Sugar industry has high hopes from Modi govt

At the moment, sugar mills say they have no money to crush sugarcane when the crop will be ready in five months’ time. Farmers too have reduced the sugarcane acreage. All eyes are on Modi-led government to resolve the crisis. 

In the current stock market rally, one unlikely sector has made serious gains: sugar stocks are up 15 to 20 per cent ever since the Bharatiya Janata Party (BJP), led by Narendra Modi, emerged victorious in the general elections a week ago.

The country’s sugar barons have gained some wealth after a long wait. Most of them have their mills in Uttar Pradesh.

Their share prices had been languishing at historical lows because they owe as much as Rs 9,000 crore ( Rs 90 billion) to farmers who sold them sugarcane in the past.

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The price at which these mills buy sugarcane is fixed by the Uttar Pradesh government. For electoral gains, successive governments kept it high.

Sugarcane, as a result, became the most attractive crop to grow.

Farmers increased the cultivation of sugarcane crops and this kept sugar prices low.

All this pushed the arrears to farmers to a record high; a year ago, they were about a fourth of the current size. 

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A committee headed by C Rangarajan, former governor of the Reserve Bank of India, had said the only way to save the industry was to link sugarcane prices to sugar prices.

Last year, Maharashtra and Karnataka, the other two large sugar-producing states, initiated moves to adopt this formula.

Uttar Pradesh is still to make the transition.

Thanks to the huge arrears, the outlook for sugar mills turned bleak and most analysts stopped tracking the sector altogether.

In the last few days, the fate of the industry has come up for discussion once again after the ruling Samjawadi Party’s dismal performance in the general elections: the party won only five of the 80 seats in Uttar Pradesh.

Some feel that Chief Minister Akhilesh Yadav ought to learn from this debacle that sugarcane politics doesn’t turn into votes (sugarcane is grown only in 38 constituencies) and should, therefore, embrace the Rangarajan formula; others say the reverses may push him to set more aggressive prices when it is time for mills to crush sugarcane in October.

In recent interviews, the chief minister has talked of capping profits for the corporate sector, in keeping with his party’s socialist ethos.

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The ball is clearly in Mr Yadav’s court in Lucknow; so why has the change of guard in New Delhi moved the sugar stocks up?

Some time ago, a few sugar barons had met Mr Modi to apprise him of the situation.

According to a person present at that meeting, Mr Modi assured them that he would take a long-term view of the issue once he became prime minister.

There is, of course, the overall euphoria that the new regime will be friendlier towards business than the United Progressive Alliance (UPA). 

That apart, the Narendra Modi-led government could help the sugar industry in a few other ways. One, the Centre had come up with a scheme for the industry whereby banks would extend soft loans of Rs 6,600 crore (Rs 66 billion) to help clear the arrears.

Out of this, only Rs 3,000 crore (Rs 30 billion) has been disbursed so far. Banks are reluctant to lend any more because they fear it could add to their already-long list of non-performing assets.

The industry is likely to argue with the new government that the conventional risk assessment tools should not be used while sanctioning these loans because the money is earmarked for the arrears.

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Two, the Centre can push exports aggressively. It had in fact announced an export subsidy of Rs 3,300 per tonne.

The idea was to increase exports, which would help clear the massive stocks lying with sugar mills and hence ease the pressure on domestic prices.

This subsidy will be available till September 2015. Though up to four million tonnes of sugar can be exported through this window, so far not more than 400,000 tonnes of sugar has been exported — just 10 per cent of the target.

Sugar mill owners say that given the recent appreciation in the rupee, the incentive isn’t enough.

The government was supposed to review the subsidy every two months in view of exchange rate fluctuations.

While mills had made a case to leave it unchanged, if not raise it, the government actually cut it to Rs 2,277 per tonne earlier this month.

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Three, the industry is expected to lobby the new government to raise the import duty on sugar from 15 per cent to 40 per cent.

Sugar mills have three million tonnes of inventory and there isn’t space for even a kilogram of imported sugar in the market, mills are likely to tell the Modi administration.

With depressed global prices, coupled with the recent appreciation in the rupee, cheap imports are being seen as a serious threat.

Many mills insist that large consignments are already on their way to India. If this stock reaches the market, prices are bound to crash.

But they are hopeful that the BJP government, with a soft spot for swadeshi, might just listen to them and put up the tariff barrier.  

Finally, the industry will push for better ethanol blending in fuels. The UPA government had mandated five per cent blending, but it never happened to that extent.

If state-owned oil marketing companies could be leaned upon to take up blending in right earnest, it will provide some relief to the industry.

 At the moment, sugar mills say they have no money to crush sugarcane when the crop will be ready in five months’ time.

Farmers too have reduced the sugarcane acreage. All eyes are on Mr Modi to resolve the crisis.