

thereof. The industry needs to be,

literally, given its space under the

sun ! World over, the industry is

rightly politically sensitive given

its impact on a countrys economy

as also the number of people it

impacts upon. In the past, however,the political arithmetic has led to

skewed policies of a short sighted

and micro level nature. These

policies have actually ended up

damaging the very interests of

the parties sought to be protected,

the farmers. The need is for the

government to adopt a visionary

approach to utilize this great

industry for maximizing value

for all stake holders, in the best

interests of the country.

1. Industry de-regulation:

The above analysis will clearly

bring out the fact that the industry

has to be freed from its shackles

to enable investment and pricing

decisions to be taken based

upon economic viability. The

government needs to restrict its

presence to the few areas which

cannot do without its intervention.

These include the need for a fairly

derived SMP for sugarcane to be

announced on an annual, all India

basis. As in other countries like

Brazil, the farmers return on cane

should ultimately be linked to the

market price for sugar rather than

the cost of production. For, a low

sugar price will lead to reduced

cane cultivation and consequent

shortage of sugar production /

market availability as also higher

sugar and cane prices. Similarly,

a high sugar price will lead to

increased cane cultivation, surplus

sugar production and a drop in

sugar / cane prices, reversing the

increase in cane cultivation.

These measures should be

done in tandem with freeing of

the industry from the release

mechanism and, hence, retail prices

of sugar. It should be remembered

that higher retail price ultimatelytranslate to higher returns for the

farmer. Thus, the Government

needs to make a paradigm shift to

achieve its objective of protecting

the farmer through a natural and

realistic market price for sugar

rather than through an articially

high cane price combined with

an articially low sugar market

price. It should realize that thebulk of the sugar is consumed not

by individuals but by institutions

which are in no way required to be

molly coddled. Even in the case of

the direct consumer of sugar, the

cost of sugar in his monthly food

bill is a negligible 1 per cent (as

brought out in the 2007 KPMG

report) and a higher sugar price

would yield much greater benets


12/52



to the farming community. The

Madras School of Economics has

recommended that the weightage

of sugar in the WPI should be re-

assessed and rationalized based

upon current actual consumption

data.

2. De-risking the business:

Farmer and Miller

The farmer and the miller need

to work jointly towards increasing

vertical productivity of sugarcane

farms and restricting horizontal

growth; the outcome will be of

great value to both parties.

Both the miller as well as the

farmer can sail safely through

the cyclicality of the business

if an efficient futures trading /

hedging mechanism were available.

Brazilian millers hedge their

produce sometimes one year ahead

of the production

The miller can reduce his

dependence on sugar by converting

h i s p l an t s i n to i n t eg ra t ed

complexes comprising sugar,

power and alcohol manufacturing

units. The scope for making

other downstream fermentation

/ alcohol based products also

need to be examined by the

millers for optimal results. A

long term approach, with a decent

investment in R&D, would be

essential for the purpose.

Central and State Governments

As recommended by the KPMG

report, while the Government

needs to dismantle the elaborate

regulatory system built up over

the years, it can continue to keep

a watchful eye over the industry

to bail it out in the event of any

serious crisis, considering the

large number of farmers involved.

Its role would continue to be

crucial in helping maintain market

price equ ilibr ium at times of

large scale surpluses or during

serious shortages. The buffer stock

mechanism in the current or an

improved form should continue to

be a weapon in the arsenal of the

government for tiding over surplus

situations. Shortage situations

can be adequately handled by the

government by tweaking the import

duty structure appropriately. In

any case, such extreme situations

are less likely to happen, oncethe industry is freed from its

shackles and natural forces of

demand / supply are allowed to

freely operate. Hence, except for

exceptional situations, the industry

should be left to nd its own feet in

order to mature and bloom

Artificial restrictions on

manufacture, movement and sale

of by products like molasses andalcohol need to be eliminated to

help the industry recover market

driven value for its products.

The Government needs to

aggressively support the 10 %

ethanol blending programme

as also purchase of electricity

through cogeneration units and

facilitate the conversion of sugar

plants into integrated complexes.A critical step here would be that

of facilitating free movement of

ethanol between various states in

the country through measures like

that of including ethanol under the

Declared Goods list of the CST

Act. An efcient and well managed

Futures trading mechanism needs

to be put in place to facilitate

price discovery both for farmers

and millers both in the domestic

and global markets. It should

also have a stable, relatively long

term exim policy supportive of the

industry, which helps the industry

to establish its credibility in the

global market.

