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Wednesday, November 25, 2020

Explained: Why the sugar industry desperately needs export subsidy this season

For the season which has started, the annual production is estimated to be 326 lakh tonne (without any diversion towards ethanol), and the season has started with opening stock of 107 lakh tonne.

Written by Parthasarathi Biswas | Updated: November 5, 2020 9:48:14 am
sugar production india, india sugar exports, india sugar production 2020, sugar exports, india sugar production lockdownSugarcane is harvested in Maharashtra. (Express Photo: Pavan Khengre, File)

The sugar industry has reacted strongly to Union Commerce and Industry Minister Piyush Goyal’s announcement that the central government is not considering an extension of its export subsidy for the 2020-21 sugar season. The industry has warned of a ‘vertical collapse’ in the sector due to excessive stock, whose ramification can be felt in the years to come. Here’s why this issue has shaken the sugar industry before the start of an otherwise good season.

Why is the sugar industry rooting for exports even before the start of the season?

At the start of the (October-November) sugar season, the industry draws up its balance-sheet and takes into consideration the expected production, the carry forward stock of last season, minus domestic consumption and exports, if any. This sugar balance-sheet determines the availability of sugar for the next season. In case of unusually high stock, ex-mill prices remain low for the present season as well as for the upcoming season, which result in liquidity crisis for the sugar sector.

For the season which has started, the annual production is estimated to be 326 lakh tonne (without any diversion towards ethanol), and the season has started with opening stock of 107 lakh tonne.

However, industry sources estimate sugar production being lower by 20 lakh tonne as mills are expected to produce ethanol, and thus the total available sugar balance in this season is expected to be 413 lakh tonne. After deducting the domestic consumption of 260 lakh tonne, the opening stock of next season (season of 2021-22) is estimated to be 155 lakh tonne.

This unusually high stock, without an export incentive like a government subsidy, will result in a ‘vertical collapse of the sector’, said Prakash Naiknavare, managing director of the National Federation of Cooperative Sugar Factories Limited.

One way of correcting this inventory is to promote export of at least 50 lakh tonne of sugar, suggested Naiknavare. Sugar mills export both white as well as raw (unrefined sugar which is brownish in colour) sugar. If 50 lakh tonne of sugar is shipped out of the country, the opening stock would be 105 lakh tonne, providing the mills a healthy inventory as well as liquidity from exports. 📣 Click to follow Express Explained on Telegram

Why are mills reluctant to export sugar without a government subsidy?

The mills’ reluctance stems from the gap between cost of manufacturing and the current price of raw sugar in international markets. Sugar contracts at international markets are trading at Rs 21-22 per kg, while the cost of production is at Rs 32. The price mismatch has ruled out any export prospects as this would lead to further loss for the mills.

Ironically, mills are facing this problem at a time when Indian sugar has made its mark in the international markets. Last season, India has reported record sugar export of 60 lakh tonne, of which 57 lakh tonne have already left the the country. The remaining consignment is expected to leave by the end of December.

Other than the traditional markets of Bangladesh, Malayasia and Sri Lanka, Indian mills have also shipped their produce to newer countries like Iran, China, South Korea and Somalia.

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How did the mills manage to export sugar last season?

The record export level last season was possible only because of the subsidy programme offered by the central government. Mills were promised a transport subsidy of Rs 10.448 per kg of sugar exported. This subsidy had helped mills bridge the difference between production costs and international prices. Also, the Union Ministry of Food and Civil Supplies was strict about compliance, which led to mills toeing the line in terms of exports.A higher demand in international markets had also seen Indian mills reporting good exports.

However, last week, Goyal ruled out any extension of the subsidy scheme as the international sugar scenario is currently stable. Industry watches said the delay in India’s export subsidy scheme had seen sugar prices rallying, and the benefit is largely being drawn by Brazil, which is the largest sugar manufacturer of the world.

As a second Covid-19-induced lockdown looms large over Europe, Brazilian mills are considering diverting 48 per cent of their cane towards sugar production, much higher than the earlier 35 per cent they were planning to.

Have last season’s exports helped mills generate enough liquidity?

No. The central government is yet to release the export subsidy due to the mills and the total due is as high as Rs 6,900 crore. Individual mills had taken loans to facilitate exports and now they have to to pay interest to the banks. Unpaid interest of Rs 3,000 crore for maintaining buffer stock has also hit hard the balance sheet of mills.

The Covid-19 pandemic has further delayed the release of subsidy, which has led to many mills not having sufficient liquidity at the start of the season.

Naiknavare pointed out how the sugar sector failed to get any mention in the fiscal packages announced by Union Finance Minister Nirmala Sitharaman to boost the economy. “The constant prodding of the central government had prompted the mills to export, but now they are stuck. Also the minister’s (Goyal’s) recent pronouncement has sent jitters across the industry, which is wary of another season of liquidity crunch ahead of it,” he said.

But why can’t mills concentrate on ethanol production, given the government’s emphasis on the fuel additive?

Last week, the central government has announced a Rs 1-3 per litre rise in the procurement price of ethanol. This is the second signal given by the government to mills to divert cane towards production of ethanol rather than sugar. The industry has estimated that this year, nearly 20 lakh tonne of sugar will be diverted towards producing ethanol. Last year, the central government had announced an interest subvention scheme for mills to augment production of ethanol.

But diversion to ethanol, although a much-needed move, will require time to materialise. With the present capacity, mills can produce 426 crore litres of ethanol, which would require diversion of 15-20 lakh tonnes of sugar.

“While the government’s move to encourage mills towards ethanol production is certainly welcome, it would require more capital and time. For the current season, in case exports are not made viable, not only will India lose its market share, but mills will certainly feel the liquidity crunch. The effect of this will be disastrous for the sector,” said Naiknavare.

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