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YE-4/08/3
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About the Issue
India is known as the original home of sugar and sugarcane. In global sugar
economy, the Indian sugar industry has achieved a number of milestones. It isthe second largest producer of sugar in the world. Sugar industry in India is well
developed with a consumer base of more than billions of people. This industry is
the second largest agro processing industry in India. More than 500 thousand people
are directly employed. Including farmers, and their family member, more than 45
million people of the rural population of India depend on sugar industry for their
livelihood. Its contribution to the Central and State exchequers is of high order. The
Indian sugar industry has been accounting for around 1% of GDP of the country in
the recent past.
Sugar production in India is concentrated in six states namely Maharashtra, Uttar Pradesh, Gujarat,Tamil Nadu, Karnataka and Andhra Pradesh which together account for 85-90% of sugar production in the
country. The Indian sugar industry is highly fragmented with over 450 mills and no single player having a
market share of over 5%. Around 60% of the mills are in the cooperative sector, 35% in the private and the
rest are in public sector. The sugar industry can be broadly classied into two sub-sectors, the organized
sector i.e. sugar factories, and the unorganized sector i.e. manufacturers of traditional sweetener like gur
and khandsari.
Over the years, the sugar production has uctuated noticeably. During the years of shortages, the country
turned a net importer. Thus the overall scenario has been that of marginal export of sugar. A High Powered
Committee of the Government of India studied the matter and has recommended total liberalization of sugar
sector to ensure steady and stable growth in production.
Recently, in a move to bring relief to the beleagured sugar mills, the Centre has announced a new scheme
extending these mills nancial assistance. As part of this scheme, sugar mills which have been facing a crisis
due to a production glut and low prices, will get interest free loans to help them pay the dues of the farmers
who supply them sugarcane.
This issue of Yojana discusses how to improve sugar economy. The experts debate how the sugar sector
can be put on a more sustainable path, helping both the industry and the farmers.
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ECONOMIC INDICATORSANNUAL INDICATORS
Units Nov
06
Dec
06
Jan
07
Feb
07
Mar
07
Apr
07
May
07
Jun
07
Jul
07
Aug
07
Sep
07
Oct
07
Nov
07
Dec
07
Jan
08
Feb
08
Prices
Wholesale price index
(All Commodities)
1993-94= 100 209.1 208.4 208.8 208.9 209.8 211.5 212.3 212.3 213.6 213.8 215.1 215.2 215.9 216.4 217 218.4
% change 5.49 5.68 6.38 6.34 6.61 6.27 5.45 4.52 4.71 4.14 3.51 3.13 3.25 3.83 3.91 4.58
Agriculture
Actual rainfall (All-India) Millimetres 50 12 2 30 32 27 48 153 259 299 194 75 - 16 19 19
Dev. from normal rainfall Per cent 33 -24 -92 32 14 -20 -31 8 0 -2 14 -22 - 1 -19 -14
Stock of Rice (Central pool) mln. tns. 12.1 12.0 12.6 14.0 13.2 13.5 12.6 10.6 6.7 - 10.65 - 11.15 - -
Stock of Wheat (-do-) mln. tns. 5.6 5.4 5.4 5.1 4.6 11.6 13.3 12.8 10.9 - 9.02 - 7.35 - -
Units 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
(Proj.)
