|
FACTORS DETERMINING INDIAN SUGAR PRODUCTION AND ITS COMPARATIVE ADVANTAGE This was prepared by Mr Satish Kansal for the Sugar and Beverages Group, Commodities and Trade Division, FAO.
India has become largest producer of sugar cane/sugar producing 280 MnT of cane and 16.5 MnT of sugar in 1995-96, making it the largest producer of sugar in the world, representing about 20% of cane sugar production. India also produces another 10 MnT of traditional sweeteners (gur 9 MnT, khandsari 1 MnT). India also has a large consumer base, thus makes it quite vulnerable to international sugar market, in the event of surplus or deficit situation. At the sametime it has good potential and prospects. Sugar production commenced in 1920's but it got industry status in late 20's/early 30's when India had 29 sugar mills producing just 100,000 tons of sugar. The industry, facing competition from imported sugar, sought tariff protection. Sugar production picked up under the Sugar Industry Protection Act passed in 1932 and country became self sufficient in 1935. Also cane pricing act was enforced to provide good cane price to farmer. This was followed by land reforms putting ceiling on land holdings to protect small farmers, formation of cane grower cooperatives and setting up of sugar mills jointly with farmers called as cooperative mills on ownership and sharing basis. Today this sector produces 60% of country's production. Under the structured Industrial Development Policy, sugar industry was part of the Five-Year Plans introduced in 1951 and has been under the direct control of the Government ever since. Sugar industry is highly politicised and so closely controlled by the Government which has no parallel in the industry. Govt. control, covers all aspects of sugar business i.e. licensing/capacity/cane area, procurement/pricing/sugar pricing/distribution and Imports and exports. Sugar scene in India has been that of protectionism. The mills, the farmers and the consumers all have been protected one way or another. Whereas the protection to farmer and consumer has been consistent, it has not been so consistent for the mill owners. Overall government policy has given impressive results. The production has gone upto 16.5 MnT. per capita consumption up from 5 to 13 kg over a period of 3 decades. There is a potential - what is needed, is some changes in policy to make it world class player. Winds of liberalisation have touched sugar also. Licensing is liberalised. The imports freely allowed. Exports deregulated. Many lessons learnt. Competition became intense. Customer more demanding on quality and service. The document gives an overview of agricultural background development in cane. Sugar production, consumption, policy/regulations. The paper ends up dealing with important issues, aspects of deregulation, decanalisation of exports, the potential and the comparative advantage of Indian sugar.
History of sugar and sugar cane in India goes back to several thousand years BC. Indian mythology vouches for this since it contains some legends depicting origin of sugar cane. It was sometimes in 4/6th century art of sugar making was discovered. Method was crude beyond imagination. Cane was cut in pieces - crushed under heavy weight - juice thus obtained was boiled and stirred, till it turned solids. Solids of uneven shape and size were called sarkaran, a Sanskrit term of 'gravel'. Modern word 'sugar' is derived from the word Sarkara. Thus it could be rightly said that India has been the original home for sugarcane as well as sugar manufacture. However, for all practical purposes, scientific sugar processing by vaccum pan method may have started sometimes in 20s. The development process was slow. Country met its sugar requirement through imports. In mid 20s number of sugar mills sprang up in UP and Bihar. By 1930-31, there were 29 sugar factories producing just 100000 MT of sugar and they found adverse competition from Japanese sugar which was ruling the Indian market.
Good beginning leading to self reliance Industry took up the matter with "Tariff Board" and Sugar Industry Protection Act was passed by the Indian Legislature in 1932. Under this act, protection was granted to the indigenous sugar industry. Salient features:
However, anytime during the period of Act, if it was found that sugar was being imported at the prices to make domestic industry ineffective, Govt. should have power to levy additional duty on imports. With enforcement of Sugar Protection Act, within a period of four years country became self-sufficient in sugar by 1935. It was a great beginning indeed.
Balancing of revenue (tariffs) However, the Govt. lost revenue by way of custom duty on reduced imports. Govt. again reviewed the position in 1934 and decided on two fold action:
The main objective of the Act was to regulate the price of sugarcane intended for use in sugar factories and assure sugarcane growers a fair price for their produce. Govt. of U.P. enacted Sugar Cane Rules in 1934 followed by Bihar and Orissa Sugar Cane Rules in 1934. In 1951, Central Govt. took over control of sugar industry under the Industries Development and Regulation Act. The post protection history of Indian sugar industry is amazing. From the mere 32 mills in 1931-32 number of units rose to 130 by 1934-35 and the production arose from 0.17 MnT to 0.95 MnT. The rate of expansion was 460%. The growth continued till 1938-39, when the production touched 1.28 MnT.
Exploitation leading to land reforms Most of the new mills were set up by private rich individuals/industrialists in North Indian states of UP and Bihar. They owned sugar cane farms and also purchased cane from small farmers - who were at the mercy of such mill owners. The exploitation of small farmers by sugar mills, led the Government to take various measures. First was policy of land reforms. Ceiling was put on holding by an individual including a sugar company. This led to disinterest of private sugar mills. But the growing need of sugar and so the sugar cane gave birth to Govt. partnered Cane Growers Programme in which growers co-operatives owned sugar mills. - First such step was in Maharashtra - Western India - 50 years later this sector produced 60% of country's production. Success was attributed to stable alliance amongst small/medium/large cane growers and Mills where they are partners.
First set back The first cycle of reversal was seen during the period 1939-44 and it continued till 1950-51 for various reasons when the output fluctuated between 0.89 to 1.1 MnTons mainly on account of instability of cane supplies caused by weather conditions, preference of farmers to essential food crops which gave them higher return. Food production became a priority during the war period.
