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Amid a field awash with maturing sugarcane in this district of the state's western region, Raj Kumar considers the implications of the central government-sponsored financial package to help the ailing sugar industry repay the estimated Rs 11,000 crore it owes to India's six million cane growers.
"The government is giving mill owners interest-free loans to pay cane farmers their arrears. But as a farmer, I have to pay interest on the loan I took to plant my crop," he noted. "How is this fair?"
While the export subsidies might breach our commitments to the World Trade Organization, many like Raj Kumar wonder why the industry has been offered interest-free loans to pay money owed to cultivators, while the farmers themselves struggle to clear their own debts.
Contrasting economics
By law, the mills must clear accounts with farmers within 14 days of procuring their cane or offer interest on the delayed payments. However, sugar companies maintain that interest payments are impossible at a time when mills are unable to repay the principal amount. The matter of interest payments is currently before the Allahabad High Court.
"So, sugar companies are using the money of poor people like me to run their mills for free," Raj Kumar concluded.
A marginal farmer tilling four acres, of which he owns three acres, Raj Kumar said he harvested 1,043 quintals of cane this winter and sold it to the mill at Thana Bhawan, operated by Bajaj Hindusthan, one of India's biggest sugar companies, at Rs 260 a quintal. Bajaj Hindusthan, he said, still owed him a little over Rs 2 lakh.
UP accounted for Rs 7,133 crore of the industry's Rs 11,000 crore of dues. In Shamli, three sugar mills collectively owed farmers Rs 308 crore.
"There is a total mismatch between the prices and sugarcane prices, due to which mills have been continuously making losses," said Abhinash Verma, Director General of the Indian Sugar Mills Association (Isma). Sugar prices are determined by market forces but the cane prices continue to be controlled and politically fixed by several state governments.
Many mills in UP, said Verma, were so poorly off that banks were wary of lending to these, thereby prolonging the arrear crisis. Thus far, UP's 119 mills have applied for Rs 2,053 crore of loans, of which Rs 1,534 crore have been sanctioned by lenders. Bajaj Hindusthan has applied for loans worth Rs 601 crore, of which 53 per cent have been sanctioned, according to Isma data.
One way out, Verma said, was to fix cane prices at a percentage of the cost of sugar, as recommended by the Rangarajan committee report of 2012.
Banking woes
Meantime, the delay in cane payments has had a cascading effect on Shamli's local economy. "Non-performing assets (loans gone bad) account for about 15 per cent of our total lending. I was previously in a rural branch in Rajasthan, where NPAs accounted for less than one per cent of lending," said Bhagesh Jha, manager of the Oriental Bank of Commerce's rural branch at Thana Bhawan. "Only half our fixed deposits last their full term, as people need liquidity."
In the Kisan Credit Card scheme launched in 1998, banks offer farmers one-year loans at seven per cent per annum, with a three per cent refund on interest for early payments. "So, if cane payments are delayed, you end up paying three per cent extra, Jha said. "And, if you continue the loan into the second year, the interest rate jumps to 12 per cent."
Last year, Jha's branch offered farming loans to 2,500 cane growers, of which 1,500 have defaulted on payments. Branch managers in three other banks said their clients faced similar problems.
Those who paid had novel ways to clear their debt. "Four men borrow Rs 1 lakh each from the bank," said an indebted farmer. "When my payment comes due, everyone pools Rs 25,000 each to clear the debt, to avoid paying higher interest costs. The next day, the same farmer takes a fresh loan at the lower interest rate and returns the money to the pool and this is used to flip each debtor's loan in turn."
Property bubble
In Shamli, rising cane arrears have also played a role in deflating a nascent property bubble, that began when the region was carved out as a separate district in 2011.
"Suddenly, everyone was buying agricultural property near the main roads, in the hope that the government would want to acquire the land for road widening and public buildings," said a speculator. "The land mafia cut plots and asked for a 10 per cent down-payment upfront and the full amount in a year." Most transactions were not recorded in the registry.
Prices for agricultural land on the outskirts of the town rose from Rs 6-8 lakh a acre in late 2010 to Rs 1.2-1.5 crore an acre in 2012, he said. When mills defaulted on payments in 2013 and 2014, many wealthy farmers could not complete the sales of their property and lost the down-payment. Prices fell and have stablised at about Rs 30 lakh an acre in some parts, according to interviews with two property agents.
Marginal farmers such as Raj Kumar steered clear of the land market but face equally pressing financial demands. 'Colleges are going to open next month," he said worriedly. "My daughter needs books, she needs clothes, she needs shoes. The mills need to pay us soon, we need the money."
| Why are sugar mills ailing? |
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Sugar and sugarcane are notified under the Essential Commodities Act of 1955, which gives the government unusual powers to control how sugar is grown, processed and sold. Each year, the central government sets a 'Fair and Remunerative Price' (FRP) for cane procurement, while some state governments set a higher State Advised Price (SAP) for their own growers. Last year, for instance, the FRP was Rs 210/qtl, while the SAP in Uttar Pradesh was 33 per cent higher at Rs 280/qtl. The average price for sugar at the mill gate in UP was Rs 3,150/qtl, according to the mill owners body, Isma. It takes about 10 kg of cane to produce a kg of sugar, so in UP the cost of raw cane accounted for close to 90 per cent of the cost of the final product. This, mill owners say, is unacceptably high. In 2013, the government de-controlled sugar production and supply, and allowed the market to set sugar prices. However, it continued to control input costs by setting the price of cane. This, the industry says, has distorted the market. The answer, says Abhinash Verma of Isma, is to follow the recommendations of the Rangarajan committee and fix the price of cane at 75 per cent of the cost of final product to ensure sugar is a commercially viable product. Officials in UP disagree. "The yields per hectare in UP are too low to apply the Rangarajan recommendations," said N P Singh, Shamli's district collector. He'd served as the additional commissioner at the state's sugarcane development department during the payment crisis of 2007 and given a report to the government, where he suggested three things. These were use of high-yielding varieties of cane that have high sugar content; a scientific approach to harvesting to maximise sugar recovery from cane, and a holistic approach to sugar processing that adequately monetises byproducts like ethanol and bagasse. While Maharashtra procures sugar at the FRP, its sugar industry is largely owned by cooperatives. This, farmers in UP said, meant farmers shared both the upside gains and the downside risks of the mills. In UP, however, the farmers are simply selling to mills, with no stake in the latter's profitability, and so, look to sell at as high a price as possible. |
