In India, government policies, both at the Centre and State levels, have played a crucial role in the development of the sugar industry. The sugar economy in India, like many other countries, is highly regulated, starting from sugarcane to the end-product sugar. Even the by-products are subject to government control. The main objectives of the national policy are to ensure a fair price to cane growers, adequate returns to industry and a supply of sugar to consumers at reasonable prices.
The economics of sugar in India are more complicated than those of sugar industries in many other countries. This is because of the existence of the centrifugal mill industry side by side with a large cottage industry that manufactures open-pan sugar, specifically gur (solidified cane juice) and khandsari (semi-white centrifugal sugar). While the two industries compete for supplies of cane on the demand side, white sugar both complements and substitutes for the products of the cottage industry.
In India the white sugar industry is of considerable economic importance. It is the second largest after the cotton textile industry. Sugarcane farmers and their families, numbering over 35 million, constitute about 7 percent of the rural population. The sugar industry employs 350 000 workers and also provides substantial indirect employment through various ancillary activities.
Both area and production of sugarcane fluctuate considerably from year to year. This is due to variations in climatic conditions, the vulnerability of areas cultivated under rainfed conditions, fluctuations in prices of gur and khandsari, and changes in returns from competing crops. Despite this instability, both area and production of sugarcane have increased considerably over the past three decades. The average area under cane increased from 2.4 million ha in the early-sixties to about 3.8 million ha in the mid-nineties. While the total cane area increased by 57 percent during this period, that of rice, which occupies a surface area ten times as large, rose by 23 percent, but the areas planted to sorghum and cotton declined. Uttar Pradesh accounts for nearly half of the total cane area. Other major producing states include Maharashtra and Tamil Nadu (12 percent each), Karnataka (9 percent) and Andhra Pradesh (6 percent).
Rising yields also contributed to the growth in sugarcane production. Yields per ha rose by more than 60 percent from an average of 43 tonnes in the early-sixties to more than 70 tonnes in the mid-nineties. Following rapid increases in productivity in the seventies and early-eighties the rate of growth slackened in the latter part of the eighties. The extension of cane area to marginal lands and the use of varieties susceptible to disease were partly responsible for the slower growth. In the nineties, however, average sugarcane yields again showed strong increases, although some reductions took place in 1996/97.
Total production of sugarcane during the last three decades more than doubled, increasing from an average of l02 million tonnes in the early-sixties to a peak of more than 280 million tonnes in 1995/96. In 1996/97, however, cane production was some 6 percent lower, reflecting reduced plantings and lower yields.
The Government regulates major aspects of the centrifugal sugar industry including the licensing of factories, the fixation of cane prices, the purchase and distribution of levy sugar and the release of sugar to the open market. In l952 the Government of India took over from the states, the regulation of the sugar industry, under the Industries (Development and Regulation) Act l95l. The l38 factories which were then operating were registered under the provisions of the Act. Thereafter, all new sugar factories and expansion programmes have required licensing by the Central Government, although some relaxation of state controls and simplification of procedures took place in early-1997.
Under each of its Five-Year Development Plans, the Government has provided for additional capacity to meet estimated increasing demand for sugar. Thus, the number of sugar factories rose from 138 in the early-fifties to l73 in l960/6l, and by the mid-nineties their number exceeded 440. In accordance with the Government's policy to shift the sugar industry away from the sub-tropical zone, most of the new factories were licensed in the tropical zone, which currently accounts for 50 percent of operating mills and 60 percent of sugar production.
In the licensing of new capacity, emphasis has been placed on larger, integrated plants to secure economies of scale. The standard size of the plant that in the past was barely l 250 tonnes of cane crushed per day (TCD), is now prescribed under the Government Licensing policy at 2500 TCD. Between the early-sixties and the mid-nineties, mills with a capacity between l250 TCD to 2500 TCD rose from 18 percent to nearly 70 percent, while those below l250 TCD declined from 78 percent to less than 15 percent. However, the average size of Indian sugar units, currently estimated at about 1 900 TCD, is still considerably below that in other major cane sugar producing countries. About 60 percent of white sugar production are supplied by mills in the cooperative sector, 30 percent in the private sector, and 10 percent in the public sector.
