Food, finance ministries fail to agree on sugar relief package

Food, finance ministries fail to agree on sugar relief package

New Delhi: Six months after Union agriculture, food and public distribution minister Sharad Pawar proposed a relief package for the sugar industry to deal with overproduction and low market prices, factions of the Union cabinet are divided over the way the relief package should be implemented. As a result, the cabinet has not been able to take a decision on the package.

According to a cabinet note, a copy of which was viewed by Mint, the finance ministry does not want sugar mills comprising public, private mills and cooperatives to all get easy loans with Union government assistance. The ministry has suggested that state governments provide guarantees for all sugar factories that are facing losses.

Besides, the ministry is of the opinion that these companies should not get interest-free loans because the industry is already being subsidized as part of the farm sector subsidy extended by the government.

With total sugar production estimated to touch 29 million tonnes (mt) in 2006-07 (October-September) and demand at 19mt, the market price of sugar at Rs1,200-1,300 a quintal is below the average cost of production. As a result, sugar mills have been deferring payments to sugar cane farmers.

According to a group of ministers (GoM) headed by external affairs minister Pranab Mukherjee, such arrears are as high as 17.4% of the total sugar-cane supply this year, against 2.9% last year. The GoM suggested that loans should be given to such mills, which will be equivalent to the central excise duty paid by these mills.

The food ministry has proposed the industry be given loans at zero interest, which will enable it to pay arrears of more than Rs5,000 crore due to sugar cane producers. “While the cabinet has agreed that bank loans be extended to sugar mills and to provide interest subvention, there are issues relating to the subvention limit and state governments involvement in such loans," said a senior government official close to the development, who did not want to be identified.

Subvention is a subsidy on the bank interest rate and is given to the farm sector.

While the food ministry is asking for an interest-free loan or full subvention at 12%, the finance ministry is suggesting a 5% subvention, meaning that factories will get loans at 7%. The official also said that a 5% subvention will cost the government Rs565 crore, which is less than half of what it would cost at 12%.

In the cabinet note, the finance ministry has said that 100% interest subvention would mean interest-free loan and not subvention. “Government is giving loans to the farm sector, including small and marginal farmers, at 7%. Therefore, there is no need to to give sugar industry an exalted status over the farm sector," said the note.

According to the note, the finance ministry wants that prior to such loans being extended, respective state governments should provide a guarantee for factories whose accounts have been classified as non-performing assets, a move which the food ministry is resisting.

The Planning Commission has also raised concerns over subsidizing the sugar industry. “We feel zero-interest loan is not justified even though the arrears need to be settled fast," said a senior Planning Commission official, who didn’t want to be named.

Some experts say the problems of arrears are more due to low recoveries and higher costs of production in several mills and that waiving interest is not the answer.

The GoM in its meeting in July had asked the finance ministry to work out a debt restructuring for private sugar mills along with the ministry of food. The former was to give its report by October. However, with the two ministries differing on the mechanism of the restructuring package, the cabinet has not been able to take a decision on the issue.