The government needs to shrink its role in the sugar sector.
Sugar mills want the government to defy economics. The government may have no choice but to do it. While sugar prices are falling worldwide, it may fix a higher price for domestic consumers.
Sugarcane arrears have touched Rs 11,000 crore in Uttar Pradesh and Maharashtra, according to the Indian Express. Mills are withholding payments, saying they don’t have the money because of high cane prices and low market prices. International sugar prices have been falling. Raw sugar futures on the InterContinental Exchange are down by 13.7 percent since their October highs.
What makes this politically difficult is that there’s nobody to point fingers at. The government at the Centre and these two states are from the same party. This sugar season, that matters more because general elections are nearing.
In India, crushing has begun in the current sugar season (starts in October) and so far, sugar output is higher by 6.7 percent over a year ago. But bad weather and crop infestation will see final output lower than the previous season’s output, according to Indian Sugar Mills Association.
Normally, that would be good news as low supply means prices would firm up. But a glut in the previous season means ample stocks and weak international prices are keeping domestic prices down.
The government had fixed a minimum selling price of Rs 29/kg for sugar in the previous season, but mills claim that’s insufficient. They want Rs 35/kg or nearly a fifth more, according to a Business Standard report. The government may agree to a level of Rs 32.
A bit of toing and froing on this front can be expected, with the balance tilting in favour of the mills because elections are drawing near.
But it appears that the government too has had enough. It is upset that sugar mills have not exported the agreed quotas of sugar, leaving more sugar inside the country.
If exported, the demand-supply situation would have been much tighter, and prices would have firmed up. Mills would be sitting on cash instead of sugar, the government seems to think. But mills were unhappy with the price they were getting.
If domestic prices improve this year, mills can sell those stocks at a better rate in the domestic market. The government has now said that if a higher MSP is agreed, no other subsidy should be sought. That may be wishful thinking.
This makes it a difficult time for investors in sugar mills. The government wants farmers to get higher prices and payment on time, but when sugar prices are dull, mills want the government to bridge the deficit. The government is not keen on that.
So how sugar mills do in the coming fiscal will be determined by how this tug of war plays out, and not the price of cane or the price of sugar. Investors will be left looking for news on government subsidies or schemes that could improve mills' financial condition.
The steep fall in crude oil prices and what that means for the ethanol-blending campaign is another uncertainty. (In the past, the government has been keen that oil retailers mix ethanol -- a byproduct of sugar production -- with petrol to cushion the impact of high crude prices.)
Overall, one factor to watch is revised sugarcane estimates, which will be out in the third week of January. If the estimates are sharply lower, sugar prices could increase anyway.
But if the Narendra Modi government does return to power in 2019, it should consider sugar sector reforms as one of the tough nuts to crack. The Rangarajan committee report on sugar sector reforms is a good place to start.
The government needs to shrink its role in the sugar sector, from its current larger-than-life size. There may be some pain but in the longer run, farmers, mills and even investors in sugar mills will benefit.
