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The much-pampered sugar sector has been given a Rs 6,000 crore interest free loan. In a press conference road and transport minister Nitin Gadkari said that banks will provide Rs 6,000 crore as interest free loan for one year with the government bearing the burden of interest on the loan. The funds will be directly transferred to farmers’ accounts after the mills submit the list of unpaid farmers to the government. Gadkari said that dues outstanding to sugarcane farmers stand at Rs 21,000 crore.
Providing aid to sugar mill owners has become an annual affair. Irrespective of which government is at the centre or the state, sugar mill owners, many of whom are politicians get bailed out.
But the problem is not that of the sugar mill owners; the problem lies with the government. Support prices of sugarcane crop have steadily been raised by all governments irrespective of the market reality.
Sugarcane farmers are some of the richest farmers in the country and are generally not impacted much by poor monsoon as fields are normally irrigated, with the support of sugarcane mills.
For a sugarcane mill, the more sugarcane it can source from farmers, the more sugar it will be able to produce. Thus despite farmers not getting paid for over a year, sugarcane production has increased. As compared to about 24 million tonne of sugar produced in the 2013-14 sugar season, the Indian sugar industry has produced a record 28 million tonne of sugar in the current 2014-15 sugar season (sugar season is between October and May).
The only reason the mills could have crushed more sugarcane is if they were confident that the government would bail them out, since farmers were involved. Thus despite sugar prices at Rs 22 per kg falling below the production cost of Rs 25-28 per kg, sugar mills continued to crush sugarcane.
The government has set up various committees regularly to find a solution to this problem. The Rangarajan Committee, the latest such body, suggested a total decontrol of the sector. Broadly, every committee that successive governments had set up have reached the same conclusion. But no government has found the courage to implement the politically suicidal measures.
What the government has instead done is try to strengthen the mill owners rather than bring down sugarcane prices to realistic levels. The government has imposed higher import duty on sugar, thus artificially inflating domestic sugar price. Globally, sugar prices have fallen to their lowest level since 2009.
The government has also increased ethanol prices, which is produced from molasses, a by-product produced when sugarcane is crushed. However, none of these measures seem to help and the sugar industry continues to face mounting debt.
The debt burden of the industry has gone up substantially in the last seven years. With the increase in debt, 20-25 per cent of the sugar mills may not be able to start crushing operations in the 2015-16 marketing year. To add to the problem sugar inventory at the end of the current marketing year is estimated at around 10.3 million tonne, the highest in the last six sugar seasons. There is just too much sugar in the system.
The banking sector has already restructured Rs 12,000 crore of loans to the sugar sector and around Rs 5,294 crore is being restructured (Read here).
By agreeing to pay interest on the Rs 6,000 crore, the government has just made the scenario worse for the sector. Banks (generally public sector banks) will now carry more debt in their books which can turn toxic after a year. Sugar mill owners will add this Rs 6,000 crore in their books as debt which has to be paid back. If these mills are selling sugar at a loss, there is no way they can repay the entire amount.
The government has pushed the sector deeper in a mess. It has bought some time, with a hope that if sugar prices increase, the problem will be automatically solved. Unless the Rangarajan Committee report is implemented in its entirety, the problem will revisit us next year. The government needn’t succumb to the greed of rich farmers.
