The government is proposing a revival package for the sugar industry that would increase buffer stocks by 150% to five million tonnes (mt), mandatorily double levels of ethanol blending in petrol and initiate debt restructuring of sugar mills.
A cabinet note detailing the package is being moved by the department of food and public distribution.
“It is part of the larger sugar policy that the government is embarking on for the sector,” said a senior government official close to the development who did not wish to be identified.
India is the world’s second-largest sugar producer after Brazil.
At present, due to two bumper crops of sugar cane, the industry is saddled with excess stocks of sugar, resulting in a progressive slump in market prices. While sugar production aggregated 27mt, annual demand for sugar was 20mt. With sugar prices in the range of Rs1,150 a quintal, or 100 kg, in Maharashtra and Rs1,350 in Uttar Pradesh, the average all- India price works out to Rs1,250, which is about Rs400 below the average cost of production.
Based on the wholesale price index for the week ended 12 May, the annual prices of sugar, gur and khandsari declined by 16.3%.
The sugar industry has also been hit by falling global prices and an export ban, which has since been withdrawn, that was put in place last year when prices were in the range of $420-$450 per tonne. Prices have now dropped to around $300 per tonne.
The London-based International Sugar Organization has predicted a global surplus of 9.2mt in the year through September as growers try to meet demand for ethanol, a fuel made from sugar.
“There’s just a huge oversupply hitting the market and the price is tumbling,” said Jonah Ford, an analyst with Great Pacific Trading Co. in Grants Pass, Oregon.
To help revive the politically-connected industry, the government is now proposing to raise the buffer stock, thereby reducing the holdings with sugar mills to 5mt. With another 1.5mt in exports, the government is proposing to further reduce the demand-supply mismatch and bring relief to the sugar mill owners.
In addition, within a year, it is looking to make it mandatory to blend 10% ethanol in petrol as opposed to the current level of 5%.
“Sugar is currently being sold at below cost of production and creation of a five million buffer will help stabilize prices, and therefore this is a welcome move,” said an industry executive who did not wish to be identified.
He also said that with 400 million litres of ethanol already been sold to oil marketing companies, it looks like the government’s move of 5% blending has paid off. Last year, the government had announced ethanol blending, subject to the discretion of the oil marketing companies.
“India has enough molasses, the by-product of sugar that goes into making of ethanol, and we can easily go up to 10% blending, especially now that the oil companies are also buying ethanol,” he said.
Not everyone agrees.
“Corporate debt restructuring schemes already exist, so how will those prescribed for sugar industry be different. The industry was doing well till the time it was left to market forces, but directional changes made by the government, like ban on export, plagued the industry,” says another industry executive who also did not wish to be identified.
According to him, ethanol blending at 5% has not been successful as most states have not implemented it.
“Even today, there is a ban on ethanol production in Tamil Nadu as the rectified spirit is diverted for production of potable alcohol,” added the official. As of now, only six states have implemented the blending plan.
Sweet Findings (Graphic)
(Ron Day of Bloomberg contributed to this story.)