While stressing the need to let the sugar sector manage its affairs based on market mechanisms, a report prepared for India’s sugar mills and factories is also recommending setting up an independent regulator for the industry.
The report, dubbed The Indian Sugar Industry—Sector Roadmap 2017, was prepared by consulting firm KPMG and sponsored by Indian Sugar Exim Corp. Ltd, which has Indian Sugar Mills Association and National Federation of Co-operative Sugar Factories as its constituents. The report claims it is based on discussions with various interested parties, such as farmers, millers, international traders and policymakers.
“An independent regulator will help systematic and centralized implementation of various regulatory provisions just as it has benefited other industries such as telecom and insurance,” suggests Arvind Mahajan, executive director, KPMG Advisory Services. Such a regulator can oversee sugar reserves, fix a price band that synchronizes sugar cane prices that farmers get with sugar prices that consumers pay, creating conditions that make it easier for sugar mills to enter and exit the market, he said.
“Since sugar is a cyclical commodity, its cyclicality needs to be managed,” said P. Ram Babu, president, Indian Sugar Mills Association, an industry lobby group. “Since millers have to depend on prices determined by the state and Central governments, they suffer when prices are low, which results in delayed payments to cane growers.”
Babu said the industry is hoping for a gradual transition towards deregulation.
The report also questions the need to treat sugar as an essential commodity, which puts certain price restrictions on the industry. It notes that a study conducted by AC Nielsen shows that more than 60% of sugar sold is consumed by industrial and small business segments, while only 25% of it is consumed by lower-income groups.
“Since this segment does not consume more than 2-3kg per month per household, a 10% rise in sugar price has less than 1% increase in their monthly food expenses,” said Mahajan, repeating a recent refrain from many players in the industry who have so far been unable to convince the government on this issue.
The report also favours removal of levy sugar, which is sugar routed through the public distribution system. But not all sugar firms say this is critical. “Frankly speaking, selling 10% sugar through levy prices does not affect our economics,” said a senior executive of a leading sugar firm who didn’t want to be named.
The report also talks about reducing the weightage of sugar in the wholesale price index, which is currently at 3.6%. According to the report, since sugar comprises a much lower proportion in the consumption basket of a household, its weightage should be brought down to 2%.
Sugar production is likely to cross 28 million tonnes (mt) this year—the sugar season is between October and September—while the domestic consumption is around 18mt. Exports from India are expected to be between 1mt and1.5mt. That still leaves a huge surplus in the market, which is putting downward pressure on prices and also hurting the profitability—and share prices—of most sugar companies.
According to Babu, a sustainable stock of sugar should be created, based on market principles, with government participation.
“This will be different from the buffer stock created by the government, which provides temporary relief,” said Babu. The government increased the sugar buffer from 2mt to 5mt last month.