Mills face strong competition for cane supplies from gur and khandsari manufacturers. While the mills must operate within certain government-established cost-return margins, gur and khandsari manufactures may price their products freely, giving them considerable advantage in bidding for cane supplies, particularly in periods of low output, as they can pass on higher prices to the consumer. In addition, certain non-price factors also induce growers to sell cane to non-mill processors in preference to the mill sector. In most areas, gur manufacture is a cottage industry and is within the technological reach of growers. The grower can convert his cane into gur with ease, is thus offered a guarantee against the risk of rejection of his crop by the mill, or of delayed harvesting reducing its quality in terms of sucrose content.
Despite short-term annual fluctuations, there has been a marked increase over the last three decades in the utilization of cane for production of sugar as compared to gur and khandsari reflecting the relatively stronger growth in the market for sugar. During recent seasons, supplies of cane crushed by mills ranged between 43 and 59 percent of total supplies, compared to less than 30 percent in the fifties. There is a wide divergence in the pattern of cane utilization in the various cane producing states of India. In Maharashtra, mills use over 80 percent of the cane produced in the state, while in parts of Uttar Pradesh and Bihar less than 20 percent is used by sugar factories, with most of the remainder being used for the manufacture of gur and khandsari.
India is the largest producer of centrifugal sugar in the world. Total production of sugar has grown very rapidly, but also very irregularly. From an average of 2.6 million tonnes in the early-sixties, production of sugar reached an average of 13.4 million tonnes in the mid-nineties. The variability of production is illustrated by data since the early-nineties, which includes a peak of 17.4 million tonnes in 1995/96 and a low of 9.3 million tonnes in 1993/94.
The goal of expanding sugar production to meet domestic requirements has been reflected in targets under each of Indias Five-Year Development Plans since the early-fifties. Output objectives have generally been met, though at the end of the Eighth Plan in 1996/97 actual production is estimated to have fallen short of the target of 14.8 million tonnes of plantation white sugar due to short-term crop fluctuations. By the end of the Ninth Five-Year Plan in 2001/02, the target for output has been set at 19.1 million tonnes.
Aside from being the worlds largest producer of centrifugal sugar, India also produces large quantities of gur and khandsari. Production of open-pan sugars has increased, despite yearly fluctuations, from an average of about 6.4 million tonnes in the early-sixties to about 9.5 million tonnes in the mid-nineties. Uttar Pradesh accounts for 60 percent of the total output of gur, followed by Tamil Nadu (16 percent) and Karnataka (10 percent).
The Indian sugar industry suffers from structural problems. Over 40 percent of the factories are more than 40 years old. In a large number of these units, mechanical breakdowns are more than normal, fuel consumption much higher, while extraction rates are well below l0 percent. Thus, in order to modernize and upgrade technology, the Government created the Sugar Development Fund (SDF) in l982, financed through a cess levied on the sugar mills. Of a total of Rs 12 740 million (US$360 million) accumulated in the Fund, as of 30 June l995, Rs 4 892 million (US$140 million) had been sanctioned for modernization and expansion of factories and Rs 4 386 million (US$125 million) for various cane development schemes.
Research and development activities to improve mill efficiency are undertaken at (l) National Sugar Institute, Kanpur; (2) Vasantdada Sugar Institute, Pune; (3) Central Electronics Engineering Research Institute, Pilani; and (4) various Institutes of the Council of Scientific & Industrial Research. A Sugar Technology Mission (SMT), established to upgrade technology in the industry is currently conducting trials in several sugar factories while a system of National Awards for Efficiency has recently been introduced.
In India sugar is an essential item of mass consumption and the cheapest source of energy for the poor. To assure supply of sugar to consumers at a reasonable price, the Government has been following a policy of partial control on sugar distribution under a two-tiered pricing system since l967, excepting for short breaks in l97l/72 and l978/79 when exceptional crop conditions made it impossible to implement dual pricing. The first tier applies to "levy sugar". For this, sugar mills have to supply quotas to the Food Corporation of India at prices, which are set by individual State Governments. The levy price paid to mills in 1996/97 was estimated to be some 15 percent below the cost of production. While the price paid to the mill varies by states, the levy sugar is sold to consumers throughout India at a uniform price.
