Sugar: Cut in excise duty on molasses

The Rs 30,000 crore (Rs 300 billion) Indian sugar industry is the second largest in the country's agro-processing sector. It is also highly fragmented. India is the world's second largest producer of sugarcane, after Brazil, and accounts for around 5 per cent of global sugar production.

The demand for sugar in the country touched 19 MT in 2006 and stock consumption ratio fell to 17.4 per cent in 2006. In the last six months the industry has witnessed bitter times as sugar prices corrected sharply both domestically and in the global markets due to surplus production and export ban.

Industry wish list

	Reduction in excise duty on molasses (currently Rs 750 per tonne). It can be levied at 8% ad valorem or Rs 170/tonne.
	Extension of tax benefits to co-generation power u/s 80IA for another five years.
	Extension in white sugar re-export obligation period.
	Promote ethanol as a bio-fuel by way of incentive and reduction in excise duty on ethanol-doped petrol.

Budget over the years

Budget 2006-07

Excise duty exemption on sugar (other than Khandsari sugar), manufactured without the aid of power was withdrawn. Such sugar attracted excise duty at Rs 38 per quintal (levy sugar) or Rs 71 per quintal (free sale sugar) as the case may be.

[Read more on Budget 2006-07]

Key Positives

	Capacity expansions: The Indian sugar industry has grown horizontally with a large number of small sized plants being set up throughout the country. The government granted licenses to new units with an initial capacity of 1,250 tonnes crushed per day (TCD) in the 1980s, which was increased to 2,500 TCD. Subsequently, de-licensing of the industry in 1998 (the only stipulation being that minimum distance between two sugar mills will be 15 kms) provided a growth impetus to the country's sugar units.
	By-products - Additional revenue: The sugar industry is closely linked to the sugar price cycle. Higher cane and sugar production results in a decline in realisations. However, sugar by-products like molasses (ethanol, ENA and rectified spirit) and bagasse aids the sugar producers in diversifying risks and lending stability to their revenues. These by-products help de risk the business model.
	Exports: India is the largest producer of sugar. However, till last year, the sugar companies were not allowed to export, as the country had to be self-sufficient. However, this year as there is surplus in the country, the government has allowed exports in tranches. With the EU regulation, this will help India access the world market.

Key Negatives

	Commodity cycle: Sugar is a cyclical industry. In India, sugar production follows a three-five year cycle. Higher production leads to increased availability of sugar thereby declining the sugar prices. This leads to lower profitability of the companies and delayed payment to the farmers. As a result of higher sugarcane arrears, the farmers switch to other crops thereby leading to a fall in the area under cultivation for sugar. This leads to lower production and lower sugar availability. This is then followed by higher sugar prices, higher profitability, lower arrears and thus this cycle continues.
	Highly regulated industry: Although export restrictions and duties have gradually been relaxed, the government still largely controls the industry, particularly the pricing of sugarcane and allocation of land designated for cane growing. This is because sugar has been classified as an 'essential commodity'. This policy has in turn affected the economics of sugar production in India.

Equitymaster.com is one of India's premier finance portals. The web site offers a user-friendly portfolio tracker, a weekly buy/sell recommendation service and research reports on India's top companies.