Financial Daily from THE HINDU group of publications
Thursday, Sep 22, 2005
Agri-Biz & Commodities - Insight
A bitter-sweet season ahead
WITH the sugar season set to start from October 1, the industry seems to be in a mood for sweeteners. Sugar production plummeted in 2003-04 and 2004-05 because of drought and infestation by woolly aphids in the major producing States.
That the sugar economy remains severely constrained by cyclical factors and parameters, such as prices of the raw material and the end product is quite well-known. Thus increases in production in the years preceding 2002-03, were followed by low production in the subsequent two seasons.
While this led to a stabilisation in sugar prices, the loss in production aggravated the industry's infirmities. The loss in production is not only likely to affect the ability of sugar mills to service their debt, but can affect their running because of paucity of working capital. The Tuteja Committee on `Revitalisation of the Sugar Industry', which submitted its report to the Government in December 2004, contended that by April 2004, the sugar industry had found itself "entangled in a complex web of problems of high stocks, low prices, poor profitability, mounting cane price arrears, financial crunch, limited modernisation/expansion/diversification and weak global competitive edge".
About 45 million sugarcane farmers, their dependents and a larger number of agricultural labourers are involved in sugarcane cultivation, harvesting and ancillary activities. There are 533 sugar mills with a production capacity of 180 lakh tonnes of sugar spread across 18 States. Sixty-five per cent of these mills are in the cooperative sector, 35 per cent in the private and the rest in the public sector.
Maharashtra is the largest producer of sugar and Tamil Nadu, Andhra Pradesh and Karnataka are among the other major producers. However, the drought in 2002-03 and 2003-04 and the woolly aphid infestation hit production in these States. Sugar output declined from 210 lakh tonnes in 2002-03 to 140 lakh tonnes in 2003-04. As the Tuteja Committee noted, because of high production, the ex-factory realisation of sugar fell sharply, priced as low as Rs 1,000 a quintal. Because of low cash flows, the sugar factories registered deficit in their stock value and were unable to service debt. Though this deficit in stock value was converted into medium-term loans in Maharashtra, lack of availability of cane in 2003-04 and the resultant under-utilisation of capacity and low production of sugar for two successive seasons exacerbated the ability of sugar mills in drought-hit States to service debt.
As these problems continue, Maharashtra is likely to be the most affected State with 89 factories closed as on June-end. The Minister of State for Consumer Affairs, Food and Public Distribution System (PDS), Dr Akhilesh Prasad Singh, said in a written reply in the Lok Sabha on August 1 that as many as 176 sugar mills were shut, as on June-end.
The ills plaguing the mills in Maharashtra are formidable because of the involvement of cooperative banks and sugar mills being organised as cooperatives.
Hence the Government has to alleviate the debt burden of these mills. That is why the Union Minister for Agriculture, Food, and Civil Supplies and Public Distribution System, Mr Sharad Pawar, said at a recent news conference in the capital that the Centre had drawn up a Rs 525-crore special restructuring package for sugar factories that have term loans outstanding as on March 31.
The package was finalised at a meeting among the Prime Minister, the Finance Minister and the Food Minister. This is the amount estimated to make up for the shortfall in the interest rates that are now being offered by cooperative banks to sugar mills. The shortage has been assessed over the one-year term, which is the reference period for the package to the cooperative sugar mills. Thus, all cooperative sugar mills which have term loans outstanding as on March 31 and which are commercially viable and have adequate operational surplus to repay the said term loans will be eligible.
Until now, cooperative banks were charging cooperative sugar mills 14 to 15 per cent interest on term loans. The new package, however, makes it mandatory for the cooperative banks which are not financially as strong as commercial banks to charge only 10 per cent across the board.
In the event, the Rs 525-crore interest subsidy on the restructured loan by the Centre is likely to keep cooperative banks financially viable. Thus, as the new season starts, the sugar cooperatives will get a breather in the form of interest subvention extended to them by the Centre. It was clearly stated that there would be no write-off of any loan in this package, as the National Bank for Agriculture and Rural Development would be borrowing to underpin cooperative banks during the moratorium period.
Considering the suggestion of the Tuteja Committee that all loans as on March-end 2004 might be deferred/rescheduled to long-term loans repayable in 10 to 12 years over and above a moratorium of both interest and principal for three years starting from 2004-05, the proposed package by the Centre has come as a relief.
The Tuteja Committee stated, pertinently, that one problem the sugar industry is facing is the exorbitant cost of term loans already incurred by them. While the loan assistance extended to the industry from the Sugar Development Fund, a decision has been taken to reduce the rate of interest to two percentage points below the bank rate on future loans. Even as this is almost on a par with the interest subsidy of five percentage points being given under the Technology Upgradation Fund Scheme for textile and jute industries, unlike the textile sector, the sugar industry does not have any arrangement for exchange of loans carrying high rate of interest with loans of a lower rate of interest. As for the textile sector, banks and financial institutions have been allowed to access external commercial borrowing so as to ensure low cost funds to meet the cost of this facility, a similar scheme for sugar industry is also the need of the hour, the Committee opined.
The latest sugar scenario, as summed up early this month in Coimbatore by the Indian Sugar Mills Association president, Ms Rajshree Pathy, is that the closing stock of sugar would be 74.47 lakh tonnes against 105.17 lakh tonnes in the previous period. With reduced closing stock after two successive years of low production, India had to make do with imports of sugar to cope with the rising consumption. About 2.22 million tonnes of raw sugar was imported during 2004-05 year to ensure that the supply situation was comfortable.
Mr Pawar, in his inaugural address at the September 4 annual general meeting of the Cooperative Federation, said that the release mechanism should continue for one more year, even as the Tuteja Committee favoured the abolition of the mechanism for free sale sugar with effect from October 1.
The sugar industry remains a prisoner of policy formulated and implemented by the government even as the levy obligation of the sugar industry stood reduced to 10 per cent effective from March 1, 2002.
A complex web of politics and economics characterise the sugar industry even as it steadfastly refuses to go the free market way.
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