Population(as on 1 Oct) in crores 101.9 103.8 105.5 107.3 109 111 112.2 -
GDPat current market prices (new series) Rs.crore 21,02,375 22,81,058 24,58,084 27,65,491 31,26,596 35,67,177 4145810 -
GDP:Per Capita (current prices) Rupees 20,632 21,976 23,299 25,773 28,684 32,224 36,950 -
Gross domestic savings (current prices) % of GDPmp 23.7 23.5 26.4 29.7 31.1 32.4 34.9 -
Gross domestic capital formation (cur. pr) 24.3 22.9 25.2 28.0 31.5 33.8 36.1 -
Central Govt. Gross Fiscal Defcit 5.7 6.2 5.9 4.5 4.0 4.1 3.4 3.2
Sectoral shares (of GDPfc at current prices)
Agriculture & allied % of GDPfc 23.4 23.2 20.9 20.9 18.8 18.3 17.5 -
Industry 26.2 25.3 26.4 26.1 27.5 27.6 27.9 -
Services 50.5 51.5 52.7 52.9 53.7 54.1 54.6 -
Prices (Annual Average)
WPI of All commodities (wt 100.00) Apr 1993=100 155.7 161.3 166.8 175.9 187.2 195.5 206.1 -
CPI-IW General index: India Jul 2001=100 95.93 100.07 104.05 108.07 112.2 117.2 125.0 -
Agriculture: Production
Foodgrains mln. tns. 196.8 212.9 174.8 213.9 198.4 208.6 216.1 219.1
Cereals 185.7 199.5 163.7 198.3 185.2 195.2 201.9 204.6
Rice 85.0 93.3 71.8 88.5 83.1 91.8 92.8 93.1
Wheat 69.7 72.8 65.8 72.2 68.6 69.4 74.9 75.6
Pulses 11.1 13.4 11.1 14.9 13.1 13.4 14.2 14.6
Oilseeds 18.4 20.7 14.8 25.2 24.4 28.0 23.9 26.4
Sugar cane 296 297.2 287.4 233.9 237.1 281.2 345.3 365.0
Industry & Energy
Index of industrial production (wt 100)
(Annual Average)
Apr 1993=100
% change
162.7
5.1
167.0
2.6
176.6
5.8
189
7.0
204.8
8.4
221.5
8.2
247.1
11.5
-
-
Commercial energy production MTOE # 230.9 237.9 246.9 259.2 272 281.4 -
Electricity generation by public utilities bln. kwh 501.2 517.4 532.7 565.1 594.5 617.5 662.5 -
External Transactions
Exports US $ mln. 44147 43958 52823 63886 83502 103075 126246 124160($)
Imports 50056 51567 61533 78203 111472 149144 190438 191566($)
Forex reserves 39554 51049 71890 107448 135571 145108 191924 291250 @
Foreign direct investments in India (net) 4031 6125 5036 4322 5987 8901.0 21991 -
Portfolio investments in India (net) 2760 2021 979 11356 9311 12494 7004 -
Rupee exchange rate Rs / USD 45.61 47.55 48.30 45.92 44.95 44.28 45.29 39.93 @
Investments (CMIE CapEx database) Mar 01 Mar 02 Mar 03 Mar 04 Mar 05 Mar 06 Mar 07 Dec 07
Project investments
outstanding* (as on)
Rs.crore 14,28,449 15,12,975 14,10,828 15,28,611 19,73,426 28,12,111 44,77,398 55,34,374.96
project count 4,539 6,108 7,196 9,070 9,822 10,050 12,725 14,144
Indicators: Monthly
Note: (a)% change is year on year (y-o-y) basis; (b) # MTOE: Million Tonnes of Oil Equivalent; (c) Total value of foreign currencies held by Govt. of India (excl. gold & SDRs); (d) @ as on 29th
Feb 2008; (e) ($) Apr 07 - Jan 08; (f) * It is the sum total of the project costs of all the outstanding (Live) capital expenditure projects happening in the country. These projects may be under announced
or under-implementation stage.
Source:i3(i-cube) at Planning Commission, New Delhi, Centre for Monitoring Indian Economy (CMIE)
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UGAR HAS an age
old association with
this country. India
is believed to have
pioneered production of
sugar from sugarcane around the
4th century CE. In fact, the English
word sugar is believed to have
originated from the Sanskrit word
sharkara. Alexander the Greatssoldiers, after their visit to India,
are reported to have marveled at
the production of honey without the
intervention of bees !
Sugar is used by mankind as
a sweetener of food and drinks.
As an additive in food products,
it is also valued for its qualities
of feel, texture & preservative
nature. It is a major source of
energy with 1 kg of sugar capable
of yielding as much as 3900
KCal. In its crystalline form, it is
produced primarily from sugarcane
and to a lesser extent, from sugar
beet. Sugarcane is cultivated in
tropical / semi-tropical climates in
countries like Brazil, India, China,
P Rama Babu
The author is Managing Director, E.I.D.-Parry (India) Limited.
