Sugar Industry: Need for export subsidy

ECONOMY/ GOVERNANCE

Topic: General Studies 2, 3:

• Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment 
• Government policies and interventions for development in various sectors and issues arising out of their design and implementation

Sugar Industry: Need for export subsidy

Context: Union Commerce and Industry Minister Piyush Goyal’s announced 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. 

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.

• This unusually high stock in the next season, without an export incentive like a government subsidy, will result in a vertical collapse of the sector.
• One way of correcting this inventory is to promote export of at least 50 lakh tonne of sugar. Then the opening stock would be 105 lakh tonne, providing the mills a healthy inventory as well as liquidity from exports

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.

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.

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 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.

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

• Recently, the central government has announced a Rs 1-3 per litre rise in the procurement price of ethanol. This is the signal given by the government to mills to divert cane towards production of ethanol rather than sugar.
• 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, to augment the capacity (building physical infrastructure)

• With the present capacity, mills can produce 426 crore litres of ethanol, which would require diversion of 15-20 lakh tonnes of sugar.

Conclusion

• 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.

Connecting the dots:

• MSP in age of Surplus: Sugarcane Pricing and Milk Pricing