Development after 1951 - the five-year plans The Govt. of India was entering into industrialisation. With limited resource, on one hand and to provide focus and prioritise the Industries on the other, Govt. introduced 5 year plans and which have been subsequently referred to as First Five-Year Plan. Second Five-Year plan and so on. The objective of these plans was to have a structured and planned and timely implementation of the industrial, infrastructural, services sector and agriculture growth. Here we are
Indian Sugar production growth came up under structured and planned sugar programme. The demand, the production requirement, the capacity needed and cane production went through a planning process and close monitoring by the planners over past 4 decades. Further in order to achieve the set targets. Govt. has been setting up committees, task forces from time to time to make policy changes in consultation with Industry, State Agriculture Departments etc. such as cane and sugar pricing policy, levy price fixation free sales / levy sugar ratio etc. Also government has been closely monitoring the licencing policy. The production of sugar cane, the cane utilisation, the production of sugar has been given in Annexure II. The target and actual production in the last year of the plan is as under: Government has been encouraging setting up of new sugar mills as well as expansions upto 5000 TCD allowing upto 100% of sugar for new mills and 80% for expanded units, to be marketed in free market for certain number of years. Thus the growth has been lateral. Today there are 448 mills with installed capacity of 12.5 MnT with average size of 2150 TPD with some units of 10000 TCD and few of 5000 TCD. In India, sugar cane is also utilised for production of traditional sweeteners like gur and khandsari. The country produces a total of about 10 MnT (9 MnT Gur and 1 MnT Khandsari). This sector enjoys all the freedom. No controls, no restriction on cane prices - the sector can pay commercial price. Thus poses a direct threat to sugar industry and sugar production has not followed cane production. However, over a period of time with changes in Govt. policy on free sale/levy ratio from 35:65 TO 60:40 can utilisation for sugar has gone up from 30% to 55% and for gur/khandsari sector has come down from 58 to 34% (Annexure III). Sugar Industry has gone through a structured planned growth based on projected requirement of sugar for consumption.
First Five-Year Plan Since the consumption was seen going up additional capacity came up by way of new unit as well as through expansion of the existing units.
Second Five-Year Plan The Industry continued to perform well and Govt. also encouraged the growth with increase in demand.
Third Five-Year Plan In 1965-66 which was the last year of the Third Five-Year Plan Industry continued to grow and exceeded the planned targets.
Third and Fourth Year Plan Gap Period Until now the Govt. was fully controlling the Sugar Industry. It anticipated that if total control continued the Industry could go into a reversal mode. Govt. adopted the policy of Partial decontrol with effect from Ist October 1967 The policy has since seen total control to partial control to decontrol and back to partial control. Why this has happened will follow later in the chapter. Results were encouraging. Mills could produce more/sell more at a good/bad price and pay more to the farmer.
Fourth Five-Year Plan The Govt. for the 4th plan fixed target for production at 4.7 MnT and license capacity of 4.87 MnT. Since capacity was not coming up the licensed capacity target was raised to 5.5 MnT.
Fifth Five-Year Plan Planning Commission appointed task force to develop programme of sugar industry for the fifth plan period 1974-79. Its findings:
The Industry performed extremely well by exceeding plan targets (5.72 MnT) by producing 6.47 MnT in 1977-78. Action:
Sixth Five-Year Plan (1980-85) Govt. focus and attention on sugar industry further increased - Objective realistic growth and pricing structure. Appointed committee for the same. Recommendation:
Following the recommendation, the policy of partial decontrol continued in the real sense from 30th Nov.'1980. Sugar production fluctuated from 3.9 MnT in 1979-80 to 8.7 MnT in 1981-82 industry suffered losses - causing delay in cane payment. Production came down to 5.5 MnT in 1983-84 leading to imports. Seventh Five-Year Plan The estimated requirement of sugar 9.8 MnT during the 7th plan period 89-90. The projected growth rate was 5%. Targets: Licensed capacity 13.26 MnT Installed capacity 11.46 MnT Licensed capacity by the end of 89-90 stood at 16.21 MnT against the target of 13.26 MnT. The installed capacity was however only 9.34 MnT (unimplemented licensed capacity of about 7 MnT). Govt. also announced a pragmatic sugar policy with increase in statutory minimum price of cane basis recommendation of the Commission of Agriculture Cost and Prices and change in the levy/free ratio of the sugar in year 1992-93 to 40/60. Industry got a boost.
Eighth Five-Year Plan Govt. constituted a Task Force to deliberate various aspects of the sugar industry in the 8th plan period: Requirement 13.41 MnT Installed capacity target 14.12 MnT Licensed capacity target 18.20 MnT Eighth plan was delayed by two years and Government made projections on the basis of parameters on the year 1994-95. The status at the end of VIIth plan: Target (MnT) Actual(MnT) Licensed capacity 20.0 21.1 Installed capacity 15.5 12.5 Production:96-97 14.8 13.0 Consumption: 96-97 14.6 13.5 There are 448 mills with installed capacity of 12.4 Mt average capacity of 2150 CD. Over 100 new mills and expansion of existing mills will add 9.0 MnT to capacity. Ninth Five-Year Plan - Targets The targets of the Eighth Plan have been achieved. The approach paper indicates the following plan:
India is the only country in the world who produces plantation white sugar. All other countries are producing either raw sugar or refined sugar or both. Thus the processing capacities are quite different and so also is the quality of sugar. In terms of number of mills, India ranks first with 448 Mills, followed by China 241, Brazil 231. World total of 2500. Average size is 2150 TCD, much lower than world average. In India, we are still setting up 2500 TCD mills whereas the trend globally is to set up 10000 TCD mills. (Annexure IV.V) Capacity Mill capacity is calculated basis normal crushing period. At the end of eighth plan, the target licensed capacity was 18.9 MnT and installed capacity of 14.1 MnT against which the licensed capacity was 21.0 MnT and installed capacity of 12.4 MnT. The target production in 1995-96 was 14.1 MnT against which the country produced 16.4 MnT. This was due to high sugar cane production and early/late crush incentive. However, there is still a shortfall in achieving installed capacity. The reasons for non fulfilment of target were:
In 1995-96 the total installed capacity was 12.4 MnT and there were 448 mills i.e. average capacity of 2150 TCD. Its distribution was as under:
Thus the growth of capacity continues to be horizontally.
BY- PRODUCTS & DIVERSIFICATION Baggase Basic utilisation of baggase continues to be as a fuel. Dry baggase contains 40% cellulose, 30% pentasone and 20% lignin. It is suitable raw material for paper industry. 30% of cellulose requirement comes from agricultural residues. However, since the mills are scattered all over the country, collection of surplus baggase poses a problem and makes paper units uneconomical. Efficient utilisation yet to come up.
