Policy risk comes to the fore as sugar prices firm up
- The confusion over rural electrification in India
- One year on, it’s finally all about the ‘software’, Chandra
- N. Chandrasekaran set to focus on new businesses in smart mobility, cities
- N. Chandrasekaran completes one year as Tata Sons chairman, stabilizes group
- Banks vulnerable to hackers without online interface between CBS, SWIFT
The sugar industry wants the government to look beyond higher sugar prices and acknowledge the strain they face on the balance-sheet front due to past losses and accumulated debt.
An Indian Sugar Mills Association (ISMA) release said that the industry has asked the government for sops on debt restructuring, rescheduling of loan repayments and extending interest subvention for 3 years.
In addition, for by-product ethanol, they have asked for a higher procurement price and restoring an excise duty waiver.
These requests come although sugar prices have risen, with wholesale sugar prices trading up 16% over a year ago. Globally, too, sugar prices have gone up, which in general has supported the increase in domestic prices as well. Lower sugar output in India and other producing countries such as Brazil and Thailand are chiefly responsible for buoyant prices.
As of 31 December, India’s sugar output is only 0.4% higher than a year ago, lower than the 11% increase seen as of 15 December. Maharashtra has seen a sharp cut in output, due to lower cane crop in some parts.
A major part of the season’s output is yet to be produced. With the situation changing so much in one fortnight, what if sugar output turns out lower than expected?
A recent note by ratings agency ICRA says it expects sugar output to decline by 9% over the previous season and fall short of consumption by 2.5-2.8 million tonnes, even as consumption is expected to increase by 2-3% annually. ISMA believes demonetisation may affect consumption to some extent, however. ICRA estimates closing stock of sugar at 4.8mn tonnes, enough for 2 months of consumption against the norm of 3 months. Opening stock for the season was 7.6million tonnes.
That is where the worry may begin for the government. A further cut in supply—ISMA’s revised estimate using satellite imagery will be available in end-January—could see stocks deplete further. Higher than expected consumption is a risk to stocks as well. This situation supports a firm trend in sugar prices which is good for producers.
But that may not be what the government wants. State elections are due in February and March. A bigger concern will be to keep food inflation in check. The government has enough policy tools to check sugar prices which can then hurt sugar producers. That’s why the producers may be trying to say, let us enjoy higher prices and if you can’t allow that, we may not be able to service our loans.
Shares of sugar producers, especially the UP-based ones, have risen since the last week of December. Domestic sugar futures have risen in this period. On Wednesday, the shares took a breather. The government’s stance has clearly become a key risk for the sugar industry.