Indian Sugar Industry

Indian sugar industry is among one of the most important segment in commodity markets and is also the main drivers for the country’s rural economy. India currently enjoys the second place in the producer’s list in the whole world just behind Brazil. Apart from this it also supports over 50 million farmers and their families thus making itself as one of the most important industry for the Indian economy. Due to the maximum consumption of sugar across pan India, the nation currently enjoys the position of one of the largest markets in the world, in terms of volume.

The sugar industry has significant social and economic impact for the nation. It is regarded as the green industry due to its by products, which are capable to generating electricity. The industry is also largely self-sufficient in energy needs as it generates the same through the utilization of bagasse, which is a byproduct released after the extraction of sugar from sugar cane. Sugar industry as a whole has the potential to generate surplus exportable energy through co-generation and to contribute in reducing the energy deficit that India is facing currently.

International Scenario

The world sugar trade accounts for around 36 per cent of the global sugar production. India is a marginal player in the world sugar trade market, which is due to the fact that the Indian sugar consumption is very high and thus the trade diminishes. The average volume of preferential trade is around 10 million MT of sugar annually. Brazil and EU dominate the world sugar trade followed by Australia and Thailand which are the other major sugar exporting countries.

Current Scenario and the need to Deregulate

Currently in most of the key sugar producing geographies like Brazil and Thailand, regulations have played a significant influence on the sugar industry. The main reasons accounted for the same is the perishable nature of cane, small farm land holdings and the need to influence domestic prices. Since 1993, after the implementation of the LPG policy and the regulation of environment which considerably eased the environment and the laws, the sugar industry did not see much of its affects as sugar still continues to be an essential Commodity under the “Essential Commodity Act.” Also in India, Sugar is a highly controlled commodity which in a sense resembles to the license Raj.

Indian Government Regulations on Sugar

There are regulations across the entire value chain – land demarcation, sugarcane price, sugarcane procurement, sugar production and sale of sugar by mills in domestic and international markets. Thus it can be seen that the entire cycle of sugar production is under the control of Government. This dual governance also leads to conflict due to the difference in SAP and SMP which are the State Advised price and Statutory Minimum Price respectively and are decided by the State and the Central Government respectively.  The incentive schemes for the BPL people and other issues like the molasses control and co-generation also plays a vital role in the conflict.

Sugar is currently regulated at the Central and state levels. At present, the Government wholly controls the price of raw material i.e., the cane and mills are forced to sell up to 20% of their outputs at a discount for the country’s public distribution system. The Government also decides how much sugar is to be sold in the market by limiting the stocks of big buyers. Recently with the large production of sugar in India, it was proposed to relax sugar export by 10 Lakh tonnes which is currently set at 50 Lakh tonnes. Once deregulation comes into effect, domestic price of sugar will be linked to international rates which are almost 30 % higher than the price in India due to which the price in Indian economy will also rise.

Should the Government deregulate the Industry?

This question has been in the minds of almost all the economists and the corporate leaders and the demand for the same can be traced back to the year 2010. With the possibility of a sharp rise in sugar price it is suggested to keep the industry regulated however there is another school of thought that supports deregulation. Few economists believe that the Government should not be burdened with the responsibility of regulation of sugar industry as any rise in sugar price would translate to a less than 1% increase in monthly food expenses.

It has been found that the per capita sugar consumption increases with rise in income. The average consumption of sugar in a low-income group household is around 2.2 kg per month, which shoots up to 5.11 kg per month in case of the higher income group households. With the deregulation of the industry, if the sugar price rises by 10%, the additional burden on lower income households would be ‘4 per month while the same on the higher income group families would be around ’10 per month. On the other hand, deregulation would help the industry to grow and facilitate the international trade and also the commodity market.

The rise of sugar price would come as a negative news for the Tipplers as the cost of liquor is bound to rise steeply once sugar price goes up an thus the impact in alcohol industry could be seen.