Co-generation of power-use of baggase Baggase is used as captive fuel in the mill as power. Most efficient as well as balanced mills should be able to save baggase to the extent of 10% of its production. The potential for co-generation and export of power to the grid after meeting mills own requirement of energy is estimated by expert bodies, at 3600 MW by 1996-97. India has not exploited its huge potential like other countries like Hawaii, Mauritius etc. where co-generation of power from sugar mills has become a dependable source for supply of power. Central Government needs to coordinate this with state government electricity boards for utilisation of the surplus power which sugar mills even can generate. Co-generation should be encouraged. Commercial aspects of power purchase arrangement and distribution needs study. The investment required is about 60% of what will be required for setting up a conventional thermal power plant. A beginning has been made with 5 such plants coming up.
Molasses Molasses for many decades have been fully controlled in every aspect i.e. price/movement/end use etc. In 1993, the Central Govt. decontrolled the molasses. Most states have complied with the centre's directive but some state government's like Bihar, UP have reimposed controls like dual pricing, Movement end use controls etc. this is only helping in keeping free market molasses prices high leading making availability difficult for distilleries and country liquor production thereby encourages illicit liquor production from Gur - hence more diversion of sugar cane. There are total 283 distilleries and 108 sugar mills having distilleries attached. Total installed capacity is 2700 Mn Litres. At current level of sugar production and surplus availability, total is estimated at 400 Mn Litres which could go upto 700 Mn Litres by the year 2000.
Developments – agricultural Just after India attained freedom, 50 years ago, Indian governments first and immediate concern was food production. In the words of the first Prime Minister of India - "Everything can wait, agriculture can not." The words expressed common concern as population was growing at a much faster rate than food production. That the country became self sufficient in food grains was a demonstration of unprecedented collaboration between policy markers, administration, scientists and overwhelming response of farmers. To give a further boost Farmer was provided incentive by way of an attractive support price and disposal mechanism by way of procurement of the food grains by the Govt. agencies. The agricultural thrust continued in other agriculture commercial crops as well like oilseeds, sugar cane where Govt. appointed technology missions and where India became self sufficient from a net importer. In sugar, it became an exporter, exporting as much as 1 MnT in 1995-96. Today India has made a place for itself in the world agricultural map where it enjoys a prominent position with rest of the world.
Developments - Sugar cane It was in mid 1960's that sugar became a priority and Govt. set up task force to plan requirement and growth. Policy was to focus on cane production. utilisation and processing capabilities. Remunerative cane prices led the farmer shift to sugar cane and oilseeds.The growth in sugar cane production has been both in acreage and yield. Whether this trend will continue, will depend upon crop economics as farmer has been adopting commercial approach. There is a need for rationalisation of sugar cane policy to encourage farmer to improve yield and mills to build up rapport with farmer to build up trust, commitment resulting in assured supplies of clean and freshly cut cane (improve extraction). In return farmer gets better and quick return.
Support system for agri crops Agriculture sector still contributing 28% to India's GDP. Projected growth rate is 3.5%. The focus of agriculture scientists has been on increase in productivity, by providing scientific inputs - demonstration by State Agriculture Departments in fields with farmers of such practices. To overcome the biggest apprehension of exploitation of farmers by financiers and traders. Govt. provided support to ensure remunerative prices as well as marketing of agriculture production.
Price support system Price support system for agriculture produce has been one of the significant factors providing confidence to the farmer. The commission on agriculture costs and prices, in the Ministry of Agriculture is vested with the responsibility of determining the minimum price a farmer must get, which brings him prosperity and keeps him motivated. Various state departments of agriculture monitor the quality and the value of direct inputs like seed, pesticides, Irrigation, fertiliser, manure etc. and also the fixed costs like interest, rental of land etc. Farmer is compensated more than the cost of the inputs. At the same time to encourage the farmer to experiment in new crop (most recent being sunflower) - the farmer is compensated lot more than the cost of input. A typical costing to arrive at the minimum support price, is annexed.
Procurement system Procurement system also needs a mention. Govt. procures the food grains and stores to provide relief to the farmer who otherwise will have to hold an inventory and block his finance. Also Govt. has appointed some state federations and cooperatives to intervene in the market i.e. to support prices of oil seeds, grains etc.
The phenomenon of crop switch is driven by one single factor i.e. farmers confidence in the price support system and the payment commitments against his cost of produce. For inducing the farmers to invest in yield apart from raising infrastructure and use of inputs, price support to farmer has to be demonstrated. With total area sown stable at 142 Mn Ha, further increase has to come only from increase in yields whatever may be the means i.e. seeds, irrigation, pest treatment, harvesting, etc.. Farmers attitude of commercialisation has been amply seen by shifting from food grains to sugar cane and oil seeds. This trend can not be assumed to continue and if farmer could shift from food grains to non food grains - he can also switch back if non food grains become less remunerative at any stage. The attached table will show the cost of production of crops competing with sugarcane. The data is sourced from the Central Agricultural Dept. who in turn get it from state agriculture deptts but the same is not so regularly compiled. While calculating the return per hectare of land - a farmer may decide on cropping basis only operating costs or basis total costs. The agricultural practices vary from state to state depending upon the irrigation facilities, soil condition, weather, inputs from local state agriculture depts. State support in form of subsidies on water, power, diesel, etc.etc. as and also work attitude of regional labour.
Sugar cane economics (interstate) U.P., Maharashtra and A.P. are amongst the largest producer of sugar cane, representing 60% of total cane produced. The variations are because of different agronomic conditions and farming practices.
Comparisoin of return on various crops in same district In order to make an effective comparison, a study was conducted for a season in Western U.P. taking into account all elements of various inputs i.e. direct costs.
Multicropping pattern
Sugar cane production Sugar cane is one of the important cash crop. The production has grown dramatically over past several years. Sugar cane growing area in India may be broadly classified into two agro-climate regions:
Sugar cane industry was initially set up in the sub-tropical region. Till 1950’s - 90% of area under sugar cane was in this region. With commencement of planning process, sugar cane found its route in tropical area. sugar cane being a tropical crop finds favourable agro climatic conditions for its growth in this region - i.e. higher yields. Growth after 1950’s was more in this region and by 1994-95 the sub tropical region, sugar cane area was 65% and cane production 55% of the total cane produced. Now the tropical region is already developed and reached near saturation level. The biggest state in this region - Maharashtra faces acute problem of lack of water which effects cultivation of sugar cane. The sub-tropical belt, with fertile land, high water table and irrigation, appears to be the area for future growth. India has total 26 states. Sugar cane is produced in 15 states. Above 9 states produce 97% of cane. 5 states contributed to about 87% of sugar cane produced in 1994-95.