ECONOMICS OF SUGAR
The
Indian
sugar industry
is green and
will be
increasingly
valued in
future
The Path Forward
Thailand, the Caribbean islands,
etc. Sugar beet, on the contrary,
is grown mainly in the temperate
regions like Europe, Japan, etc.
It is also produced in syrup form
from sources like corn (High
Fructose Corn Syrup or HFCS) in
countries like the U.S.A..
India is the largest consumerof sugar in the world with annual
consumption of about 19 million
MT. It also happens to be the
second largest producer of sugar,
next to Brazil, with production in
the sugar year 2006-07 crossing
28 million MT. Global production
from cane as well as beet is around
170 million MT currently.
About 80 % of global sugar
production is from sugarcane. It
has been clearly established that
sugarcane is the cheapest source of
sugar; the cost of sugar production
through the cane route can be as
low as 40 % of that of sugar from
the sugar beet route. One of the
major producers of sugar through
INDEPTH
S
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the beet route, the EU, has already
begun cutting down on production
realizing the futility of competing
with cane. Increasingly, therefore,
sugarcane would be the route
for sugar and related products
manufacture.
The bulk of the Indian
sugarcane cul t ivat ion
and hence, location of
the sugar mills, is in the states
of Uttar Pradesh, Maharashtra,
Tamil Nadu, Karnataka, Andhra
Pradesh, Gujarat, Punjab, Haryana
& Bihar. The annual production is
in the range of 300 to 350 million
tons of sugarcane out of whichabout 30 % is used for gur and
chewing purposes and the balance
for producing sugar. Sugar
production during 2006-07 was a
little over 28 million tons second
only to Brazils production of about
33 million tons. Uttar Pradesh with
30 % and Maharashtra with 27 %
of the sugar production top the
nine states. While Bihar, Punjab &Haryana are at the other end of the
spectrum with less than a million
tons of production per annum, the
balance states produce in excess of
1 million tons each per annum.
Production growth over the last
half century has been a little under
5 % CAGR with typical cycles
of 4 to 7 years. Of the total of
about 450 mills in the country, over60 % are either in the co-operative or
government sector and the balance of
about 40 % in the private sector. The
states of Maharashtra, Karnataka
& Tamil Nadu have relatively
larger share of co-operative mills.
However, over 50 % of the output
is accounted for by the private mills
and the share of the private sector
has been steadily increasing.
The average land holding of
cane farmers is very small and
fragmented. The bulk of the
holdings are reported to fall between
1 and 4 hectares. Around 50 million
farmers, including indirect labour,
are believed to be dependent on this
crop. It is also very labour intensive
in terms of cutting labour required
for harvesting cane. Indian farm
productivity ranges from 40 tons
per hectare to 110 tons per hectare
against the global average of about
64 tons per hectare; however, even
within India, States like Tamil Nadu
have farms reporting harvests in
excess of 120 tons per hectare.
Sucrose content wise, it ranges
from 9 to 11 % with an overall
national average of about 10 %.
The cost of sugarcane is as
high as 70 % of the value of the
sugar produced by the mill. Farm
productivity and sucrose content of
the cane are, hence, critical factors
which impinge on the economics
of operations. Sugarcane is alsohighly perishable with the sucrose
content dropping drastically
beyond 24 hours from the time of
cutting. In fact, perhaps owing to
the rather un-economical land size
& populist pressures, Indian cane
prices are probably the highest in
the world. Paradoxically, Indian
domestic retail sugar prices are one
of the lowest in the world thanks
to the paranoid reluctance of the
Government from letting them rise
to their natural levels.
Every ton of sugarcane can
produce about 100 kgs of sugar on
an average as also about 45 kgs of
molasses and 300 kgs of bagasse.
Alternatively, the sugarcane juice
can be converted directly into about
70 litres of alcohol in lieu of the
sugar and molasses. The Indian
Government has now decided
to permit millers to convert the
sugarcane juice either into sugar and
molasses or directly into alcohol.
