New Delhi: The sugar sector tasted bitter this year as surplus production pulled down prices sharply in the domestic market, bringing cheer to consumers but forcing the government to give subsidies to the ailing industry.

The year began on a positive note for the industry, which supports over 50 million farmers and their families, with the Union government lifting the ban on exports in January.

The ban was imposed in July 2006 to rein in prices and contain inflation.

But the government’s decision came too late to bring any significant benefit as global prices had fallen drastically by then, making exports unviable.

Hit hard: The sugar manufacturing facility of Bajaj Hindusthan Ltd in Bhilai. The losses incurred by manufacturers trickled down to sugar cane farmers, who were not paid by the millers.

In the domestic market, prices plunged from Rs25-26 a kg, when the ban was imposed, to Rs14-16 at present.

Big retailers, such as Big Bazaar, sold sugar at as low as Rs5 a kg under special schemes.

As the industry appeared set to achieve a record output of more than 28 million tonnes (mt) in the 2006-07 sugar season, which ended in September, and even higher next year against the annual consumption of around 19mt, the Centre was left with no option but to extend export subsidy to help industry in selling off the huge surplus stock.

Sugar mills located in coastal areas were given a subsidy of Rs1,350 per tonne, while those in non-coastal states Rs1,450 per tonne to defray the internal transport, freight, marketing and handling charges for exports.

The Centre also did away with the requirement of “release order" for exports. India exported 1.7mt of sugar in 2006-07.

Sensing that there would not be much exports, the government decided to create a buffer stock of 5mt of sugar to give further relief to sugar companies, which posted heavy losses as the prices fell below the cost of production.

The affect of losses incurred by manufacturers trickled down to the sugar cane farmers, who were not paid by the millers.

“It was an extremely critical year for the sugar industry," said S.L. Jain, director general, Indian Sugar Mills Association (Isma).

Heavy losses, huge cane price arrears, record production and progressive decline in sugar prices marked the year, he said, adding that in some regions even the cost of sugar cane was not recovered from sugar prices.

Mounting cane arrears, particularly in Uttar Pradesh that offers a higher price to its farmers compared with the statutory minimum price (SMP) fixed by the Centre, forced the Union government to come to the rescue of the industry and announce another bailout package in October.

The one initiative that stood out in the package was the mandatory 5% blending of ethanol with petrol from October this year and 10% from October next year. The move was aimed at providing sugar industry another stream to earn revenue and thus mitigate, to some extent, the cyclical nature of sugar business. The government also said it would allow millers to produce ethanol directly from sugar cane juice against the practice of making it from molasses.

Towards the end of 2007, the government notified its decision to give interest-free loans to sugar mills for clearing cane price arrears of 2006-07 and 2007-08 seasons.

“Interest subvention will be limited to 12% per annum, of which 5% will be met out of general budget provisions of the Central government and the remaining 7% from the Sugar Development Fund," the notification said.

During the year, the Uttar Pradesh government’s decision to scrap the sugar policy after Mayawati became the chief minister was a major blow to the sugar mills in the state.

Under the policy, announced in 2004, at least 28 new mills with large capacities came up with the state receiving Rs8,000 crore investment.

To find out long-term solutions for the problems faced by the industry, Isma engaged consultancy firm KPMG that suggested measures such as alignment between sugar and cane prices and removal of levy sugar system.

Ensuring alignment between sugar cane and sugar prices will be the key policy imperative for managing the cyclical nature, it said.

“For the first time, we are seeing a real help coming from the government for liquidating the cane price arrears... With these government initiatives, we are hopeful that 2008 will not be worse than 2007," Jain added.

However, with sugar production in 2008 projected to cross 30 million tonnes in the country and exports as well as domestic consumption expected to be near the current levels, the industry may well witness another rough season next year.