The trend The sugar cane crop has been in growth mode though there have been fluctuations and a sharper increase came in last 15 years. The growth can be attributed to:
The sugar cane produced in the country is utilised for the following purposes:
Production over the period has shown a significant growth. Over the past fifteen years. Production of sugar cane, white sugar is not consistent due to utilisation pattern of sugar cane. The above data would reveal a trend that would indicate:
On yearly basis, loss of sugar production is lot more than drop in sugar cane production and likewise increase in production is also much more than increase in sugar cane production. Thus such reversals can be witnessed again in 1996-97.
Role of traditional sweetners - gur/khandsari Gur is produced by continuous direct heating of crude extracted juice in open pans - till it turns solid paste. Khandsari is sugar produced from unrefined cane juice. The trend and the data reveals that sugar production has a strong and direct rivalry with traditional sweeteners segment i.e. gur and khandsari. While healthy efficient competition is order of the day but gur and khandsari is an inefficient utilisation of limited resources of raw material, i.e. sugar cane
Comparative Extraction and Recovery from Sugar Cane (%)
Let us take a look at gur and khandsari and the concessions these two sweetners enjoy over white sugar. Gur
Khandsari
Competition with sugar mills Thus because of complete freedom. gur and khandsari enjoy, they give stiff competition to sugar mills - be it cane procurement, cane prices, unrestricted sale of product as well as by - product.
This explains the reason of excessive diversion of sugar cane and the changes in the sugarcane utilisation pattern for sugar versus traditional sweetners. Impact on overall sugar economy
Sugar cane pricing Till mid 1960’s industry was fully controlled. To provide support to farmer, in 1965-1966, the sugar cane price for sugar mills was fixed based on production and input costs called SMP (Statutory Minimum price). The sugar mills on one hand paid SMP. Gur and khandsari producers could pay lower or higher than SMP. This would result in diversion of sugar cane to khandsari and gur causing a decline in sugar production and also lower cane production. Therefore, Government adopted partial decontrol policy i.e. mills could sell 35% sugar in free market enabling mills to pay more than SMP (like khandsari & gur) but the same was administered by states called SAP. Thus sugar production went up from 2.13 Mn. T in 1966-67 to 2.16 Mn. T in 1967-68 to 3.75 Mn. T in 1968-69. In early 70’s, Government appointed a commission, amongst other things, the tasks being to recommend mechanism to stabilise sugar cane supplies to sugar mills. The commission got known as Bhargava Commission, which sought the views of industry, cane growers, Cooperative Sugar Federation. The cooperative mills wanted 100% benefit of free market sugar benefit to farmer on the logic that levy price was fully covering the production cost whereas private mills wanted 50% sharing. While sugar cane constituted 70% of the sugar cost Bhargava Commission recommended 50% of the profit sharing (on the logic that sugar mills will have to pay 60% income tax on 50% profit - mills will effectively get 20%). The government accepted the Bhargava formula and incorporated the same in the Sugar Cane Control Order of 1966. Thus in practice, country has two systems of sugar cane price movement. In cooperative mills dominated states, i.e. Maharashtra, Karnataka, Gujarat, sugar cane price is based on profit sharing formula while in other states dominated by private mills - State Government advise the sugar cane price known as State Advised Price (SAP). The statutory minimum price or SMP is used only to determine the price for levy sugar But this is not the end. The politicians need to impress upon farmers that when they fight for farmers right, the later has to discharge its obligations i.e. apart from guaranteeing supplies also improve quality/productivity and not to ask per unit price alone. (At the time of shortage farmers are lured by gur and khandsari manufacturers who can pay more.). The farmers need to understand that cane price has to has a relation with sugar price. Concept is already in place in some parts of the country. The mills, farmers and cooperatives and politicians need to work together agree on the principle of cane pricing which should have a relation to sugar sales proceeds, quality and productivity. Then only a natural continuous growth can be expected. Sugar cane prices based on Bhargava formula will lead to competitive farming and competitive processings. Both farmer and mills will have to become competitive in respective areas.
Sugar pricing The country has dual sugar pricing policy. Levy sugar price (fixed by Government) It is a peculiar situation where raw material price is fixed by the Government which goes up every year. Sugar price for the levy sugar (40% of production) is fixed without taking into consideration of all factors that go into production - i.e. 40% of the sugar is sold below cost of production. Thus Government, for all its valid reasons, has protected the farmer and the household consumer who gets levy sugar. Non levy - sugar (free market price) Once the house-hold consumer is protected through levy price - mills should be left free for the free portion of sugar. But it is not so. Free is not free at all. How much quantity - and when all the Govt. decides. The quantity is determined based on historical data of past plus to keep the prices under check - who uses this sugar. 80% of free sale is used by Institutional users who are free to charge on their product. Besides the controls, on sales, are such that mills are forced to sell its product fortnightly basis due to fear of the quantity short-sold getting converted into levy. The advantage is taken by the trade i.e. the retailer. He adjusts his price upwards when the mill rate goes up but does not drop when mill is forced to sell at lower price. The sugar price is perhaps the lowest in India comparing to other countries. The annual increase in 1994-95 over 1988-89 is only 5.3% as against 13.5% in case of Rice, 10.8% in case of wheat, 13.5% in case of food grains. 18.0% in case of groundnut. The sugar cane price is up 20%. (Annexure VII). Annexure VIII shows the sugar cane price announced by the Government (SMP) and the actual cane price paid. Annexure IX shows the Trend in Sugar prices.Thus, there is no mechanism by which sugar mills can price or hedge their product in the market where price fluctuation can be as much as 8 to 10%. India perhaps is the only country in the World where sugar cane price is going up and the sugar price is not keeping pace. Sugar cane prices - both SMP and SAP have been going up. Sugar prices have not followed cane prices. India is the only country where there is no relation between sugar realisation and cane prices. Therefore, if the growth is to be assured, cane pricing-one of the key issues for the health of sugar industry, has to be realistic.