Demand
Domestic demand for sugar
is about 20 million tons with
average annual growth rate of about
3.5 % (against the world average of
about 2.2 %). India is the worlds
largest consumer of sugar; total
global demand is in the region of
160 million tons. Unlike Brazil
which exports over half of its
production and Australia whichexports over 70 % of its production,
the bulk of Indias production
is consumed domestically with
occasional imports or exports of
a few million tons to tide over
decits/surpluses.
Increasing GDP and changing
life styles and food habits are
driving down the demand for gur
in India with a proportionateincrease in demand for sugar.
About 70 per cent of the sugar
demand is from institutions
including confectionery units,
soft drink plants, etc. while the
rest of the volume is accounted
for by households for direct
consumption.
CONTROLS THE INDIAN
WAY
The Indian industry has been,
traditionally, a regulated one
arising out of a sound rationale.
On the one hand, the sugarcane
industry has been the precursor to
the much touted contract farming
system which is in fashion today.
Given the thousands of farmers
with miniscule individual land
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holdings on the one side and the
relatively large and dominant sugar
mill owners on the other side, our
forefathers perceived a distinct
imbalance in the negotiating
strengths of the two parties. The
distinctive sweet tooth that most
Indians have, the deeply rooted
cultural importance of sugar and
the need to make sugar, as a source
of organic energy, available at
affordable prices to the Below the
Poverty Line (BPL) consumers
were factors which drove the need
to protect the consumer from un-
affordably high prices for sugar.
The vulnerability of the interests of
the small farmer and the common
consumer thus drove the need for
creation of checks and balances by
the Indian Government, leading to
various legislations and controls
under the Essential Commodities
Act (ECA).
Essential Commodities Act
As a developing nation emerging
from the brink of poverty, thecountry needed to ensure that the
poor were assured the availability
of cheap and good quality of
essential food items; sugar was
included as one such item under
this rigorous Act of Parliament.
The Act gave the Government
sweeping powers not only to
regulate distribution, storage and
pricing of levy sugar but also gaveit widespread powers for punishing
the offenders. The Act spawned
subsidiary Orders / Rules like the
Sugar Cane Control Order, Sugar
Control Order, etc. which covered
the gamut of sugar production,
starting from sugarcane to the
levy of a cess on sugar sales for
the creation of a fund for the
development of the industry.
Among other things, the Act
facilitated the following:
a. Statutory Minimum Price for
Cane (SMP): Based upon various
parameters like cost of cultivation,
yield, etc., the minimum sugarcane
price to be paid by any miller toa farmer was announced each
year by the Central Government.
Considering the relatively long
duration of a year of this crop,
this step encouraged the farmer
to grow sugarcane with the
Government backed re-assurance
on cane price. The Government
went even further to ensure that
the farmer was paid a share of anyadditional prots on sugar sales
of the miller, beyond a stipulated
level which covered the miller
costs and a decent prot, under
Section 5A of the Sugarcane
(Control) Order, 1966. This is
one of the laudable provisions
incorporating a mechanism for
fair sharing of returns on agri-
products between the grower and
the processor.
b. Quotas for sale of sugar: A
free sale and a levy sale quota
have been in vogue. These quotas
are announced by the Government
every month for each mill taking
into account the anticipated
demand for sugar in the ensuing
months. While the free sale portion
could be sold by the mills into theopen market at market determined
prices, the levy sale could be sold
only to agencies managing the
public distribution system and at a
pre-determined levy price which
was intended to cover the cost of
production alone. The levy price
has generally turned out to be not
only much lower than the market
price but, sometimes, even lower
than the cost of production itself,
as is the case currently.
c. Command Area for Cane:
In the interest of ensuring
guaranteed market access and
price recovery for the fa rmer
as also to prevent poaching ofcane between warring millers,
the Government chose to dene
an area of about 15 kms radius
from each mill as the Command
Area. Farmers could choose
to register their commitment to
supply cane with the mill within
whose Command Area their farm
fell. The command area concept
also served as an assurance of raw
material availability to the miller,
encouraging investments in mills.
