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Vishal Koul

State Of The Economy 2016

Not sweet at all
The sugar industry in UP is struggling to get rid of its debt

Himanshu Kakkar

Long wait:Sugar farmers and mill owners are struggling in Uttar Pradesh

You are doomed if you are a cane farmer – idhar khai, udhar naala,” laments Parmanand, a sugarcane grower in Hapur district of western Uttar Pradesh (UP). While he concedes that sugarcane is the most remunerative cash crop, he also tells us how he is yet to receive full payment for the crop he sold last year to a nearby sugar mill. Similar is the plight of several other farmers in this northern state, which contributes one-fourth of the country’s total sugar production.

This could also be the reason why 2,500 farmers across the nation are abandoning agriculture everyday, according to the 2011 Census. However, in UP, while cane farmers are preparing for a bitter crushing season, they are also putting up a tough fight. Dharmendra Malik, general secretary of the state’s Bhartiya Kisan Union (BKU) says, “We organise farmers movement at least three times a year. First, when the state government declares cane prices, then to keep the sugar mills operational and finally to retrieve farmers’ dues.” 

He points out how the farmers are struggling with an increasing arrears list. “Mill owners owe 4,000 crore to the farmers for the previous year, 3,000 crore for the current year and 1,000 crore as interest,” says  Malik. It is this dismal state of affairs that is causing unrest within the farmer community. For instance, on February 1, the BSU called for a chakka jaam (road blockade) in the entire state.

While farmers are blaming mills for failing to pay them their dues, the crux of the issue is that the sugar mills aren’t a profitable lot either. The sugar industry experienced a major financial crisis in 2015, especially the mills in UP. The Indian Sugar Mills Association (ISMA) and the state’s mill owners are currently engaged in discussions with state authorities to revive the cluster, but no solutions have emerged yet. 

Bitter truth
Gursimran Mann, MD, Simbhaoli Sugars is trying hard to recall the last time her company was not in the red. “The last time we recorded a profit was in some quarter in 2010,” she says. The company owns three mills in UP, one each in Simbhaoli, Chilwaria and Brijnathpur.  The mill sold 850-crore worth of sugar in FY15, but had to face several issues throughoout the year. In addition to a poor balance sheet, there were reports of farmer protests and mills being sealed due to non-payment of dues. Mann claims that the same scene played out at multiple sugar mills in the state. “It is unfortunate that it came to that. It affects farmers, but coercive measures cannot result in a solution,” she reasons.

Mill owners in the state also complain about the mismatch between cane prices and sugar prices. DCM Shriram, which owns one mill in Lakhimpur Kheri and three others in Hardoi district of UP, is grappling with this price mismatch. Ajit Shriram, joint managing director, says, “The fundamental problem is that the cane prices are not correlated with market prices of sugar. It is practically not possible to have high cane prices, low sugar prices and a viable industry. The sugar price is determined by the market while we are asked to pay the state advised price (SAP) for cane, which is much higher than the fair and remunerative price (FRP) determined by the Commission for Agricultural Costs and Prices.”

The Akhilesh Yadav government has maintained SAP at 280 per quintal for the ongoing production season that commenced in October. Much against the wishes of the farmers, this rate has remained the same for the past three years. However, the earlier BSP government had raised SAP by 40 per quintal every year in its tenure. Mill owners complain that having to abide by high SAP has raised production costs. Shriram points out, “There was a time recently when just the cane cost was 120% of the selling price.” This explains why the cane arrears across the country touched an all-time high of 21,000 crore in April 2015. The severity of the debt burden is evident from the fact that the heads of two state-run lenders — State Bank of India and Punjab National Bank — wrote to UP’s chief secretary asking him to restore financial viability of the mills. Mann says, “Financing is not as easily available now as it was earlier.”

Mills say they used other verticals to sustain themselves. “The last profit we made was in FY09  and that too a small one. We incurred heavy losses thereafter in the sugar business,” says Shriram, adding that that other verticals were used to support its sugar business. The DCM Group has interests in urea, seeds and chloro vinyl. But even Shriram is aware that this cushion can’t work forever. “It is a matter of stability and consistency. At the end of the day, we are dealing with bankers. Nobody will lend to you when you have arrears/weak fundamentals. We need to find a long-term solution for cane pricing”, he adds.

Quitting, however, is not a solution as the law doesn’t allow a sugar mill to shut down without securing permission from the District Magistrate. Also, selling isn’t a possibility with no buyer wanting to enter the troubled sector. Thus, mill owners like Mann believe that it bodes well to stay put, “It would be immature to exit due to policy problems. We have been in this business for the past 80 years and we believe in it.”