The remaining domestic supplies of milled sugar, plus any imported supplies are sold at free market prices. The proportion of free-sale sugar has been progressively increased from 35 percent in the mid-seventies to an estimated current level of 60 percent. The annual levy sugar quota has remained around 4.2 million tonnes in recent years, while the free sale volume has risen from about 5.0 million tonnes in the mid-eighties to about 8.0 million tonnes currently.
Total consumption of sugar has increased steadily despite fluctuations in production. These variations were moderated by relatively large stock changes and large imports during periods of severe scarcity such as in 1967 and again from 1985 to 1987 and in 1994. Between the early-sixties and the mid-nineties, sugar consumption rose from about 2.6 million tonnes to about 13.0 million tonnes. During this period, annual per caput consumption increased from 5.3 kg to more than 14.0 kg. Per caput consumption of plantation white sugar in urban areas is higher, about l5 kg compared to a 9 kg estimated for rural areas. Given the distribution of population between urban and rural areas (roughly 30 and 70 percent respectively), urban consumption accounts for nearly 45 percent of the total white sugar utilization.
Consumption of gur and khandsari increased from 6.4 million tonnes to more than 9 million tonnes between the early-sixties and the mid-nineties. However, per caput consumption of these products has actually declined significantly from about 15 kg to 10 kg. On a volume basis, per caput consumption of open-pan sugars was overtaken by that of white sugar in the mid-eighties, reflecting distribution of subsidized levy sugar at times at prices close to the retail price of khandsari and gur, and relatively low prices of free market sugar maintained through the monthly release mechanism and the importation of large quantities of sugar when needed, along with bans on exports. As a result of these measures, sugar recorded the lowest price increase vis-à-vis all other essential commodities such as cereals, pulses, edible oils, and even compared to the alternate sweeteners e.g. gur and khandsari.
The policy of the Government is to export sugar on a continuous basis and since 1960 India has been mostly a net exporter of sugar. Until early-1997 the decision to export or not was taken each year, based on expected production and domestic demand, with the surplus, if any, being allowed for export, irrespective of world market conditions. Until then the Indian Sugar and General Industry Export Import Corporation Limited, an organization of the sugar industry, was the only agency appointed by the Government of India under the Sugar Export Promotion Act of 1958 to handle exports. The Corporation was authorised to recover from all factories on a proportionate production basis any losses suffered on exports when world prices were below costs of production. However, since early-1997 trade has been deregulated, and exporters may register freely for export quotas. Despite ample availabilities from the previous seasons peak output, exports in 1996/97 were not expected to increase because of relatively low prices in international trade as compared to the domestic market.
Prices of sugarcane are supported through systems operated by the Central and the State Governments. Based on the recommendations of the Commission for Agricultural Costs and Prices, the Central Government announces at the beginning of each season the Statutory Minimum Price (SMP) that mills are required to pay for sugarcane. The SMP is fixed taking into account (a) the cost of cane production; (b) returns to growers from alternative crops and the general price trends of agricultural commodities; (c) the need to ensure availability of sugar to consumers at a fair price; (d) the price at which sugar produced from cane is sold by mills; and (e) the recovery of sugar from cane. The SMP for cane is specified in relation to a basic sucrose recovery level, with a premium for higher values. The SMP has been increased every year since 1988. The SMP for 1996/97 was set at Rs 45.9 (US$1.26) per quintal, more than double the level of the early-nineties.