The actual area to be declared as
Command Area, however, has
been a contentious issue.
d. Controls on By Products:
M a n y o f t h e s u g a r m i l l s
generate Electricity out of the
waste bagasse as also alcohol
out of the by product, molasses.While, traditionally, mills had
generated power to meet in-house
requirements, they are gradually
investing in new equipment which
is helping them generate a surplus
for export into the grid. Molasses
and alcohol have been sensitive
issues given the fact that their end
product, potable liquor, falls under
the state subject and accounts
for a signicant portion of state
government revenues. Concerns
of illicit brewing have also led to
stringent controls on movement
and sale of molasses.
Electricity generation, too,
has traditionally been perceived
as a state activity and strictly
monitored and controlled. The
liberal provisions of the recently
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promulgated Electricity Act have
been like a breath of fresh air to the
industry but their implementation
has been tardy, at best, in most
states.
e. Exim Controls: Given its strong
concern for the food security of thecountry, the Central Government
has also actively used its export-
import policy as a tool to regulate
the inow of imports and exports
out of the country with the stated
objective of protecting the end
consumer. The cyclical nature
of Indian sugar production has
necessitated frequent Government
interventions through changes in theduty structure as also bans on imports
/ exports of sugar. Sudden changes
in the Indian Governments exim
policy impact the global scenario
dramatically since India is the single
largest consumer and second largest
producer of sugar in the world. The
credibility of the Indian exporter
has also been poor owing to the
impromptu bans resorted to by the
government which have often come
in the way of the exporter honouring
his commitments.
Crop characteristics
Sugarcane is a long duration crop
(about a year) and farmers would
not be enthused to cultivate the crop
unless there is reasonable certainty
of a decent return on their investmentand effort. As mentioned earlier,
sugarcane is also highly perishable
and needs to be processed within
a maximum of 24 hours failing
which the process of reversal of the
sucrose content sets in. The farmer,
therefore, needs the assurance of
prompt off-take by a miller; he also
needs to be located close to the mill,
with minimum transport time for the
cane. The rationale for a strong bond
between the farmer & the miller is
thus born.
The fact that farmers tend to
flood irrigate sugarcane fields
is rightly held against the crop,
considering the scarcity of goodquality water the world over. In
countries like India, however,
imprudent use of water is a fall-out
of irregular availability of power
as also the policy of giving free
electric power to farmers, both of
which induce them to have their
electric pumps running day long.
Both precious subterranean water
as well as costly electric power aresquandered away in the process. A
good portion of the fertilisers used
by farmers are wastefully leached
away & salinity risks increase.
Some of the crop is also subject
to decay owing to the practice of
flooding. Studies have clearly
proven that sugarcane yields can
actually rise with calibrated supply
of water and fertigation throughmodern drip irrigation systems.
India can ill afford ood irrigation
& needs to shift quickly to more
sustainable techniques.
Considering the relatively longer
duration of this crop, questions
are also raised as to its economic
viability vis--vis other crops, some
of which can be raised in two oreven three cycles within a year.
Once again studies have proven
that the returns to the farmer from
sugarcane is far superior to that
of other crops, despite its longer
annual cycle.
SMP Vs SAP
The Central Government
declares a national SMP for cane
every year deriving it on a very
logical basis which includes factors
like cost of cultivation, potential
earnings from alternative crops,
etc. Over the years, however,
most of the state governments
have indulged in one-upmanship
by declaring individually higher
State Advised Prices (SAP) for
sugarcane, superseding the logically
derived uniform SMP across the
country. While the powers of the
State Government to declare such a
populist & irrational SAP has itself
been a matter of dispute, the millers
&, inevitably, the farmers too have
suffered in the process. Given the
fact that any such articial increase
in the SAP is not recovered from
the end consumer sugar price, the
miller ends up being squeezed.
