Centre, NITI Aayog working on devising long-term solution for sugar sector

The solution to the sugar Industry problem lies in any or a combo of a price stabilisation fund, the Gujarat model of payment of cane dues and increased focus on ethanol blending

10 min read Last Updated : Apr 08 2021 | 1:17 PM IST

After the current round of state assembly polls, all eyes will be on the crucial Uttar Pradesh elections scheduled for February-March 2022.

Though still more than a year away, all political parties have started preparations in their own way for grabbing power in the most crucial of state assembly polls.

If the ruling BJP loses its grip on UP, it will deal a body blow to the party’s national expansion plans and could have a strong bearing on the 2024 general elections.

The current farmers’ stir at Delhi borders and its spread into the agriculturally crucial western UP could be seen in the same context.

Discontent among farmers, who are believed to constitute the biggest voting block irrespective of caste and religion, could make or mar any political party's quest to grab power in UP.

Though sugarcane cultivation is concentrated mostly in the western parts of the state, experts say the crop and the sugar economy in general could have a direct bearing on 80-100 of the 403 assembly seats in UP.

Any slippage here could make or mar the prospect of any party that wants to come to power.

Sugarcane dues in the current marketing season that started in October touched almost Rs 23,000 crore by mid March. Of this, more than half, or almost Rs 14,000 crore, pertains to one single state--Uttar Pradesh.

In March 2020, sugarcane dues during the same time were about Rs 19,200 crore.

The issue of pending sugarcane dues has been rearing its head from time to time and isn't a new development for cane farmers.

But, keeping it lingering for long could have a devastating impact on farmers’ morale, more so at a time when many of them have been protesting at Delhi borders for more than four months now.

The UP government did not hike the State Advised Price (SAP) of sugarcane for the 2020-21 season, making it the third year in a row that sugarcane prices haven’t been raised.

The reason was any hike in sugarcane purchase rate could further push the mills towards losses as the price of the end product (sugar in this case) hasn’t increased in the last few seasons.

That said, sugar companies do make money from alternative sources such ethanol, co-generation and bagasse.

But a look at their balance sheet will reveal that sugar still yields 80-85 per cent of the annual revenues of an average sugar mill. Therefore, any slump in sugar prices will have a direct bearing on the financial health of the sugar companies.

To bring about a long-term solution to the problem of recurring sugarcane and restore the financial health of the sector, the NITI Aayog along with the line ministries have been working on a set of recommendations.

The Central government last year formed a high-powered panel consisting of heads of major ministries related to the sugar sector, along with officials from the states, to analyse the recommendations and prepare a road map for implementation.

The panel is working on three major pillars to provide a long-term solution to the sugar sector:

Price Stabilisation Fund:

One of the suggestions being actively considered is the creation of a price stabilisation fund and tweaking the C Rangarajan formula of revenue sharing based on recovery levels.

The recovery rate is the amount of sugar that a given sample of sugarcane fetches. The higher the quantum of sugar derived from sugarcane, greater should be the price price it fetches in the market.

On the price stabilisation fund, sources said such a fund is being mooted to bridge the gap between the fair and remunerative price and the liability of sugar mills based on the revenue sharing formula.

This, in turn, will ensure that in the years when sugar and product prices are not remunerative, neither the farmers suffer, nor do the mills face losses.

Illustrating further, a senior industry official said that the Fair Remunerative Price (FRP) of sugarcane in the 2020-21 sugarcane season at a base recovery of 10 per cent has been fixed at Rs 285 per quintal. If the revenue sharing formula suggested by former chairman of the erstwhile Prime Minister’s Economic Advisory Council, C Rangarajan, is taken, the FRP liability should be much lower as sugar prices haven’t risen the past few years.

However, to ensure that farmers are not deprived in the case of lower FRP, the NITI Aayog in a report has time and again recommended a special price stabilisation fund.

The Commission for Agriculture Costs and Prices (CACP), too in many of its past reports, has favoured a stabilisation fund.

Sources said the agriculture ministry, in its submission on the fund, was of the view that its repercussions on WTO agreements and final price of sugar should also be kept into consideration.

However, there is not much clarity yet on how the proposed fund will be financed.

Meanwhile, the revenue sharing formula recommended by C Rangarajan had suggested fixing sugarcane price at 70 per cent of the revenue realised from the sale of sugar and its by-products and 75 per cent from the revenue realised if only sugar is considered for calculation.

The NITI Aayog, in its report on the sector submitted last year, had suggested this revenue sharing formula be tweaked upwards to 75 per cent for revenue realised from sugar and by-products and 80 per cent purely from sugar due to improvement in recovery rates over the year.

