A misleading recovery

Problems of an unreformed sugar sector have not vanished

Sugar stocks have shown a significant recovery in the last month and a half after being in the dumps for several quarters. Thus, Bajaj Hindusthan has risen 50 per cent, while Balrampur Chini Mills has gained 60 per cent and Dhampur Sugar Mills has seen its price go up by 70 per cent. The primary reason for this rally is that there has been a steady rise in sugar prices: since September, the commodity has become almost 25 per cent dearer. Actually, at the beginning of the festival season every year, sugar prices tend to climb because of extra demand from sweetmeat makers. This time, globally prices are on the rise and have hit a seven-month high.

What has added to the investor sentiment is the forecast that the world output of sugar will be three-four per cent lower in the year ahead. In India too, the Indian Sugar Mills Association has scaled down its projected production for the coming year from 28 million tonnes to 27 million tonnes, largely on account of deficient rainfall in Karnataka and Maharashtra (the largest sugar-producing state in the country). Other factors too are at work. One, the Union government has allowed sugar exports of four million tonnes, which should reduce the glut and improve prices of the sweetener. Two, the Uttar Pradesh government (the state is home to a large number of private mills) has announced an incentive of Rs 40 on every quintal of sugarcane that the mills will buy from farmers in the sugar season that began early this month. And three, the Centre has exempted ethanol produced from molasses from central value added tax, which will raise sugar mills' realisation by Rs 5 a litre to Rs 47-48 a litre.

But the financials of the sector are still weak and the market may have moved ahead of the fundamentals. The current price of sugar is not enough for the mills to pay the sugarcane farmers fully and still report a profit. The mills may not make sustained profits in future quarters. In any case, the huge carryover losses from the past will take very long to wipe out. Sadly, there is still no sign of the systemic change that would make sugar a viable business proposition. The industry is a regulatory mishmash: while the price of the output (sugar) is decontrolled, that of the principal input (sugarcane) is controlled. Uttar Pradesh, every year, announces the price at which mills can buy sugarcane from farmers. For political reasons, it is very high - way beyond what the mills can pay, given the price of sugar. As a result, arrears to farmers are huge. The industry in the last few months has demanded steps that hark back to the days of the Licence Raj: minimum support price for sugar, accommodation from state-owned banks, monitored monthly release of sugar, and subsidy on cane purchases. But what the sector needs is not more intervention but more reform. A solution to this imbroglio exists, in the form of the suggestion by a C Rangarajan-led committee to link sugar and sugarcane prices. This requires placing the national interest above short-term politics.