Since the bulk of the cost (70%)
is the cane price & very little
margin is left after accounting
for conversion cost, this leads
to nancial sickness of the mill,
setting off the vicious cycle of cane
payment arrears, reduced cropacreage, fall in sugar production
and, hence, increased sugar prices
in the market. Un-witti ngly,
therefore, the State Governments
end up creating the very disease
which they are forced to cure
subsequently at considerable cost
and suffering to the farmers, the
millers as also the tax payer.
Infation & WPI
Historically, the Government
has been sensitive to market
prices of sugar, deeming it to be a
signicant contributor to ination.
This sensitivity has been translated
into the relatively steep weightage
of 3.60 % for sugar in the Wholesale
Price Index (WPI), apart from a
weightage for sugarcane. Hence, at
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the rst sign of inationary trends
in the economy, sugar prices are
one of the rst things which the
Union Finance Ministry monitors.
Intervention happens through
modulation of the sugar release
quota, thus preventing the market
price from rising beyond a point.
The Government has failed to
realize that, while on the one hand,
most of the cane producing states
are imposing ever higher SAP
for sugarcane, on the other, it is
articially preventing market prices
from rising to their natural levels.
More importantly, such price control
measures have primarily benetedthe institutional buyers of sugar
rather than the common man on
the street ! The recent AC Nielsen
study has clearly established that
over 70 % of the sugar produced
in mills is ultimately destined for
institutional customers who use it
as an ingredient in various food
products like confectionery, soft
drinks, sweetmeats, etc. Even forthe balance 30 % direct consumers,
sugar comprises barely 1 % of
the monthly food budget. Thus,
increased sugar prices will not
really pinch the common man or
drive inationary tendencies.
Mil l e r a s a p r o d u c e r o f
Intermediates
Unlike other food grains whichare most often meant for direct
consumption, sugarcane is one crop
which is processed by a miller to
create products which are themselves
intermediates in the manufacture of
other products. While the bulk of
sugar is consumed by institutions,
molasses and alcohol too are
intermediates in the manufacture
of alcohol & downstream products
like potable liquor, acetic acid, etc.
Electric power, though it can indeed
be consumed di rect ly wi thout
any further processing, virtually
becomes an intermediate by virtue
of the extensive grid required
for distribution and the State
governments continued vice-like
grip on generation and distribution
capacity.
The combination of a large
raw material cost component and
inability to recover cost increases
from end product prices owing to ill
conceived Government interventions
as well as the intermediate nature ofthe end products, has left the miller
submerged in nancial crises and
losses for most of the time. The
2007 KPMG report on the industry
clearly establishes that even the
listed companies in the industry
(whose performance is superior to
the co-operatives which account for
the bulk of the industry) have not
been generating economic returnson investments. Such chronic
illness, obviously, does not permit
investments in long term initiatives
like R&D.
Molasses, Alcohol, Ethanol
Potable alcohol or liquor, is a
state subject under the Constitution
and under the guise of managing
the potable alcohol production
and sales, most state governments
have set up a plethora of rules
and controls which have been
strangling the industry. Movement
of molasses into or out of some
states is so tightly regulated that this
valuable by product is virtually sold
for a song, sometimes at prices as
low as Rs. 100 per MT.
If the sugar mill chooses to value
add, by converting the molasses
into alcohol, once again, the state
government intervenes, placing
restrictions on movement of alcohol
out of and into the state. Pressure
is also exerted on the mills to
produce only that grade of alcohol
(rectified spirit or extra neutral
alcohol) which can be utilized for
liquor production. Mills are rarely
allowed to produce the chemical
grade of alcohol (denatured spirit)
which could expand their product
range and give them the exibility
to optimize their returns depending
upon the relative market prices of
different types of alcohol. Since
liquor attracts very high state
excise duties and taxes, the state
governments obsession with the
product is understandable. But,
once again, the state government
ends up driving prices of molasses
and alcohol down since the controls
effectively eliminate competition
for purchase, limiting the sugarmills market to a few powerful
liquor units in each State. Needless
to state, such a scenario is also the
breeding ground for mercenary
lobbies which ultimately inuence
State policies too.