While the Central Government regulates the sugar industry, the State Governments exercise control over supply and distribution of cane as an agricultural crop. Thus, the State Governments announce State Advised Prices (SAPs) for sugarcane in respect of cane supplied to mills within their boundaries. The SAPs which mills are required to pay are generally substantially higher than the SMP. The prices announced by the State Governments of Punjab, Bihar, Haryana, Uttar Pradesh, Madhya Pradesh and Rajasthan are not connected to the recovery percent in cane, while those announced by the State Governments of Karnataka, Tamil Nadu and Andhra Pradesh are based on recovery rates. In Maharashtra and Gujarat, where cooperative mills dominate the sector, initial payments are slightly higher than the MSP with additional payments at the end of season based on mill profits.
The introduction of the SMPs for cane, their repeated upward revision and the introduction of the SAPS have contributed significantly to the expansion in area and production of cane. The relatively favourable prices obtained by cane growers were reflected in the shift in areas, especially in the eighties, away from wheat and other competing crops to sugar. However, recognising that unduly high SAPs could disturb the inter-crop price parities and lead to distortions in cropping patterns, as well as strain the viability of the sugar industry, the Commission on Agricultural Costs and Prices has recommended that restraint be exercised in fixing the level of the SAPs. In addition, since these price systems provide little incentive to improve quality (in terms of sucrose content), the sugar recovery content of cane has remained stagnant at less than l0 percent for the past two decades, against l2 percent or more in some of the other major cane sugar producing counties.
Within this regulatory framework, the cane growers encounter three different market situations: The first is the unorganized market where cane is sold to the gur or khandsari producers. The second is the private sector sugar mills, and the third the cooperative mills. In each of these markets a different price for cane may prevail. In the unorganized market, the price tends to be the lowest, except in seasons of shortage, when gur producers have greater flexibility to bid for supplies. In the case of co-operative sector mill, the tendency is to offer prices which initially are slightly higher than the Statutory Minimum, while the private sector mills generally pay the State Advised Price (SAP).
Government procurement prices of levy sugar are fixed on the basis of the SMP of cane plus conversion costs as recommended by the Bureau of Industrial Costs and Prices. However, as indicated above, the actual support prices of cane are generally much higher than the prescribed minimum prices.
Consumers use ration cards to purchase public distribution sugar (PDS) at Fair Price shops. The PDS price which had remained unchanged for several years was increased in early-1997 to Rs 10.50 per kg (US 29 cts/ kg). The industry is supposed to offset losses on subsidized levy sugar from the balance sold on the free market. Though there is no price control on free-sale sugar, market supplies are regulated by the Government through a mechanism of monthly release quotas. Prices are thus indirectly maintained at levels considered appropriate by the Government. During the 1996/97 season, free sale sugar wholesale prices rose from about Rs 1 270 (US$35) to some Rs 1 430 (US$40) per quintal. Retail prices also increased to about Rs 1 550 (US$43)per quintal.
Over the last three decades, production of sugar rose at an average rate of 5.5 percent per year. Following a slackening in growth during the early-nineties, production rose sharply in 1995 and attained a peak level in 1996. Future prospects will continue to be largely dependent on government policy and technological advances, but under current conditions there is potential for production to approach 17 to 18 million tonnes by the end of the decade and 20 million tonnes by 2005.
Although gur and khandsari are still the main sugar products consumed in rural areas, demand for white sugar is expected to continue to increase both in absolute and per caput terms. Rising incomes and urbanization are expected to result in further shifts in demand from open pan to white sugar. Moreover, the growth of sugar demand by food industries and other non-household users, estimated to account for about 40 percent of total utilization, will provide additional impetus to longer term market growth. Under the assumption that pricing and distribution policies remain unchanged, the domestic market could absorb much of the prospective increase in production. In addition, net imports could be needed periodically to offset short-run crop shortfalls. However, if the general liberalization of the Indian economy extends further also to the sugar sector, it may be expected that domestic price levels would adjust upwards, leading to some weakening in the growth of demand and possibly to added incentives to production expansion.
India could generally remain a net exporter of sugar to world markets although availabilities could be constrained by the prospective close balance between supply and demand. The country's net trade position would thus remain vulnerable to short term crop variations, and would consequently continue to constitute an element of uncertainty in the international sugar market.
Table 1: India sugarcane area, yield and production
Table 2 : India sugar production, trade and consumption