The government should

continue and sustain the initiatives

currently in place to encourage

R&D and investments in the

development of agricultural

technology / productivity as also

in the plants. Vertical growth in

productivity of land should be

targeted using technology for

optimal use of water. Populist but

counter productive incentives likefree power to farmers need to be

re-examined. Any farmer would

gladly relinquish free power for

assured quality power supply

combined with a better realization

on his sugarcane. The nation would

benefit too, through conserved

electricity. Similarly, it should

actively push for development of

integrated sugar complexes for

maximizing the value of the byproducts. It should also help the

millers improve their on stream

days through better capacity

utilization of their sugar, power

plants and distilleries to enhance

value for all stake holders.

Last, but not the least, it needs

to develop road / rail facilities as

also port infrastructure in order to

help potential exporters / importersto deal with customers / suppliers

overseas on the best of commercial

terms. It should be remembered

that India is situated at a vantage

point to meet the requirements of

sugar decit countries like Pakistan,

Bangladesh, Sri Lanka, etc.

(Email : ramababup@parry.

murugappa.com)


13/52



UGAR INDUSTRY is the

second largest agro-based

industry in the country.

The Indian Sugar Industry

is a key driver of rural

development, supporting over

about 55 million sugarcane farmers,

their dependents and a large mass

of agricultural labourers involved in

sugarcane cultivation, harvesting,machine manufacturing etc. of

almost 607 sugar mills and ancillary

activities, constituting some 7.5%

of the rural population. Besides,

about 0.5 million skilled and semi-

skilled workers, mostly from the

rural areas are engaged in the sugar

industry.

As such, the sugar industry

has been a focal point for socio-economic development in the rural

areas by mobilizing rural resources,

generating employment and higher

income, besides giving a fillip

to transport and communication

facilities. The cooperative sector

sugar mills in Maharashtra have

been instrumental in bringing major

N Sanyal

R P Bhagria

S C Ray

socio-economic changes in rural

areas. A number of cooperative

sugar factories have also undertaken

welfare activities like opening

colleges, technical institutions,

dispensaries and hospitals etc. in

rural areas.

It is often said that sugar is

produced in the eld and extractedin the sugar factory. This is

absolutely correct. In fact, sugar

recovery mainly depends upon

following three factors for its

efciency :-

(i) Sucrose content in sugarcane

(ii) Cane supply arrangement and

(iii) Plant and machinery.

The sucrose content in sugarcaneis very important. However,

scientists have found that sucrose

rich varieties are more prone to attack

by pest and diseases. Therefore, the

farmers sometimes try to avoid

growing sucrose rich varieties.

The second factor, i.e., cane supply

arrangement is also important. The

The authors : N. Sanyal is Joint Secretary (Sugar); R.P. Bhagria is Chief Director (Sugar) and Dr. S.C. Ray is Director

(Sugar Technical), Ministry of Consumer Affairs, Food & Public Distribution.

ECONOMICS OF SUGARVIEW POINT

The entrepreneurs

who are

interested to

invest judiciously

in the sugar sector

should invariably

go for integrated

agro-complexes

Indian Sugar Industry

S


14/52



cut cane must be crushed within

24 hours, otherwise, the sucrose

in cane starts getting converted

into fructose and glucose. Quality

of plant and machinery is equally

important. Whatsoever, sucrose rich

varieties may have come to a sugar

factory for crushing, if the plant andmachinery is outdated, it cannot

extract the full sucrose content from

sugarcane and recovery rate gets

affected adversely. On the other

hand, modern sugar plants have

been able to extract the sucrose

content from sugarcane almost

to the fullest extent. Hence the

importance of modernization of

plan t and machinery of sugarfactories in the country. We should

not forget that the loss in sugar

recovery is a national loss and we

must avoid it.

The problems of sugar industry

include, inter-alia, obsolete plant

and machinery and large numbers

of small sized plants. The High

Powered Committee on Sugar

Industry (Mahajan Committee) in itsreport submitted to the Government

in April 1998 mentioned that

practically half of the sugar

factories are more than 25 years

old. The physical condition of many

of these sugar factories is poor,

resulting in high down time and

loss of capacity. The other main

problem of the sugar industry is the

small size of many a sugar plant.Although it is difcult to indicate

the optimum size of a sugar plant as

the same depends upon a number of

factors which may vary from region

to region, the Central Government

in 1987 declared 2500 TCD as the

minimum economic size of a sugar

plant. A Technical Commit tee

accordingly prepared specications

of a sugar plant capable of crushing

2500 TCD with provisions for

expansion to 3500 TCD.