In recent years, the Central
Government has rightly sought to
promote ethanol manufacture for
blending with petrol to reduce the
import bill while also reducing
pollution. This initiative, regrettably,
has not taken off at all owing to the
State Governments reluctance
to permit mills to manufacture
anhydrous ethanol. This could be
due to a combination of factors
including their apprehensions about
reduced liquor production and
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consequent loss of revenue as also
the impact of the powerful lobbies
which have a vested interest in the
status quo.
Electricity Generation
To be fair to the Government,
it cannot be said that the co-
generation units of sugar mills are
given step motherly treatment.
However, considering the severe
power shortages the states and the
country as a whole are facing, there
is an urgent need to pro-actively
encourage power generation
through such a renewable ,
environment-friendly source.
Many of the proposals of the Union
Ministry of Renewable Energy
sources as also the revolutionary
Electricity Act remain only on
paper.
Cyclicality
The sugar industry, historically,
has passed through cycles of 4 to
7 years of growth and depression.While some of this is caused by
natural, agro-climatic factors
like the failure of the monsoon,
pest attack, etc., the bulk of the
cycles have been caused by policy
interventions for inuencing the
market price of the end product,
sugar. Since the cane price
accounts for over 70 % of the
sugar price, the impact of anysqueeze on the end market price
impacts the farmer most. The
Governments misplaced efforts
to help the consumer ends up not
only giving un-intended benets
to the institutions who consume
70 % of the product but also
strangling the farmers who are
supposed to be on their priority
list. The depressing stories of
mills cane payment arrears and
the Governments schemes for
bailing them out are inevitable
consequences which place the
industry in a bad light.
As brought out earlier, theprole of the industry has driven
the Government into all kinds of
regulations aimed at protecting the
farmer and the consumer. Sugar and
sugarcane are politically sensitive
all over the world whether it be
India, Brazil or Thailand. The moot
question, however, is whether, in
India, these controls have beneted
the target segments or have stood in
the way of progress.
THE POSITIVES
This is one crop which can be
deemed to be a Kalpavriksham.
Every part of the stick of sugarcane
is valuable and not a portion of
it is wasted. While sugarcane
juice can be converted into sugar
and / or alcohol, the fibre in
it can be converted either intovaluable electrical energy or as
raw material for manufacture
of paper and related products as
also innumerable other alcohol-
based products . Sugarcane is
also a robust crop, relatively free
from diseases. It requires limited
care and nurturing. Socially, in
countries like India, a large number
of small farmers are dependent
upon this crop and many workers
bene fit from the employment
generated at the time of cane
harvesting.
The crop, thus, is a virtual boon
to any tropical country since it
addresses food and fuel security
with the added advantage of being
green, as a source of renewable
energy which is environmentally
friendly. India is fortunate that it
is one of the few tropical countries
which can grow such a multi-
purpose crop economically.
Exit of the European Union
The single major factor which
is presently inuencing the globalsugar trade is the decision of the
EU to cut down on its subsidies
for Beet sugar production. This
has effectively reduced the EUs
export to the world, primarily South
Asia and Africa, to the extent of
about 5 million tons of sugar. This
development combined with the
logistical advantage enjoyed by
raw sugar vis--vis rened sugar,give India a distinct advantage in
meeting the demand for sugar in
South Asia.
Spiralling Oil Prices
The other aspect which is
significantly impacting on the
global sugar business is the
dwindling crude oil reserves
and consequent rise in crude oil
prices. In the recent past, crudeprices have even touched $ 100
per barrel. Prices of petrol,
as a result, have also been on
the up-trend and countries are
increasingly concerned about the
dis-proportionately high costs
of fuel. Alternative, renewable
sources of energy are being
aggressively explored and ethanol
produced out of sugarcane has beenfound to be one of the most viable
substitutes for petrol. Brazil, with
its large sugarcane crop acreage,
has wisely pushed for ex fuel
automobiles and about 50 % of
its sugarcane juice is now diverted
for ethanol production reducing
its dependence on imported crude
/ fuel. Sugar mills in Brazil
are building in flexibility to
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switch from sugar production to
ethanol production to optimize
realizations. The sugarcane
crop, thus, is an invaluable asset
for India, with its potential for
production of ethanol which can
be blended with petrol to reduce
the countrys dependence on highpriced oil imports.
