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The Indian sugar industry's losses are set to rise 60 per cent in the 2013-14 crushing season (November-October), owing to rising production costs and a fall in realisations. According to an estimate by rating agency CRISIL, the sugar industry would record a loss of Rs 1,600 crore in the coming crushing season, against an estimated Rs 1,000-crore loss in the current season. In the 2010-11 season, the industry's losses stood at Rs 400 crore.
In the last two years, the sugar industry has recorded losses due to a continuous rise in cane prices. Ever year, in states such as Uttar Pradesh and Tamil Nadu, state governments announce the cane price, commonly called state advised price (SAP). Typically, this is substantially higher than in the previous year. The fair and remunerative price (FRP) is announced by the Centre.
Sugar prices in the open market didn't rise in proportion to the rise in raw material prices, resulting in a loss for mills. Failure to arrest the trend may result in the closure of many units. "Due to unreasonably high sugarcane prices, usually fixed/influenced by most states on political considerations, costs of sugar production have been increasing at a fast pace, year after year. The result is Indian sugar has become uncompetitive globally, owing to which despite the fact that we have surplus sugar, we are unable to export. This puts pressure on sugar prices, because of which mills lose money continuously," said Abinash Verma, secretary general, Indian Sugar Mills Association.
Through the last three seasons (2010-11 to 2012-13), the average cane price paid by mills rose at a 14 per cent compounded annual growth rate, while sugar prices have risen only three per cent annually. "The impact of this incongruity between the increase in the prices of raw materials and end-products is reflected in the balance sheets of 74 companies (together accounting for about half the domestic sugar production). About 40 per cent of these companies posted net losses in the 2011-12 sugar season, while about 30 per cent had an interest cover of about one per cent, against 17 per cent in the 2009-10 sugar season. Thus, the proportion of companies that find it difficult to service their interest is increasing," said Ajay Srinivasan, director, CRISIL Research.
For the 2013-14 sugar season, the Centre has announced a 24 per cent rise in the minimum price for sugarcane (FRP), while the increase in sugar prices is likely to be only eight to nine per cent. The financial performance of sugar mills would, therefore, deteriorate. The worst hit would be mills in Uttar Pradesh and Tamil Nadu, where the SAP announced by the state governments is higher than the FRP.
Therefore, there is an urgent need to rationalise sugarcane prices. As suggested by the Rangarajan committee, cane prices have to be directly linked to sugar price realisations, a practice followed by major sugar-producing nations. This would not only ensure fair, stable and timely returns to farmers, but also assure mills reasonable returns on their investments. Verma said for the sugar industry to survive and grow, the politics in sugarcane pricing had to be done away with.
Karnataka has already decided to adopt a revenue-sharing/cane price-sugar price linkage formula.