The trend is now to set up sugar

mills of higher capacity. The large

capacity plant size cuts the xed

cost per tonne of sugar produced,

thus reducing the cost of productionof sugar. The Mahajan Committee

quoted the study conducted by

the World Bank on Indian Sugar

Industry - Priorities for Reforms,

April 1997 which found that With

higher plant size, wages and other

overhead cost per tonne of sugar

get reduced substantially. It is, to

some extent offset bye increase in

cane transportation as mills have to

obtain cane from longer distance.

The lower average size of the

sugar mills thus tends to increase

the cost of production of sugar in

the country. The table gives the

size-wise number of sugar factories

in India.

It can be observed that as many

as 229 out of 607 sugar factories are

still below the minimum economicsize of 2500 TCD. Still only 23.39

% of sugar factories out of total

607 installed sugar factories have

crushing capacity more than 2500

TCD, thus leaving adequate scope

for modernization / expansion.

In Thailand and Brazil, some of

Indias competitors in the world

market, the sugar factories have

higher capacity plants. Therefore,

increasing the size of sugar factory

and replacing the old plant andmachinery of Indian sugar industry

offers a challenging task.

India produces plantation white

sugar predominantly. The sugar

manufacturing process comprises of

juice extraction, juice clarication,

evaporation and crystallization.

Modern and updated machineries

are required in every stage of the

process of sugar manufacture toensure improved overall technical

efficiency. Modernization is a

relative term. In the early forties

replacement of steam-driven

duplex pump by electric ones was

considered modernization. Now-a-

days the situation has completely

changed. In the true sense of the

term, modernization now would

mean replacement of steam turbinewith variable speed DC drives

for fuel saving and operational

exibility and control, application

of hydraulic drives in milling

Size Range Number of %

Sugar Mills

Below 1250 TCD 63 10.38

1250 TCD 87 14.33

Above 1250 TCD but below 2500 TCD 79 13.01

2500 TCD 236 38.89


5000 TCD 31 5.10


10000 TCD and above 8 1.32

Total 607

Source: Directorate of Sugar, Department of Food and Public Distribution

(As on 30.11.2007)


15/52



tandem, modern cane preparatory

devices, automatic cane feeding

systems, self-setting mills, lotus roll

and trash plate with perforated holes

to reduce re-absorption of juice

and to reduce moisture percentage

in bagasse as also to increase mill

extraction substantially. Applicationof high pressure boilers with multi-

fuel, mix burning fluidized bed

furnace and matching condensing

type turbine, installation of latest

technology of bagasse drying system,

etc. have increased possibility of

surplus power generation with less

steam consumption for per unit

power production. Application of

microprocessor based automaticjuice flow stabilization with

automatic pH control system,

clarification of juice by ion

exchange resins, installation of

dynamic juice heater, plate type

heat exchanger in claried juice

heating, short retention clarier,

vapour recompression system,

rising and falling lm evaporator,

etc. have tremendously increasedthe possibility of conservation of

energy.

Installation of Talodura process

for thick syrup clarication which

involves use of phosphate solution

and poly Acrylamide and Flocculant

of colloids helps for better removal of

colouring matters and other impurities

from syrup to get low ICUMSA sugar,

is considered superior technology.Application of continuous pan,

automatic pan control instruments,

vertical continuous crystallizers and

high speed continuous centrifugals

has opened up a new dimension for

the sugar industry to conserve energy

on the one hand and to maintain

quality of product comparable to

international standard on the other

hand.

The Indian Sugar Industry has

not made significant attempt

to use diffusers for extracting

juice from sugarcane bagasse

through the process of diffusion.

It has been observed that bagasse

diffusion or cane diffusion offers

good potential of higher juiceextraction and lower energy costs

for extraction of juice. The diffusers

have reportedly found a very

successful application in the South

African Sugar Industry and their

performance has been comparable

or even superior to the performance

achieved by the Australian Sugar

Industry. The Indian Sugar

Machinery Manufacturers shouldalso explore the possibility of

adoption of such technology to

achieve higher extraction. In India

only a few factories have adopted

such technology and Tanuku sugar

factory in Andhra Pradesh is one

of them.

Notwithstanding signicant

technological development

that has taken place in ourcountry, a lot of scope still exists

in modernizing the process and

equipment design. Some of these

can be in indicative areas like:

(i) Direct determination of pol in

cane: This is one of the most

important aspects from the

viewpoint of assessment of

cane quality and efficiency.

Near infra red measurement

technique needs to be developed

for online estimation of sugar in

cane and other house products

for correct assessment of plant

performance.

(ii) Possibility should be explored

to develop suitable membrane

technology for concentration

of juice by reverse osmosis

process which in turn would

open up new direction for energy

conservation.