 Sweeter prospects
There are no easy solutions to revive the industry but central government initiatives such as diverting surplus sugar towards exports and increasing ethanol blending can work as much-needed catalysts. Tarun Sawhney, chairman, ISMA says, “The central government has played a very important role by mandating exports of sugar.” Sawhney, who is also the MD of Triveni Group that owns seven sugar mills across UP, is hopeful about the future. “There are huge stocks of sugar across the country. Now, 3.2 million tonne have to be exported in any form. 70% of this has already been exported. Besides, drought in central and southern India has helped raise sugar prices from 22 per kilo in July 2015 to 30 currently. So, the industry’s health has improved a little,” he says. ISMA estimates the total sugar production in 2015-16 to be 26 million tonne. Shriram, too, welcomes the government’s push for increasing the export quota, “We have sealed contracts for about two-thirds of our stock. Exporting excess sugar is a good way get the stock out of the system.” 

Ajit Shriram, Joint managing director, DCM Shriram The December 2015 scheme by the government that raised the ethanol-blending target to 10% in petrol/diesel can also help elevate the burden of sugar mills besides bringing down the country’s oil import bill. “With 10% set as the benchmark, you need 230 crore litres of sugarcane juice,” says Sawhney. The oil industry was able to achieve 3% of the target last year and is expected to meet 5% this year. 

Sugar mills owned by conglomerates with varied interests are wasting no time in making the most of the scheme. Simbhaoli Sugars has combined its sugar mills business with spirits business. Explaining the rationale behind this move, Mann says, “We see better synergies from a taxation and operational perspective.” 

In addition to these measures, monsoon, too, has aided the sugar farmers this time. “Since we have not had intermittent rains, we have managed to sow high yield varieties such as 238, 288, 289. This has translated into higher recoveries this year. While the recovery was 9.5% in 2014-15, it went up to 10.3% in 2015-16,” says Sawhney. A higher recovery (for the same amount of sugarcane) translates into a lower cost per kilogram of sugar produced. 

Tarun sawhney, Chairman, ISMA and MD, Triveni GroupBut BKU’s Malik complains that benefits of higher recovery don’t trickle down to the farmers. “UP has surpassed Maharashtra this time in terms of recovery. But the  cost of growing sugarcane has increased further for the farmer. Unfortunately, the UP government has allowed mills to pay only 230 of the mandated 280 SAP. The balance is to be paid after three months,” he laments, adding that it would only add to the arrears problem.

But ISMA’s Sawhney is quick to respond.  “The broader section of the industry has cleared the arrears but it is the troubled mills operating under the Board for Industrial and Financial Reconstruction or corporate debt restructuring schemes that continue to have trouble clearing dues.” The government has asked mills to utilise 85% of their sugar sale proceeds for payments to farmers. While Malik claims this is not followed by mills, owners deny the charge. 

Gursimran Mann, MD, Simbhaoli SugarsAmidst all this, to ease the debt burden, the state government also announced a subsidy last year for mills if the sugar prices remained within a price band. However, mill owners feel that a long-term solution would be the implementation of the C Rangarajan committee report of 2012 that favoured easing control of the sugar industry and proposed a revenue-sharing model.  Shriram says, “In countries like Australia, Thailand, Brazil and South Africa, a farmer is typically paid 55-65% of the sugar value. C Rangarajan proposed increasing it to 75% and incorporating a revenue-sharing formula. Also, FRP should also be implemented with a price stabilisation fund.” He also makes a case for sugar to be removed from the list of essential commodities and cutting the compulsory 10% supply quota to the public distribution system (PDS). For example, out of 100 kilos, 10 kilos must be supplied to the PDS. Of this, 65-70% is consumed by the FMCG sector and 15% by households. “Sugar accounts for 1.73% of the WPI. If you spend 100 on food per month, you spend 1.83 on sugar. Thus, the cash crop accounts for a small share of a household’s expenditure,” Shriram explains.

Despite the distress surrounding the sector, mill owners and farmers haven’t lost all hope yet. Simbhaoli Sugars’ Mann continues to remain optimistic. “The situation is better than what it was at the same time last year. The losses are declining. We should be able to break even next year,” she says. A few kilometres away, standing tall against the merciless sun, a lot like the cash crop he cultivates, Parmanand says a silent prayer as he waits for the benefits of that potential break even to reach him.

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