Sugar

Primary source of Alcohol

The sugar industry is also the primary source of raw material for the alcohol industry in India. As we know that the alcohol industry too is at a booming stage which can be justified by the increase in disposable income of middle class people, the demand for sugar is increasing at a drastic rate.

Carbon Trading Opportunity

Sugar being a hydrocarbon and a carbon compound opens a new wide dimension of growth. By 2017, there is a total exportable power potential of approximately 9700 MW. Apart from this, the sector also has the capability to fulfill almost 6 per cent of the additional power requirement of 128 GW by 2017. According to the experts, the sector can also generate 48 million carbon16 credits through co-generation which will again be an achievement in itself.

Presently, bagasse based exportable power is mere 847 MW, which is expected to rise 10 fold at approximately 9700 MW by 2017. The bagasse based co-generation which currently has less than 0.6 per cent of the installed capacity can fulfill 6 per cent of the additional future requirement as well. This tremendous energy generation capacity shows significant untapped cogen potential which can help to partially bridge the energy gap that India as a nation is facing.

As the sector continues to hold its stature and position and also plays a key role in the economy, it is expected to face some significant challenges. The most important being the lack of alignment between sugarcane and sugar prices as a result of which it leads to cane payment arrears. The arrears typically result in the eventual need for government financial support packages.

Industry at Challenging Times

The Indian sugar industry is at the cross roads today, where it can leverage opportunities which are created by global shifts in sugar trade as well as the emergence of sugarcane as a source of renewable energy, through ethanol and cogeneration. With the mounting pressure on the government to seriously consider deregulation of the sugar sector for long, the sector has been hindered in a complex web of controls and regulations.

As far as the decontrol is concerned, there are two important steps of reform that the Center can take at this point of time:

• Withdraw the levy system
• Do away with the free-sale quota for mills

Under the existing levy system, mills need to compulsorily surrender a part of the sugar they produce (currently set at 10 per cent) to the Government which is intended for supply through the public distribution system. The reason behind such a system is a mystery and the mill owners suffer this forced sale to the government even after 20 years of process of economic liberalization. This legal pressure to part with production, that too at unjustifiable prices, must go forthwith. To meet the needs of Public Distribution System, the Center can buy from the mills in auctions in a transparent manner which can again be cumbersome and expensive for the Government.

Another challenging problem with the industry is the restriction on marketing the balance 90 per cent production through a system of quotas. There is no reason why mills should be deprived of free marketing of what they produce. The Government should simply get out of interfering with sugar marketing.

The implication of the twin measures of abolition of levy and free-sale quotas is that henceforth the sugar mills will have more freedom to market the output, where the prices will be truly market-determined, rather than distorted as at present because of the twin restrictions. The owners of sugar mills could trade the sugar produced freely in the free international market and gain big. Also this won’t result in the unnecessary stocking of sugar in the mills where the problem of warehouses is already a deadly issue.

Once the output side is freed with removal of marketing restrictions, the sugar prices will become truly market-driven and the government will have little role to play as it can only monitor open market sugar prices. With the view of regulating or moderating the prices the government can, as and when needed deploy the tariff mechanism effectively deployed to encourage or discourage foreign trade (import-export). Thus we can see government can release the burden of regulation of sugar industry off its shoulders yet control is externally thus promoting a symbiotic win-win-win situation for government, mill owners and customers.

Conclusion

Currently the state of sugar industry can be visualized as the industry facing a double whammy.

The Government decides the input price (cane price through SMP/SAP) while the output price is impacted by government-imposed marketing restrictions. It is utmost important that at least one side of the twin restriction is freed. Decontrol is necessary and it is the best thing that can happen to the challenged domestic sugar industry. The time has come when the policymakers seriously applied themselves to remove at least some of barriers from the natural growth of the industry. This necessity arises because the sector provides livelihood for millions and is considered to be n integral part of the food processing sector and also has a tremendous scope for making the industry truly competitive.

Author: Niraj Satnalika

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