Besides, a number of new

designs, innovations and systems

are already being implemented and

tried in some of the existing and newsugar units and the transfer of these

to other factories would enhance

the overall efciency of the Indian

Sugar industry signicantly.


has been alive to this problem

of sugar industry and created

a Sugar Development Fund

(SDF) . The two impor tan t

Acts viz Sugar DevelopmentFund Act, 1982 and Sugar Cess

Act,1982 were enacted. The

Sugar Development Fund Act,

1982 was enacted to provide

for funding of activities for

development of sugar industry and

for matters connected therewith.

The Act authorizes the Central

Government to apply funds for

making loans for facilitating therehabilitation and modernization

of sugar factory. The Sugar

Cess Act, 1982 authorized the

Central Government to levy

cess for the purpose of the Sugar

Development Fund Act, 1982, by

imposition of a duty of excise on

all sugar produced by any sugar

factory in India at such rate not

exceeding Rs. 15/- per quintalof sugar. The rate of cess till

recently was Rs. 14/- per quintal.

Now it has been increased to Rs.

15/- per quintal.

The Sugar Development

Fund Rules, 1983 were framed

prescribing rules for uti lization

of SDF. The loans advanced for

modernization / rehabilitation of

sugar factories till 31.10.2007


16/52



are Rs. 1497.93 crores. Further,

the Central Government has also

set up Sugar Technology Mission

(STM) in 1993 to assist the sugar

industry in preparing scheme

for technology upgradation and

trials of new efcient technology.

Despite the efforts of the Central

Government, many sugar factories,

especially in the cooperative

sector, have not come forward

for modernization/ upgradation of

their plant and machinery. Often,

they cite lack of cane availability

as a limiting factor. However, I am

of the view that a separate study

may be conducted to determine

as to why sugar factories continue

to live with small sized sugar

plant and are not coming forward

to seek assistance from SDF.

The All-India recovery has been

hovering around 10.30 % for

the last 15 years. Among states,

Maharashtra is achieving highest

sugar recovery of over 11.5%

while Bihar depicts the lowest

recovery of around 9%. Sugar

recovery has remained stagnant

during all these years. The better

sugar recovery in Maharashtra

is partly due to harvesting and

transportation of sugarcane by

the mills which ensures supply of

fresh cane to mills. As an opposite,

the cane growers in U.P and other

North Indian States cut the cane

themselves and wait for their turn

to deliver cane at factory gate or

purchase centre, often for more

than a day.

The Bhargava Commission

in their report in 1974 while

suggesting norms of technical

efficiency for sugar industry,

had suggested total loss of sugar

percentage of cane being restricted

between 2.3 to 2.7 with the

following break up:

(i) Sugar loss in

Bagasse 0.9 to 1.1

(ii) Sugar loss in

press matter 0.1

(iii) Sugar loss in

molasses 1.2 to 1.4

(iv) Unknown losses 0.1

Total 2.3 to 2.7

However, the Government of

India technical norms as set out

in 1988 prescribe total sugar loss

percentage of cane at a maximum

of 2.2% for sugar factory set up

prior to 1972 and 2% for newsugar factories. I understand

that many sugar factories in

India have been able to reduce

sugar losses to even less than

2% with the use of modern plant

and machinery.

S

ugarcane is considered to

be one of the most energy-

efcient crops for conversion

of solar energy into biomass.

Expert findings reveal that the

input-output ratio is highest for

sugarcane in India i.e., 5.6 times

as compared to 1.2 to 1.8 times for

other crops like wheat, rice, etc.

and sugarcane yields maximum

quantity of biomass in the form

of bagasse, leaves, etc. At present

there is potential of producing about

5086 MW power and hardly about

847 MW is being produced. Since

fossil fuel reserves are depleting

very fast, the renewable resource

of biomass energy would play

a key role in future. Ministry of

Non-Conventional and Renewable

Energy is preparing a comprehensive

plan under which 10 per cent of the

total additional power shall be

from the renewable sector by 2021.

Hence the importance of biomass

energy is signicant. Earlier soft

loans from SDF were available

at concessional rate of interest for

captive cogeneration of electricity

only. Keeping the prospectand potential of co-generation

of electricity from bagasse, the

Government has amended the

Sugar Development Fund Act.

Now, the amended statute enables

the Government to give loans to

sugar factories at concessional rate

of interest for undertaking bagasse

based co-generat ion of powerfor export and for production of

anhydrous alcohol or ethanol from

alcohol/molasses.

The State Governments should

take pragmatic view in regard to

feeding the power produced by the

sugar factories to the state grids.