When we speak of per capita sugar consumption for India, we shall consider traditional sugar cane based sweetners ( gur & khandsari) as well. Thus with sugar and gur/khandsari consumption taken together the consumption stands at around 24 kg/annum. Trends and comparisons with other countries (Refer Annexure X,XI)
Sweetners consumption India vs world
Trend in consumption pattern
The Industrialisation in india has been highly regulated and protected leading to monopolisation and centralisation. Over a period of time, however the Govt. encouraged new business - new entrants but beginning of the 1990’s the reforms and liberalisation has changed the environment. Protection has disappeared. Imports exports liberalised. Production have overtaken, demand competition has increased, new technology has come in supported by direct foreign investments, All this has resulted in growth in consumerism driven by better quality and availability at reasonable prices. Sugar however remains insulated, liberalisation and reforms touched sugar limiting to only imports and in some way in exports. Some of the major regulatory measures at the central Govt. and State level are as under:
ISSUES RELATING TO SUGAR INDUSTRY Central Government Measure Licensing
Production Monitoring The Sugar (control) Order 1966, regulates the production, sale of sugar, stock limit. It also prescribed standard of quality - to which sugar must conform at the time of delivery.
Sugar Cane Pricing Sugar Cane (control) Order 1966, was issued to promote sugar industry and to ensure fair deal to cane growers by fixing minimum price payable by sugar mills. Act provided cane price fixation basis 50% profit sharing. Not enforced in some states where such state fix its own price.
Sugar Supplies for Public Distribution The Levy Sugar Supply (control) order 1979, was issued empowering the Govt. to direct sugar mills to supply levy sugar to authorised persons/organisation etc. at a price fixed for the season.
Dual Sugar Pricing Policy Under the provision of the Sugar Control Order, Govt. has been regulating the sugar supplies for distribution under PDS and free market. Several times in the past, industry has gone through complete control or partial control to complete decontrol and back to partial control. (Annexure XII) Under the current policy 40% of the sugar produced is to be delivered by mills, for public distribution, at a price fixed from season to season. Balance 60% can be sold in the free market as per quantity decided by Govt. on month to month basis for each mill. Also mill has to sell minimum 47.5% in the first fortnight and 52.5 in second.
Quality/Packaging Governed by Indian standards. Grade 31, 30, 29 and Packaging only in 100 kg jute bags. Consumer packs allowed in 1, 2, 5 kg in any packaging. Exports packing can be in 50 Kg and in any packaging material and so also imports
State government regulations Over and above the central Govt. control, each state Government enforces its own regulatory measures to protect the State/farmers. Following are some typical controls in the State of Uttar Pradesh which are there in other states in some form or other.
Restriction on Sugar Cane Purchase Order, 1966 This Order provides for restriction on purchase of sugarcane by gur producers. It also provides for permits for purchase of sugarcane by a khandsari manufacturer holding a licence.
Sugar Cane Cess Act, 1956 This Act has been promulgated for imposition of cess on cane sold to a sugar factory. At present the rate of cess is Rs. 140 PMT on sugar which is collected at the time of delivery of sugar.
Sugar Cane (Purchase Tax) Act, 1961 This Act proposes to impose a tax on the purchase of sugarcane by the owner of a sugar factory. A sugar factory is not allowed to remove any sugar until Purchase tax has been paid thereupon. At present the rate of Purchase Tax is Rs.220 MT on sugar.
Sugar Cane (Regulation of Supply & Purchase) Act, 1953 This Act regulates the supply and purchase of sugarcane required for use in a sugar factory, khandsari unit and for manufacture of gur, it provides for:
Sugar Cane (Supply & Purchase) order, 1954 It provides for rules and regulations governing purchase of cane in a reserved area/assigned area and purchase for cane at cane purchasing centres within the reserved area of a sugar factory.
Molasses Control Order While the Central Government has decontrolled the molasses, the State Governments, had imposed its own regulations like:
Regulations for trade - domestic Sugar is governed by the Provision of Essential Commodities Act. The act provides stipulations on trade licenses, stock limits and rotation period for stocks. In addition, there are restrictions on sales and distribution, i.e.
Sugar - distribution and trading practices Under the dual pricing policy Government announces from time to time portion of the sugar, that can be sold in the free market and what is to be supplied at the fixed price under the public distribution system called levy sugar.
Levy Sugar sales/distribution system Currently 40% of production (effectively due to non-levy unit 33%). Quantity for distribution per month fixed unit per kg/family etc. Varies basis additional requirement arising due to important festivals. Food Ministry issues allocation of various food departments/corporations. Such deptts approach individual mills to lift the sugar and for onwards supply to various public distribution system (ration shops) appointed by the State Govt. Consumer get their sugar allocation on fortnight basis against the ration card issued to each family head. In reality, however, not all such sugar reaches bonafide users and finds way into open market due to large price differential that exists between levy and free market sugar (Rs. 5.50/Kg. Or 6.25 c/lb).
Free sales sugar marketing system Quantity Currently it is 60% of the production for older mills. Extra fee sale sugar is allowed for late and early crushing and also for new units. Effectively it is 67%.
Free Sales Release Food Dept. assesses the monthly requirement for the country basis-historical demand pattern over the previous years and allowing growth ranging 4 to 5%. The statewise allocation is then fixed basis historical data plus any specific festival demand for the month in that state. Millwise allocation is then made basis production/stock of the mills on pro-rata basis. Individual mill adjustments are made for the export release of the previous months or additional incentives out of late/early crush.
Period of Sale Mills have to complete sale and despatch of 100% of the such sugar released by the government on monthly basis and within stipulated period, so prescribed. Also in order to reduce speculation and ensure supplies in market, mills are bound to sell the quota evenly in two fortnights of the month i.e. 50:50. However, the only relaxation is that mills can sell upto minimum 47.5% in a fortnight and a maximum of 52.5%. Failure can lead to prosecution under the sugar control order and such quantity can be converted in levy sugar. Thus mills are forced and have to comply with this requirement. This is one singular factor which determines the price of sugar in market (not consumer).
Authorisation for Sale Such sugar can only be sold to government approved licenced wholesaler only and to actual users who have a storage/dealing license. Further these wholesalers have to sell only to retailers but can sell to another wholesaler only once. The wholesalers also have to sell such sugar within 15 days of receipt - on first in first out basis (earlier this was 7 days). The institutional bulk consumers, in order to meet their requirement and to buy at the best prices are also required to have a wholesaler license. (Any person/user can store sugar upto 900 kg without license). There is no restriction in movement of sugar from one state to another.
