New Delhi: The Rs7,000 crore bailout package for the sugar sector announced by the government earlier this week will help clear over 40% of the payment sugar mills owe farmers, ratings agency Crisil said on Thursday.

Following a record sugar production of 31.5 million tonnes in the 2017-18 season and plunging wholesale prices, mills in different states currently owe sugarcane farmers over Rs22,000 crore.

While sugar production in 2017-18 rose by a sharp 48% year-on-year, current dues to farmers also surpassed the past record of Rs19,430 crore seen in 2014-15. Due to rising acreage, Crisil expects sugar production to rise further to 32 million tonnes in 2018-19.

On Wednesday, the government approved a bailout package for sugar mills which include an expenditure of Rs1,175 crore for creating a buffer stock of 3 million tonnes, fixing a minimum sale prices of Rs29 per kg for mills, and Rs1,332 crore of interest subsidy to sugar mills for expanding their ethanol production capacity which will help in diversion of excess cane supplied by farmers.

In its analysis, Crisil said with sugar sale prices set at Rs29 per kg mills can expect an incremental cash flow of Rs6,500 to Rs7,000 crore in the next four quarters.

Sugar mills will see a further cash inflow of Rs1,000 to Rs1,100 crore by saving the inventory carrying cost of 3 million tonnes due to the creation of a buffer stock, Crisil added. Further, mills will benefit from the raw material subsidy of Rs5.5 per quintal on sugar purchased from farmers which was announced in May.

“Most of the benefits, such as raw-material subsidy and carrying cost, are proposed to be credited directly to farmers’ accounts towards arrears... the improved liquidity from these measures would prevent the working capital situation from worsening," Crisil said.

It added that benefits arising out of increased ethanol production capabilities will accrue over the longer term and will have a limited role in addressing the current liquidity issue of millers.