This will not only enhance the

nancial viability of sugar factoriesbut it would also enhance the cane

price paying capacity of the factory

which would ultimately benefit

the farmers. At present due to

installation of high pressure boilers,

project costs have gone up in case

of bagasse based cogen projects.

Accordingly, SDF loan amount

has also been increased from 30%to 40%.

Another area of concern

which significantly impacts the

viability of the Indian Sugar

Industry is the high cost of

cane. A contributory factor for

this is the low sugarcane fields

in India and re la t ively low

overall recovery rates. These


17/52



inhibiting factors combine to

make the per hectare output of

sugar in India much below than

obtaining in other developing

countries like Brazil which is

one of our main competitor in

sugarcane production. Speciallywith the dismantling of tariff

protection and restrictive trade

practices, there is tremendous

scope for India to emerge as a

significant player in the world

sugar trade which so far it has

eschewed. But the sine qua non

for this is that both agricultural

efficiency (per hectare output

of sugar and cost of production)

as well as conversion efficiency

(milling and overheads) needs

significant improvement. If

we can make a fair degree of

progress on both these counts,

India will surely become a major

exporter which will stabilize

the industry and reduce i ts

cyclicality significantly, as wellas open up new vistas of growth

for the Indian sugar industry.

This is the most opportune

time to explore the possibility

of establishing multi-product

i n t e g r a t e d l a r g e a g r o -

complexes . Mode rn i za t i on

alone of a bare 2500 TCD and

even, to say, a sugar plant

o f 5000 TCD may no t be

helpful in bearing the shock

when sugar prices fall due to

surplus production. Hence,

the en t repreneurs who a re

interested to invest judiciously

in the sugar sec tor shouldinvariably go for integrated

agro-complexes in order to

sustain technical and economic

viability of their plant s. Apart

from enhancing the viability

of their projects, this would

a lso s t rengthen the energy

security of the country.

(Email: [email protected])

An MLA rides a bullock cart loaded with sugarcane to attend the Bihar Assembly session in Patna. He wasdemonstrating against the conditions of sugarcane farmers and sugar mill.

WHAT A SIGHT!


18/52



OTTON AND sugar

cane are two agricultural

commodities that provide

raw material for major

industries. In cotton

textiles, consumer tastes and quality

play a very important role. That is,

consequently, a highly competitive

industry. On the other hand, the

sugar market in India has knownonly a certain standard varieties

and there is little by way of market

research or consumer promotion that

is required. That is the reason why

cooperation has generally failed

badly in textiles except in ginning

and spinning. On the other hand,

sugar factories are the favourite

eld of the cooperative barons and

capitalists past their peak as also ofthe politicians. That is probably the

reason why the sugar industry is so

closely regulated and controlled by

the government.

India is supposed to be the home

of sugarcane and sugar. Indians

knew the art of making sugar since

at least the fourth century. The

Sharad Joshi

advent of the modern sugar industry

in India dates back only to mid-

1930s when a few vacuum pan units

were established in the sub-tropical

states of Uttar Pradesh and Bihar.

Until the mid-1950s, the sugar

industry was almost wholly conned

to these states. It was only after late

1950s/early 60s that the industrydispersed into southern, western

and other parts of northern India.

India is the largest consumer and

the second largest producer of sugar

in the world.

Over 50 million farmers and

their dependants as also a large

number of agricultural labourers

are involved in sugar cultivation,

harvesting and ancillary activities.

Even at the height of the

pre-1991 licence-permit-quota-

Inspector Raj, no sector or industry

was more closely regulated than

the sugar industry. Since the

beginning of the planning era,

sugar industry operated under

the policy of partial control in

The author is Founder, Shetkari Sanghatana and Member of Parliament (Rajya Sabha).

ECONOMICS OF SUGAROPINION

Governmentis keener on

stability of pricesfor consumers

rather thanpayment of

reasonable pricesfor cane growers

Sugar : Issues

C


19/52



1950-51 and 1951-52 followed

by six years of decontrol between

1952-53 and 1957-58. This policy

was followed under the pragmatic

leadership of the then Minister of

Food, Shri Ra Ahmed Kidwai.

However, with the departure of

Shri Kidwai, his vision of theregime of decontrol was lost.

After alternating between control

and de-control the government

finally adopted in 1967-68 the

policy of partial decontrol, which

has since, been the mainstay of

governmental policy except for

two short periods of decontrol in

the 1970s. Under this policy, the

government procures, ostensiblyfor supplies through the Public

Distribution System (PDS), a

certain percentage of production of

sugar at levy price xed by itself

and the balance is allowed to be

sold by the mills in the free market

subject to the monthly release

mechanism. The levy quota for

sugar mills has been brought down

from the peak levels of 70% in1968-69 to the present levels of 10

per cent through a gradual process

of deregulation.