Customer Base
Trade Channel Thus driven by statutory requirements most trade from the mills is to licensed wholesalers - who in turn service retailers for the household customers and endusers for institutional demand. Moreover, with such a large customer base spread all over the country, neither it is possible for the individual mill to access them, nor service. Thus trade is an important link in the supply chain. In order to make sure of commitments/transactions and collection of sales proceeds a system of indent and order collecting agent got developed over a period of time in most states. These agents are appointed by the mills whose role is:
The mills for the above service pay a consideration by way of commission (0.5 to 0.75%). The secondary sale is transacted through brokers. Such brokers bring the wholesalers and the retailers in contact for the ultimate sale and charge a free (upto 0.25%) The retails either pick up the sugar or the wholesaler makes the delivery to the retailer at a cost.
Segmentation - Consumer base (Typical) The distribution/segmentation of the Sugar is
The distribution of the free market segment is
Thus almost 52% or say half of the sugar produced goes in for indirect consumption i.e. institutional segment. - Large Buyers such as:
Segmentation - regional The product quality in different sates is based on customer preferences/cane quality/processing capabilities etc. also driven by local sugar availability.
Sugar market - major trading centres Sugar is allowed to move freely through the country. Apart from local price, cross movement shift in different states from neighbouring states taken place due to transportation costs and local prices, the differentials got determined basis delivered cost in consuming centres.
Sugar Price Determined by demand/supply gap in each state and cross movement from surplus to deficit states. Each state has developed preferences of colour/grain size etc/ Primarily sale is on Ex.Mill basis and free market price is more trade driven then customer driven as almost 100% sugar is marketed through trade and mills have to sell the sugar to fulfill statutory obligation - thus demand is actually created by Trade. While sugar price at mill level and wholesale level fluctuate, within 5 to 6%, retial price moves only upwards. Also sugar price entirely depends upon Govt. fix on price. Sugar prices had been kept artificially low both for fee sale as well as PDS
INTERNATIONAL TRADE India has always been in the International market either for imports or exports. In last 15 years, India imported 6.596 Mn. T sugar and exported 4.496 MnT. Imports have outweighed exports. The volume of exports and imports are based on suplus or shortfall anticipated or determined between demand and supply. It is likely due to inconsistent policy, delayed action, monopolization etc. the imports and exports may have not been most efficiently handled and India may have paid high price for imports and perhaps didn’t get best price for its exports.
Policy on international trade The International Trade in India has generally been highly regulated both in terms of authorisation as well as volume. There has been a dramatic change since 1991. With the wave of economic reforms and Liberalisation Policy, even essential commodities like edible oils and sugar also got freedom/relaxation in imports/exports. While imports of sugar were put under OGL, exports got decanalised.
Imports In last 3 decades. First import was in 1979-80 and the imports unitl 1993 were canalised through Government agencies such as * State Trading Corporation of India. * Food Corporation of India.
Exports India entered the world market as an exporter in the year 1957 and has exported sugar all along. The quantity has been as low as 20000 MT in the year 84-85 to as high as 1.02 MnT in the year in 1995-96. The exports have never been an economic proposition due to dual sugar pricing policy which makes the free market prices high. Thus to boost exports Govt. enforced an act in 1958, called as Sugar Export Promotion Act. The very purpose of the Act, as the title suggest, was to boost exports. Salient Features were: The exports were canalised through two canalising agencies: - State Trading Corpn. of India (STC) - Indian Sugar General Import Export Corpn. (ISGIEC) These agencies will procure sugar from the mills willing to supply the sugar, otherwise, as per act. all mills were obliged to supply for export. The profit and loss so achieved on the exports would be shared amongst all the mills on the apportioned quantity.
Impact of decanalisation of exports How much sugar will be exported - the decision rested with the Central Government i.e. it will announce how much sugar can be exported. The monitoring agency will then issue public notice on the system which broadly is: - Exporter to have registration with APEEDA. - Exporter enters into an agreement with a buyer in another country and then applies to APEEDA for export registration certificate with following: - Bank certified original contract - Copy of the letter of credit. - Registration fee. - Non performance bank guarantee of 5% of contract value (to be encashed in the event of export not taking place in time). - In case of merchant exporter, consent letter of the mill supplying sugar. The procedure was simple, it was on two counts that export didn’t get a boost. One Fear of 5% Bank guarantee encashment. Two Export not profitable. India could still export upto 0.5 MnTons was a matter of chance that Pakistan’s demand came and India got advantage of low freights. 80% of the exports were to Pakistan. In long run, the policy of decanalisation is a non starter, under the dual sugar pricing policy because domestic price of free sugar is high. International price will determine the economics. The contribution is negative. The loss will be solely be borne by the exporter (earlier it was shared by the entire industry).
ISSUES RELATING INDIAN SUGAR INDUSTRY Profitablity of sugar business The Reserve Bank of India’s study, in respect of select Industries, has indicated that gross profit in sugar industry has been lowest at 9%. The post-tax profit has been significantly lower. Risk free Investment give an yield of 15%. The study conducted by industries association of the sugar industry, for listed companies covering 15 year’s performance has revealed that:
Therefore, the key issue is to develop strategy and a consistent policy which will help the sugar industry and sugar production to grow. To see a growing Trend line is not good enough.
Sugar mills capacity The Government has been issuing licenses based on its planned requirement of sugar and also the gestation period which could be upto 3 years. There has been delays in conversion of license into Installed capacities due to: Investors delaying the investments because of declining profitability during the period. Financial institutions not coming up for committing finances in companies with sugar as a core-business. Some basic issues leading to poor health of sugar industry remain unaddressed - the licensing policies have been modified to attract investments by way of incentive i.e. New sugar mills will be allowed to market upto 100% of its production in free sale (against 60% from existing units) for a certain period. There lies the catch - while the new units come up, some old units become sick and close and may decide to set up another new mills. Thus effectively there was no substantial increase in capacity but more free sale sugar in market - i.e. Lower prices or delayed release for old mills at the expense of new mills. The government, on the advice of Committee of Members of Parliament, scrapped the incentive schemes effective 31st March 94 and all new licenses (over 50) were to be without any Incentives/Sops. But it was not be - sugar is the only industry where only one thing is certain that policy can not be certain. Despite with good production in 1994-95 and 1995-96 and capacity utilization of 110% and 125% at installed capacity of 12.4 MnT with another 1 MnTon in pipeline, under some pressure. Government again announced an inventive scheme with retrospective effect i.e. covering all licenses issued after 31st March, 1994 which earlier did not have provision for such incentive. Under this scheme-
All such capacities either from new units or expansions have to come by October 1999 to avail such incentives. There is a need to address to the basic issue whether we need horizontal growth. To achieve economy of sale, to be competitive, per unit capacity must grow vertically to target average capacity of 3500 TCD which today is no more than 2150 TCD. The licensing issue must be addressed accordingly.