“The prices of sugarcane may need to be adjusted slightly upwards keeping in view the improvement in recovery rates in the last few years, i.e. between the reference period of Rangarajan Committee recommendations and the current period. Thus, in place of 70 per cent price of sugar and by-products and 75 per cent price of sugar only, the pricing formula can be 75 percent of sugar and byproducts and 80 percent of sugar price,” the Committee said.

This formula can be implemented prospectively, say from sugar season 2020–21 or 2021–22, the Aayog had said.

Staggered Payment of sugarcane price a la Gujarat Model

Unlike in the North and several other parts of the country where sugarcane farmers are entitled to get their full payment within 14 days of delivery of cane to the mill gate, in some states such as Gujarat, the payment is made to them in tranches.

This, according to the votaries of the system, ensures that mills are not compelled to sell dump their sugar into the market during the peak crushing months to generate cash for making payment within 15 days.

On the other hand, it also ensures that there are no carryforward dues payable to the farmer and he gets his payment in the same year in which sugarcane is delivered to the mills.

“In Gujarat, most sugar factories are in the cooperative sector and we make 30 per cent of the payment within 15 days of delivery of cane, while the next round of payment is made after the mills close in April. The third and final round of payment is made before Diwali,” Ketanbhai C Patel, vice chairman of Gujarat State Federation of Cooperative Sugar Factories told Business Standard.

Patel said the system has ensured that till date not a single rupee is carried forward as sugarcane arrears in Gujarat and all farmers get their payment within a few months of delivery of sugarcane to the mill gate.

“That apart, we are also able to pay a higher sugarcane price to farmers in excess of Rs 350 per quintal which is not the case in Uttar Pradesh and Maharashtra,” Patel said.

He said the staggered payment can work among private mills of UP as well which has highest sugarcane dues.

However, the proposal might not find much favour with farmers, one of the key constituents in the entire matrix.

V M Singh, Convenor of Rashtriya Kisan Mazdoor Sangathan (RKMS) said that staggered payment system will hurt the interest of sugarcane farmers and create another monster just like the Government has done with the farm laws.

“When the farmer is not able to pay the price of fertilizers and other inputs required to grow sugarcane in installments, how can he be asked to take return for the same crop in tranches,” Singh said.

Increased focus on ethanol blending

One of the least controversial and politically safe ways to provide a long-term solution to the sugar sector’s woes is to drastically scale up the ethanol blending programme from the current target of 10 per cent by 2022 to 20 per cent by 2030 or even earlier.

The recent developments and Central government’s attempts at providing a stable and differentiated pricing regime for ethanol produced from various sources do provide some hope.

In the first four months of 2020-21 ethanol blending season that starts from December and ends in November, for the first time, India’s ethanol blending has reached over 7.2 per, putting the country on course to meet the elusive target of 10 per cent blending by 2022.

According to industry sources, if the Oil Marketing Companies (OMCs) lift all the contracted ethanol quantities in the next few months, then the all India average blending could be even near 8 per cent by the time the season ends in November 2021.

So far, the best ever ethanol blend with petrol has been around 5.2 per cent at All India level.

Infact, already as on date in as many as 11 states that include big ones like Maharashtra, Uttar Pradesh, Karnataka, Gujarat, Haryana, Punjab, Delhi, Bihar, Uttarakhand, Himachal Pradesh, Goa and Daman and Diu, almost 9.5-10 per cent ethanol is being blended with ethanol.

This also means these states are already close to the 2022 blending target.

But, it hasn’t been all smooth so far.

Sugar industry players, said that blending could have been even more in the first four months of the 2020-21 season, but for some strategic gaffes by the Oil Marketing Companies (OMCs) in estimating the ethanol storage capacity in each of their depots, because of which mills are being compelled to supply ethanol at depots which are away from their production units.

Data from industry sources said that till March 29, OMCs have placed a requirement of 4.57 billion litres of ethanol for 2020-21, of which bids have been finalized for 3.25 billion litres by sugar companies.

Against this, around 2.98 billion litres of ethanol has already been contracted, of which 1.00 billion litres (around 33.5 per cent) have been supplied, while the rest are in the process of being delivered.

Of this, around 77 per cent or 0.77 billion litres of ethanol is that which has been produced from B-heavy molasses and sugarcane juice which will straightaway lead to reduction of 0.8 million tonnes of surplus sugar.

In total, industry players believe that, in 2020-21 around 2 million tonnes of sugar will be less produced because of this diversion of sugarcane for ethanol.

As per ethanol policy, the sugar companies are under the obligation to deliver the contracted ethanol to the nearest preferred OMC depot, for which the Oil companies reimburse the transportation charges.

However, sugar companies allege that OMCs are reimbursing the transportation charges much lower than the actual rate as the base rate was fixed in October 2020 (before the current spurt in fuel prices) which is why sugar companies have to bear an additional burden of around Rs 3-5 per litre from their own pocket to deliver the ethanol at the depots.

Table: India’s sugar production in million tonnes