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What do you think of the sugar demand-supply situation in the country?
With an estimated production of 24.3 million tonnes (mt) and consumption of 22.5 mt in the 2012-13 season (ending September), there is a surplus of about 1.5 mt. With an opening stock of about six mt as on October 1, 2012, carryover stocks for the next season would be comfortably placed at about 7.5 mt. Nevertheless, the surplus is very small and pretty manageable.
The market is worried about supply, owing to chances the government would release sugar in the open market. Do you think this is a concern?
This year, the demand-supply scenario is comfortable. Current prices, which have fallen by about Rs 4 a kg in the last four months, are prevailing at levels seen two years earlier. Therefore, the government wouldn't be worried on this front. I do not expect the government to release any more sugar into the market. In fact, it has already reduced the quota up to March and decided not to convert unsold and free-sale sugar to levy sugar. I am not worried on this account at all.
What is the scope for decontrol in the sugar sector? How would it affect companies? What are Isma's expectations on this front?
The Rangarajan committee, set up by the prime minister, recommended reforms on the sale of sugar, with immediate effect. While recommending reforms on cane-side controls, it suggested these be further discussed through the next couple of years, as these hit farmers directly. Therefore, we expect the government would decide to remove levy sugar obligation from mills and abolish the regulated release mechanism very soon.
The burden on mills to supply 2.7 mt of levy sugar for the Public Distribution System at a discounted price (about 60 per cent of cost of production) leads to an annual loss of Rs 3,000 crore for them. If the government decides to rightfully buy its levy requirement from the open market, the industry can reduce its losses and pass on an additional Rs 2,000 crore to farmers by way of higher cane prices. Similarly, once the regulated release mechanism (which has totally outlived its utility) is abolished, mills could better plan their inventories, sugar sales and cash flows. This would reduce working capital requirements and production costs. Not only would these improve the margins of mills, but these would also attract more investments into the sector, benefiting all stakeholders.
The market is concerned about companies' margins, owing to falling sugar realisations and higher cane prices. How would the industry deal with this?
The continued, unreasonable increase in cane prices has increased the cost of production manifold, especially in the last few years. For instance, though cane prices in Uttar Pradesh have risen 70 per cent in the last three years, sugar prices have increased just 10-15 per cent. The absence of a linkage between cane and realised sugar prices has adversely affected the economics of the sector. After studying the problem, the Rangarajan committee had recommended a revenue sharing formula through which cane prices could be fixed at 75 per cent of the sugar price realisation. For decades, such a linkage has been successfully followed in all important sugar-producing countries such as Brazil, Australia, Thailand and Mauritius. Such a linkage would provide a long-term solution to the ailing sugar industry in India, make it competitive globally, help pay remunerative cane prices and supply sugar to Indian consumers at reasonable prices.
Considering the low international prices, are exports viable at this point? What are the opportunities and constraints before the industry on this front?
The high cost of Indian cane, the highest in the world, has made Indian sugar the most expensive, making the industry highly uncompetitive. Despite the lowest conversion costs, unreasonable cane prices have made Indian exports unviable. If India has to become a net exporter of sugar, we need to cut costs in the long run. Since sugarcane accounts for 60-70 per cent of the costs, improving farm productivity would protect farmers' incomes. States would also have to control the urge to increase cane prices unreasonably.