Policy towards traditional sweeteners The role of traditional sweeteners has been dealt with in details. There the issue is not to do away with this segment. It can’t even be suggested since these have been there and their are consumers for these products particularly gur. The consumption pattern has already gone through a shift i.e. conversion towards sugar. During 1960 to 1980 sugar at 4.8 Kg. represented 25% of all sweeteners at 20 Kg. Sugar has gone up from 4.8 Kg. to 13 kg and gur and khandsari per capital has come down from 15 kg to litle over 10 kg and we see it going down further to 9 kg where it will stabilise. While gur has a demand of its own in the rural population base - there is no justification in allowing gur to be diverted to manufacture illicit liquor. (What a pity to use a product what sugar by product - molasses can do) Khandsari production recovers 4% less sugar and produces 4% extra molasses - what a waste of valuable resources of cane again. There is need: To remove control on sugar or bring gur and khandsari under similar controls. To have uniform taxes/duties for all sweeteners. To impose ban on further capacities in gur/khandasri sector and to be covered by licensing. To have common cane price and not more than the price fixed by Government. Once all sweeteners are governed by the same regulations/controls we see these two sectors stabilishing on the strengths of its own. Net impact will be no more fear of diversion of sugar cane. The efficient segment will survive and will benefit all segments the farmer, the consumer and the producer.
Sugar cane pricing It was almost two decadeds ago when the committee comprising of cane growers, sugar mills, co-operative decided the cane price to be determined basis minimum statutory price. Plus 50% sharing of profit. This is also in line with International practice where sugarcane price is related to sugar sales realisation. But in actual practice only few states like Maharashtra, Gujarat, Karnataka have followed this agreement. In other states, the respective government’s fix the price for political gains. Here the Central Govt. has to act firmly once for all, that cane price will be as per the provision of the sugar control order. There may be a need to relook, if necessary, in order to maintain a growth rate of 3 to 4% in sugar cane production. The farmer in India has options. If he shifted from wheat/paddy to sugar cane or oil seeds - he can always go back. Sugar cane price for farmer is a sensitive issue. It has to be such that the return/hectare of his land, is well placed compared to wheat/paddy etc. Wheat procurement price in 96-97 have been increased by 35% (From Rs. 3800/ton to Rs. 4750/ton equivalent to US$ 106 to US$ 132/MT). Have free sugar price have support price for cane.
Estimate of production Apart from the various issues which we need to address, is tasks of managing inventory well. With latest communication systems/information systems/techniques available what we got to set right is the system of Forecasting/availability. We know the carry forward stock, demand is reasonably known, we got to have a realistic estimate of sugar production. This is one single factor where we have gone wrong time and again. If the estimates and actuals can be off by as much as 15%. Decision making becomes difficult. Take a look at last few years. Some of the reasons are:
The industry/Govt/co-operative’s body should be constituted and have scientific assessment.
Management of surpluses/deficits Over last five years, we have witnessed a closing stock of the season of as low as 1.224 MnT in October, 1989 equivalent 1.5 month’s consumption to as high as 7.95 MnT in October, 1996 equivalent to 7.5 month’s (or 60%) consumption. The standard norm in India is 2.5 months or 20% of consumption (2.8 MnT) i.e. excess inventory of 4.7 MnT at the end of 1996. The impact of this has been: Blockage of excess Inventory of over Rs. 5000 crores. (US $ 1680 Mn) Yearly impact: Rs. 1200 crores (US $ 335 Mn) Damage of stocks Low prices of sugar in domestic market Delay in payment to farmer - forcing him to shift to other crops. Drop in Production in next year The inventory can be used to its advantage. The carrying cost provides the flexibility. The advantages: Carrying cost goes down thus low total cost. Increased liquidity to pay the farmer. Regular presence in International market.
Deregulation liberalisation Delicensing With 448 sugar mills in existence and an other 100 in pipeline, this aspect should be examined. The policy should be to: Encourage new capacity with development of cane responsibility. Min. capacity 5000 TCD. Expand vertically to achieve economy of scale. New capacities in surplus cane areas. Minimum distance norm should stay and distance be flexible between 25 to 40 kms. 15 kms distance could make some sugar mills unviable. Incentives if any, to be in the form of reduced excise duty etc. - not of high free sale quota.
Capative Farming to Improve Yield/Recovery Low or stagnant recovery of sugar from sugar cane is an issue which has not been dealt with at national level. Over last 10 years, while the yield has gone up by 24.5% i.e. from 57 MT/Ha to 71 MT/Ha, the average recovery has been fluctuating between 10.3% to 9.9% it has been lower in the year of high cane production. Some reasons.
Government should encourage captive farming. Sugar mills will take more interest in cane development, newer varieties, tissue culture, sophisticated farming/crop treatment techniques/planned harvesting etc. Impact will be higher yield. Better recovery. Inprovement of 0.1% recovery would yield 0.15 MnT of sugar.
Decontrol/Doing away with a dual pricing There have been three options such as full control, partial decontrol and complete decontrol. Over past 4 decades - all have been experimented with two/three times. But almost for three decades now, since 1967-68, except for a brief spells of decontrol/control in between 25.5.71 to 30.6.72 and 16.8.78 to 17.12.79 partial decontrol has been in existence. In this policy a certain portion of sugar has to be supplied at Government fixed price called levy and balance can be sold in free market. The ratio of levy to free has changed over a period of time from 35:65 to 60:40 (1992-93). Decontrol has not been successful in the past. In 30 years, it did not work for 30 months. Why risk again - the industry view is divided while some section is for decontrol and the cooperatives/Federation against.