The number of operating sugar

mills in the country has increased

from 29 in 1930-31 to 412 by

1996-97 and a little above 475 in

2007-2008. Some 95 factories are

non-operational.

The extent of control over

the industry has been very

comprehensive and inhibitive. It

is the Central government that

decides where and when a sugar

factory can be opened. It decides

what technology the sugar factory

will deploy, what kind of packaging

material it will use for bagging the

sugar and at what prices the bags

can be purchased, what wages it

will pay to the factory workers

as also to the labour employed

for harvesting and transport. It

decides, again, the percentage of

total sugar production that the

factories will deliver as levy sugar

and at what price for the PublicDistribution System, the Statutory

Minimum Price to be paid to the

cane growers, the freesale quota

and the monthly releases thereof,

what quantity could be imported/

exported and at what price and

at what tariffs . In fact, it may

be said that there was hardly any

decision that a management of the

sugar factory, whether cooperativeor private could take without

some kind of intervention by the

government.

In the case of the cooperative

mi l l s the governmenta l

control is even closer. The

government decides on their

credit and expansion plans as also

diversication into byproducts. The

cooperative factories have growninto stereotypes that follow the

Open Pan technology and produce

only standard varieties of sugar

with little attention to byproducts.

This is quite contrary to the general

pattern in main producer countries

of the world under which, sugar

invariably was the byproduct and

the derivatives the main revenue

earners. The government ruleswere clearly inuenced by political

considerations and urban consumer

interests. For example, it was

ordained that the delivery of sugar

cane by the members of the

cooperative factory will be treated

as a transaction of sale and purchase

and, consequently, subject to a

hefty purchase tax. The licenses

for factories were doled out for

political considerations. The Levy

prices were fixed to favour the

northern states.

The controls on the sugar

industry have caused more harm

than benets. Imposed under the

Essential Commodities Act 1955sugar has always been subjected

to various controls as per the

provisions of the Act and Rules

here under, the Sugar (Control)

Order 1966; Sugarcane (Control)

Order in 1966; Levy Sugar Supplies

Order, 1979, Sugar Packing and

Marketing Order, 1977, Sugar

Cess Act 1982 etc. Most of these

controls have outlived their utilityif they ever had any. The Now

off-now on sugar export policy

has prevented the development

of a stable and dependable export

market.

From the year 1971 to 2007,

the Statutory Minimum Price was

revised 26 times and the basic

percentage was revised from9.4% to 8.5% in 1972-73 and

then to 9% in 2005-2006. The

levy percentage was reduced

from 70% to 10% in ten steps

from 1972. The Government

made scores of decisions affecting

the control regime in the sugar,

shifting between total control,

involuntary partial control, and

partial control and to completecontrol some 9 times.

The private sector sugar factories

have generally been in favour of

scrapping the levy sugar system

while the dominant school in the

cooporative sector clamours for the

continuation thereof.

The Statutory Minimum Price

(SMP) and its derivative the levy


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prices, for the sugar were based

on a different concept than the

Minimum Support Price (MSP)

for other agricultural produce.

The minimum support price was

based on the cost of cultivation

and certain other social economic

considerations relating to theeconomy as a whole. The Statutory

Minimum Price for the sugarcane/

Levy price for the sugar follow,

even though not expressly so

mentioned, a policy of equalization

of income per acre of sugarcane

amongst different states with

different levels of yield and sugar

recovery. The consequence has

been that the levy price for northernstates where the sugar yield and

recovery are poor, were much

higher than those in the southern

states where the sugar recovery

is much higher and the quality of

sugarcane much better. The sugar

recovery in the southern states is

generally above 10% while that in

the Northern region is generally

less than 10%. The duration ofthe crushing period also varies

from a minimum of 63 days in

West Bengal to a maximum of 160

days in South Gujarat in the year

2005-2006. For the same year the

sugarcane yield per hectare varied

from 42.6 tonnes in Bihar to a 110

tonnes in Rajasthan. Consequently,

the Levy prices varied in the year

2002-2003 from Rs. 1208 pmt in

Gujarat to Rs. 1327 pmt in Uttar

Pradesh. In the year 2005-2006, it

varied from Rs. 1222 in Gujarat to

Rs. 1409 in north Bihar.

The sugar pol icy of the

G o v e r n m e n t o f I n d i a i s

clearly influenced by political

considerations. On the one hand,

the ruling parties have tried to keep

the control of the cooperative sector

Table 1

Cost of Cultivation of Sugarcane per Acre

(2006-07)

Sr. No. Item Cost in Rs.

