The Indian sugar industry has never stood on its feet. The government’s debilitating controls and populist policies, often devoid of economic sense, ensured that it could not even attempt to do so. Mindless sugarcane pricing triggered the sugar cycle which ensured that the country oscillated between massive surplus and severe shortage. The government grappled with large cane arrears while the industry survived on periodic government funded bail-outs and subsidies. No sane investor chose to bet his money on this sector.
That may well change soon if some of the recent measures announced by the government are any indication. In fact, Indian sugar industry is at the cusp of becoming financially independent and globally competitive.
It all began in 2013 when the government chose to decontrol the sector. It was not a comprehensive exercise. The decontrol focussed on the sugar side of the business. It allowed sugar mills to sell whatever quantity they wanted at a time and price of their choice. Supply of levy sugar at discounted prices to the government for distribution through PDS was also ended. However, the controls on the sugarcane side remained and it continues even today. This includes the contentious issue of government fixing the price of sugarcane. The decontrol did not help much as the sugar cycle continued to play out and industry’s woes refused to go away.
Help then came from an unlikely quarter. In 2016-17, a new variety of sugarcane (CO 238) was developed for use in Uttar Pradesh (UP). To everyone’s amazement, it delivered significantly higher yield (30 tonne per acre against 22 tonne from earlier varieties) and even higher recovery (sucrose content was 11.5 per cent as against earlier 9.5 per cent). Considering that UP produces bulk of India’s sugarcane, its share in the country’s sugar output rose to 40 per cent from 25 per cent.
This singular development effectively broke the sugar cycle and made India a consistently surplus sugar producer.
Today, production exceeds domestic consumption by 60 lakh tonne and the focus has shifted to managing the surplus. The government re-introduced monthly sale quota and fixed minimum selling price for sugar to ensure the cash-strapped sugar mills do not flood the domestic market with sugar. That kept the local prices stable. To liquidate excess stock of sugar, it announced export subsidies. Without subsidies Indian exports are unviable as cost of producing sugar (thanks to high cane price) is way above the international sugar price.
This was promptly contested by other countries in the WTO. India has been allowed to continue with the subsidies till December 2023. The fear is what will happen post-2023.
The ethanol option
India’s ethanol programme — blending ethanol with petrol for use as auto fuel, was first announced in 2003. It never took off for multiple reasons — poor pricing of ethanol supplied for blending, periodic shortages of sugar and competing demand from potable alcohol sector.
The Modi government revived the programme and gave it the necessary impetus both in terms of targets and policy push. It understood the multiple benefits that the programme, if implemented properly, offered — improve sugar mills’ cash flow, ensure better prices for farmers, enhance India’s energy security and reduce pollution.
It began by fixing attractive prices for ethanol that oil marketing companies (OMCs) procured for blending. This motivated the sugar mills to produce ethanol.
The government then allowed sugar mills to produce ethanol from earlier stages of sugar production rather than just C-Molasses.
As a first step it allowed conversion of B-heavy molasses (which has more sugar content than C-Molasses and is typically converted into sugar) and then followed it up by allowing mills to produce ethanol directly from sugarcane juice. More importantly, it also offered higher prices for ethanol produced from cane juice and B-Molasses (to compensate mills for reduction in sugar output).
These measures not only enhanced ethanol availability but also helped in tackling the sugar surplus. In 2019-20 sugar season (October-September), 8 lakh tonnes of what would have been sugar output was converted into ethanol. In 2020-21, it will be 20 lakh tonnes. The plan is to convert the entire sugar surplus of 60 lakh tonnes into ethanol in the next 2-3 years.
That will obviate the need for export subsidy which anyway becomes illegal after December 2023. In case the sugar production drops in a particular year, the government can reduce direct conversion of sugarcane juice to ethanol by lowering its procurement price. Ethanol, thus, is proving to be a good tool to manage the sugar surplus.
In FY21, the ethanol blending target of 5 per cent was met. It is expected to reach 8 per cent in FY22 and the government hopes to achieve 20 per cent blending by 2025.
To ensure that enough ethanol is available to achieve this target (about 1,100 crore litres needed against today’s output of 460 crore litres), it has helped the unbankable sugar industry with an innovative scheme — a tripartite agreement between sugar companies, banks and OMCs.
The banks fund ethanol capacity addition (said to be worth ₹41,000 crore) and the money from ethanol sales will be used to repay the debt through a separate escrow account.
Free up cane pricing
To make the Indian sugar industry truly self reliant, just one step remains — freeing up cane pricing. Sugarcane price fixed by the government today has little correlation to the realisation from end products. This inflicts huge losses on the mills and causes cane arrears to build.
A solution is available. The Rangarajan Committee has suggested a formula to fix cane price factoring in the price of sugar and other by-products. On most years it will pay farmers well. In case the cane price, arrived by the formula, drops below what the government considers as a reasonable payment, it can bridge the gap from a dedicated fund created for the purpose and a cess can be levied to build up the fund.
If the government bites this final bullet, the sector will become globally competitive and financially independent. Cane arrears will be history. There will be no need for the government to subsidise the industry and offer large bail-outs. And Indian sugar industry will finally come of age.