Is the sugar industry finally coming of age?
The Indian sugar industry has never recovered. The government’s debilitating controls and its populist policies, often devoid of economic sense, have prevented it from even attempting to do so. The senseless pricing of sugar cane triggered the sugar cycle that swung the country between a massive surplus and a serious shortage. The government was grappling with large backlogs of cane as the industry survived on periodic government-funded bailouts and grants. No sane investor has chosen to invest their money in this sector.
That may well change soon if some of the recent measures announced by the government are any indication. In fact, the Indian sugar industry is on the verge of becoming financially independent and globally competitive.
It all started in 2013 when the government chose to take control of the sector. It was not a complete exercise. Deregulation has focused on the sugar side of the business. It allowed sweets to sell as much as they wanted, when and for what price they wanted. The supply of reduced-priced sugar to the government for distribution through PDS has also been discontinued. However, the controls on the sugarcane side remained and it continues to this day. This includes the controversial issue of government pricing of sugar cane. Deregulation didn’t help much as the sugar cycle continued to unfold and the industry’s woes refused to go away.
Help then came from an unlikely neighborhood. In 2016-17, a new variety of sugar cane (CO 238) was developed for use in Uttar Pradesh (UP). To everyone’s amazement, it gave a significantly higher yield (30 tons per acre compared to 22 tons for the previous varieties) and an even higher recovery (sucrose content of 11.5% compared to 9.5% previously). Since UP produces most of India’s sugar cane, its share in the country’s sugar production has increased from 25 percent to 40 percent.
This unique development effectively broke the sugar cycle and made India a constantly surplus sugar producer.
Today, production exceeds domestic consumption by 60 lakh tonne and the focus has shifted to managing the surplus. The government has reintroduced a monthly sales quota and a fixed minimum selling price for sugar to ensure cash-strapped sugar factories do not flood the domestic market with sugar. This kept local prices stable. To liquidate excess stocks of sugar, he announced export subsidies. Without subsidies, Indian exports are not viable because the cost of producing sugar (thanks to the high price of cane) is much higher than the international price of sugar.
This was quickly challenged by other countries at the WTO. India was allowed to continue the subsidies until December 2023. The fear is what will happen after 2023.
The ethanol option
India’s ethanol program – mixing ethanol with gasoline for use as an automotive fuel, was first announced in 2003. It never took off for multiple reasons – low price of ethanol supplied for blending, periodic sugar shortages and competing demand from the potable alcohol sector.
The Modi government has relaunched the program and given it the necessary impetus both in terms of objectives and political impetus. He understood the multiple benefits that the program, if properly implemented, offered – improving cash flow for sugar factories, ensuring better prices for farmers, boosting India’s energy security and reducing pollution.
He began by setting attractive prices for the ethanol that petroleum marketing companies (OMCs) procured for the blend. This motivated the sugar factories to produce ethanol.
The government then allowed the sugar factories to produce ethanol from the early stages of sugar production rather than C molasses.
First it enabled the conversion of heavy molasses B (which contains more sugar than molasses C and is usually converted to sugar), then it enabled factories to produce ethanol directly from the juice. of sugar cane. More importantly, it also offered higher prices for ethanol produced from cane juice and B molasses (to compensate factories for reduced sugar production).
These measures not only improved the availability of ethanol, but also helped control excess sugar. During the 2019-2020 sugar season (October-September), 8 lakh tonnes of what would have been sugar production was converted into ethanol. In 2020-21, it will be 20 lakh tonnes. The plan is to convert all of the 60 lakh ton sugar surplus into ethanol over the next 2-3 years.
This will avoid the need for export subsidies which will become illegal anyway after December 2023. If sugar production drops in any given year, the government can reduce the direct conversion of sugarcane juice to ethanol into ethanol. lowering its purchase price. Ethanol therefore turns out to be a good tool for managing excess sugar.
In fiscal year 21, the target of 5% ethanol blending was achieved. It is expected to reach 8 percent in FY 22 and the government hopes to reach 20 percent of mix by 2025.
To ensure there is enough ethanol to meet this target (around 1,100 crore liters needed against current production of 460 crore liters), he has helped the unbankable sugar industry with an innovative program – a tripartite agreement between sugar companies, banks and JIs.
The banks are funding the addition of ethanol capacity (estimated to be worth 41,000 crore) and the money from the ethanol sales will be used to pay off the debt through a separate escrow account.
Free cane price
To make the Indian sugar industry truly self-sufficient, there is only one step left: freeing the price of cane. The price of sugar cane set by the government today has little correlation with realization from finished products. This inflicts enormous losses on the mills and causes the accumulation of sugar cane arrears.
A solution is available. The Rangarajan Committee suggested a formula for setting the price of cane taking into account the price of sugar and other by-products. Most years he will pay farmers well. In the event that the price of the cane, obtained by the formula, falls below what the government considers a reasonable payment, it can fill the gap with a dedicated fund created for this purpose and a tax can be levied. to constitute the fund.
If the government bites this last bullet, the sector will become globally competitive and financially independent. Cane arrears will be history. The government will not need to subsidize the industry and offer large bailouts. And the Indian sugar industry will finally come of age.