1 Casual Labour 5,775.00

2 Permanant Labour 5,000.00

3 Domestic Labour 8,728.004 Bullock Labour 1,000.00

5 Machine Labour 3,600.00

6 Seed 3,960.00

7 Chemical fertilisers 5,407.00

8 Manure 2.000.00

9 Insecticides 1,220.00

10 Irrigation charges 4,350.00

11 Interest on Current capital ---- ----

12 Rent of Land 15,000.00

13 Education Cess 110.00

14 Depreciation of plough etc. 252.00

15 Interest on xed capital 5,640.00

Total Cost of Cultivation per acre 62,042.00

16 Per Acre production 35 tonnes

17 Cost of production 1,722.62/tonne

18 Cost of Harvesting and Transporting 200.00/tonne

19 Prot 10% 177.00

20 Expected Rate 2,149.62/tonne

in sugar industry where the cane

prices have remained generally

lower than the statutory minimum

price. In the Northern region, in

the absence of the cooporative

movement, it has taken direct

control of a large number of sugar

factories and introduced the concept

of State Administered Prices (SAP),

which are much higher than thestatutory minimum price and are

paid through the budgets of the

state governments. The government

is keener on ensuring the stability

of prices for the consumers rather

than payment of reasonable prices

for the cane growers.

The crunch between the prices

of sugar and the prices of sugar

cane reects itself in the shape of

low prices - often lower than the

statutory minimum price, in the

southern states and, particularly,

in the cooperative sector. On the

other hand, in the northern states

it reects itself in the form of huge

backlog of payment to farmers.

The prices that the cane growersget for their produce have to be

viewed from three angles. Under

any circumstances, the farmers

expect and should get a price that

will cover the comprehensive

cost of production. The statutory

minimum price fixed by the

Central government is very

often much less than the cost

of production calculated by the


21/52



Table 3

Sugar and Byproducts produced from 1 tonne of Sugarcane

Recovery Production in (Kg) of

percentage

Sugar Molasses Pressed Surplus

mud Bagasse

10 100 40 50 60

11 110 40 50 60

12 120 40 50 60

13 130 40 50 60

Table 2

Factories with sugar recovery of (%) Statutory Minimum Price Payable

(Rs. / Tonne)

10 811 + 93 - 180 = 728

11 811 + 2 (93) - 180 = 821

12 811 + 3 (93) - 180 = 914

13 811 + 4 (93) - 180 =1007

Table 4

Revenue obtained from product and byproducts by sugar factories from 1 tonne of sugarcane crushed

Recovery percentage Factorys revenue in Rs. Less extraction

cost Rs. 400

Sugar Molasses Pressed Surplus Total

@ Rs. @ Rs. mud Bagasse Revenue

12,000 1,500 @ Rs. @ Rs.

pmt pmt 100 pmt 800 pmt10 1200.00 60.00 5.00 48.00 1313.00 913.00

11 1320.00 60.00 5.00 48.00 1433.00 1033.00

12 1440.00 60.00 5.00 48.00 1553.00 1153.00

13 1560.00 60.00 5.00 48.00 1673.00 1273.00

Agricultural Price Committees of

different states. It is imperative

to calculate the cost of cultivation

of sugar cane in a typical nodal

farm. The averaging methodused by the Central governments

CACP often results in very

ridiculous computations. Table

1 gives the details of cost of

cultivation of sugar cane in

any typical holding in southern

Maharashtra.

Secondly, it is useful to see

what would be the Statutory

Minimum Price payable in case

of factories with varying levels

of sugar recovery. Table 2 gives

the statutory minimum prices

payable in a Maharashtra- like

situation where the harvesting andtransportation is ensured by the

factories.

The final question is - can a

reasonably efcient factory afford to

pay at least the statutory minimum

pr ice to safeguard the cost of

cultivation?

The Tables 3 and 4 gives

the quantity of various products

and by-products produced from

1 tonne of sugar cane and the

incomes obtained from there. It

is quite clear that there should be

no difficulty for a new factoryto pay the farmers the statutory

minimum prices prescribed by the

Central government. The protest of

both the sugar barons in the South

about inability to pay the statutory

minimum price and that of the mill

owners in the North who amass

huge backlogs have no justication

whatsoever.

(Email: [email protected])


22/52




constituted an expert group

headed by Prof. Radhakrishna

has focussed on the present state of

agricultural indebtedness in the

country in its totality.