Why control and what to do
Packaging Industry should be left free what it does for packaging. It could be 1 kg to 5 kg for Household consumers, 10kg to 25kg for small institutional consumers and 50 kg for bulk users, 100 kg packing should be banned under the ILO convension.
By-Products Molasses, molasses base products should be de-regulated. The price to be determined by the free market forces. Trading and interstate movements should be freely allowed.
Regulations There is need to look at all the controls/legislations. Regulations, acts. etc. at the Central Government level and the State level. The process need to be simplified - multiple regulatory bodies to be replaced by single body. The list of compliance should be by exceptions. Producers/traders etc. need to be told what they can’t do.
International trade (imports-exports) The Sugar policy has to have a provision for import and export of sugar. Amongst largest producer of sugar, India is the only country where it has a large consumer base, therefore, its exim policy has to keep this in mind. Ideally the imports and exports have to balance the gap and surplus situations and to sustain and to maintain reasonable price level of sugar. Since 1980, total Imports have been 6.6 MnT against total export at 4.50 MnT though India has been an exporter all through out. Thus India could be in the international Trade for both import and export depending upon its domestic production which with stable inventory could keep domestic prices at a reasonable level to boost production. What it means is export more at a time of high physical stock and cover through futures import with option of delivery in the event of subsequent lower production, if any, i.e. maintain floating inventory. Who should import and who should export is an issue to which there can not be a straight answer because of complexity of Indian agricultural and sugar business dynamics. Under the liberalised economy to suggest control may look conservative, but at the same time, the imports and exports of sugar are needed with following objective: To maintain domestic sugar prices with in a band. Thus maintain certain minimum inventory and monthly plan of import/exports. And encash opportunities in the international market. Under free pricing, sugar exports could be deregulated. But India with such large consumer base can not afford total freedom on volumes. Some regulatory - quantitative or tariff are necessary to maintain adequate availability.
Sugar industry body The issue or organisations needs to be debated between industry and Government to set up a responsible and responsive organisation. Logically with such a large base of 448 sugar mills, an effective centralised agency should take this responsibility. The sugar industry associations could play more responsible role like Austrailia. South Africa etc. Then only they could achieve stablilished policy for sugar business. There is a need of coordinated and concerted effort for appreciation and consolidation of the needs of the consumer. farmer, processor and to address to various above issues if India has to attain the glory of self sufficiency and attain the status of net exporter and an important significant player in the international market.
COMPARATIVE ADVANTAGE- INDIAN SUGAR Here we address some of the factors which give India an advantage in the international market, in comparison to other sugar producing countries. We will also dwell on some issues which place India in a disadvantageous situation. Broadly advantages and disadvantages are summarized as under:
Sugar policy The dual policy of sugar pricing, keeps the free market price artificially high thus export is not economically viable most of the time. The difference over average price, in case it was free pricing, could be Rs. 1350/MT (US $ 35 to 40). The export policy is not consistent resulting into restricted exports even when there is an opportunity - In fact non compliance penalty of 5% export value has become a disincentive. Indian farmer gets 62% of sugar price as cane price - compares with 50% in Pakistan, 68% in Brazil. However, cane price is not linked to sugar sales realisation nor it is linked to cane quality leading to low recoveries.
Productivity India has improved its productivity considerably over a period of past two decades and compares well with major cane sugar producers (Annexure II and XV). However, the improvement has only been on yield of sugar cane per hectare which has gone up from 58 in the year 1984-85 to 71 in the year 1995-96. At this level of average 70 MT per hectare, it compares well with other sugar producing countries. However, within the country it is as low as 46 in the state of Bihar and as high as 113 in the state of Tamil Nadu. There is a scope of improvement in some states like UP, Bihar, Punjab, Haryana, Andhra Pradesh with average touching 75 MT. (Dealt in Chapter on cane production). The sucrose content averages 12% which is not good as compared to Brazil/Austrialia. With better farming practices and favourable climate, it could improve to 12.5%. Sugar production as percentage of cane has been ranging between 9.3 to 10.3%. Here also 1% improvement is achievable. There is substantial scope of improvement in productivity both in terms of yield as well as sugar contents and recovery by adopting better harvesting practices and close coordination of sugar mills with farmers. It has been estimated that better farming and harvesting practices could result upto 1.0% improvement in extraction which can lead to 10% increase in production. The comparison with other sugar producing countries is as under:
Cost of production While there is not much information with respect to cost of production of other countries, on the basis of information available through a paper presented at an international conference, India is a low cost producer but because of lateral capacity expansion, with average capacity of 2000 TCD, can not reap the benefit of economy of scale. Same is true in farming sector where land holding is mere 1.57 Ha. But there is a scope of improvement in sugar content and recovery which can bring the cost down by as much as $25/MT.
Sugar stocks The biggest burden on the Indian Sugar Industry is the inventory carrying cost. The average period for which the sugar remains with mills in 8 months and the time it takes to finish previous season’s stock can be as much as 18 months. The Govt. has created a buffer stock of 1 MnT for one year - cost will be $60/MT plus blocking $ 335 Mn worth of foreign exchange. Thus $ 60/MT is net flexibility for export. The opportunity gets missed year after year because of too-cautious approach.
Export markets India has a distinct advantage of its geographical location. It is land locked with neighbouring countries like Pakistan, Nepal, Bangladesh and Bhutan. Also Sri Lanka is the nearest country by Southern India. All these countries (except Pakistan who like India is exporter/importer depending upon its consumption) are regular importers of sugar. Besides some Gulf countries as well as Indonesia have a market for Indian granular sugar. India is most competitive for Pakistan, Bangladesh, Srilanka and Nepal. Indian Sugar will have $ 30/MT freight advantage over Brazil, 15$ over Thailand, Besides Indian sugar should command premium over Brazilian sugar.
Fobbing costs While infrastructure bottlenecks do exist but if the export is planned on regular basis and planned well, it could be well organised effectively. Indian FOBing costs from Coastal factories and distant factories are as under:
Recently loading rates upto 3000 MT/day have been achieved by way of sharing the advantages with the port labour.
The FOBing costs in India, for coastal Mills, as percentage of Ex. Mill cost compares well with other countries.
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||