The recommendations are

highly relevant given the enormous

interest the subject has evoked and

its seemingly intractable nature.

agrarian crisis - in the making for

at least two decades and brought

about by the neglect of agriculture

in the planning process - the

expert group has analysed theproblems in their entirety. There is

an agricultural crisis, characterised

by low growth and declining

productivity, as well as an agrarian

crisis, marked by persistently high

agriculture, increasing production

and marketing risks, collapse of

the extension system and a growing

institutional vacuum, and lack of

livelihood opportunities are foundto be the primary causes.

Some of its other interesting

ndings are :

l average household borrowings

Highlights of Report

Agricultural indebtedness is

not the root cause of the crisis but

only a symptom and hence needs

to be dealt in its totality.

Though immediate credit

and non-credit relief measures

addressing the farming community

are essential, the design and delivery

system should be strengthened.

Rescheduling of loans and

relieving of interst burden upto

two years in the case of farmersaffected by natural calamities,

drought conditions in rainfed

areas and farmers in distress due

to production crisis resulting from

a multitude of risks are essential

one time measures.

In many parts of the country

farmers are burdened with high

proportion of indebtedness to high

interest bearing informal sources

like moneylenders.

The expert group recommends

the initiation of the process in the

distressed districts by creating

Moneylenders Debt Redemption

Fund.

Recommends institutional

nancial inclusion of the farming

community on a mission mode.

One of the key recommendations

of the expert group is improvement

of the rural nancial architecture

that would improve timely and

adequate delivery of credit to

farmers by reducing transaction

costs and improving the credit

absorbtive capacity.

A major recommendation of

the group is improved deployment

o f R u r a l I n f r a s t r u c t u r e

Development Fund (RIDF).

The Expert Group recommends

that based on the model of self

held group (SHG) federations

of poor in Andhra Pradesh, the

state governments should make

efforts to facilitate the formation

of federations of SHGs for

farmers, especially for small andmarginal.

Expenditure on health is one of

the sources of farmers distress and

the group recommends farmers

health insurance scheme on the

lines of the one implemented in

states like Karnataka.

Rural indebtedness

In his Independence Dayspeech this year, Prime Minister

Manmohan Singh had reiterated

his governments commitment to

an agriculture. He had announced

a special programme for the

sector, entailing an investment of

Rs.25000 crore, to be launched

shortly.

Against the backdrop of the

dependence of the population onagriculture.

On the most obvious and tragic

manifestation of the crisis - the

large number of suicides by farmers

in different parts of the country -

the expert group has come to the

conclusion that the root cause is not

indebtedness alone and that suicides

are only a symptom. Stagnation in

by themselves have not beenexcessive.

l In fact , in the wake of

m o d e r n i s a t i o n a n d

expansion, the credit needs

of agriculture have expanded

enormously.

l T h e d e f i c i e n c i e s i n

agricul tural credi t - on

account of banks not meeting


23/52



their targets, poor performance of co-

operatives and regional rural banks - have

been well documented.

l In the long term interests of the nancial system, a

positive repayment culture for bank loans should

be encouraged. Those who repay promptly must

be rewarded.

Suggested measures

Immediate remedial measures recommended by

the expert group include :

l better monitoring and implementation of the

existing package of relief measures covering 31

distress affected districts;

l

rescheduling of loans and waiver of interestburden up to two years as well as grant of fresh

loans to farmers affected by natural calamities.

The Centre and the States should share the burden

equally.

l a one time

re l ie f to

f a r m e r s

who a r e

p a y i n gexorbitant

interest to

money lenders should be provided by banks

through long-term loans. A special fund, to be

called the Money Lenders Debt Redemption Fund

with a corpus of Rs. 100 crore to operationalise

the scheme must be created.

Finally, the committee nds that more than one

half of the farm households do not borrow eitherfrom institutional or non-institutional sources.

Institutional agencies should be placed on a

mission mode to extend coverage. The group has

made some valuable suggestions to improve credit

delivery in rural areas and enhance the quality of

nancial architecture.

(From the Report of the Expert Group on

Agricultural Indebtedness)

It is declining earnings that

result in the inability to repay

debt that triggers farmers

decision to commit suicide

hence indebtedness of farmers

becomes a key issue.

YE-4/08/5


24/52



ITH INVOLVEMENT

of large human factor

in the sugar sector,

on the one hand, 50

million sugarcane

farmers and on the other teeming

million of sugar consumers,

economics and politics have co-

existed over the long history of the

Indian sugar sector.

Evidently, all important policy

measures weaved by the Indian

Government governing the sugar

sector evolve around the aforesaid

consideration. The interest of

sugarcane farmers is protected by

a statutory minimum price payable

to the sugarcane farmers notied

by the Government of India based

on farmers-centric considerations.

On top of this,

economics of sugar yojna-april-08

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