Rise of BRIC nations
Spurred by large consumption
bases, un-tapped resources and
relatively lower costs, developing
countries like Brazil, Russia, India
and China (BRIC) are recording
significant growth rates in their
GDP which could lead to a shiftin the balance of global economic
power. The rapid increase in the
GDP is also expected to lead to
a substantial increase in demand
for sugar in these countries. The
potential for the Indian sugarcane
industry, therefore, is not just for
exports to South Asia but also for
domestic consumption itself.
Investment AvenuesInvestments in commodities
are the flavour of the day. The
next boom in value is expected to
be in the Commodities market and
globally, hedge funds and other
investors are shifting more of their
funds to the Commodities market.
The development of organized
futures trading mechanisms for
sugar are not only leading to a moreliquid futures market for hedgers
and speculators but also improving
price discovery and raising sugar
prices to new levels. Both the
Indian farmers and millers will
benet through this development.
THE PATH FORWARD
The Indian Sugar industry will
have a rosy future, if its potential
is fully developed and it is allowed
to bloom. It is one of those rare
industries whose products are likely
to have continued, sustained &
increasing demand into the future
whether they be sugar, power,
alcohol or other related chemicals.
More importantly, since they arebased upon a renewable source like
sugarcane, the industry is green
and will be increasingly valued in
the future. Earnings from Carbon
credits would be one of the more
immediate and visible forms of
value. Indias good fortune in
being climatically suitable for
cultivating sugarcane needs to be
exploited for maximum benet tothe country. The Government and
the industry need to address certain
aspects of the business to create
this future and enjoy the benets
thereof. The industry needs to be,
literally, given its space under the
sun ! World over, the industry is
rightly politically sensitive given
its impact on a countrys economy
as also the number of people it
impacts upon. In the past, however,the political arithmetic has led to
skewed policies of a short sighted
and micro level nature. These
policies have actually ended up
damaging the very interests of
the parties sought to be protected,
the farmers. The need is for the
government to adopt a visionary
approach to utilize this great
industry for maximizing value
for all stake holders, in the best
interests of the country.
1. Industry de-regulation:
The above analysis will clearly
bring out the fact that the industry
has to be freed from its shackles
to enable investment and pricing
decisions to be taken based
upon economic viability. The
government needs to restrict its
presence to the few areas which
cannot do without its intervention.
These include the need for a fairly
derived SMP for sugarcane to be
announced on an annual, all India
basis. As in other countries like
Brazil, the farmers return on cane
should ultimately be linked to the
market price for sugar rather than
the cost of production. For, a low
sugar price will lead to reduced
cane cultivation and consequent
shortage of sugar production /
market availability as also higher
sugar and cane prices. Similarly,
a high sugar price will lead to
increased cane cultivation, surplus
sugar production and a drop in
sugar / cane prices, reversing the
increase in cane cultivation.
These measures should be
done in tandem with freeing of
the industry from the release
mechanism and, hence, retail prices
of sugar. It should be remembered
that higher retail price ultimatelytranslate to higher returns for the
farmer. Thus, the Government
needs to make a paradigm shift to
achieve its objective of protecting
the farmer through a natural and
realistic market price for sugar
rather than through an articially
high cane price combined with
an articially low sugar market
price. It should realize that thebulk of the sugar is consumed not
by individuals but by institutions
which are in no way required to be
molly coddled. Even in the case of
the direct consumer of sugar, the
cost of sugar in his monthly food
bill is a negligible 1 per cent (as
brought out in the 2007 KPMG
report) and a higher sugar price
would yield much greater benets
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to the farming community. The
Madras School of Economics has
recommended that the weightage
of sugar in the WPI should be re-
assessed and rationalized based
upon current actual consumption
data.
2. De-risking the business:
Farmer and Miller
The farmer and the miller need
to work jointly towards increasing
vertical productivity of sugarcane
farms and restricting horizontal
growth; the outcome will be of
great value to both parties.
Both the miller as well as the
farmer can sail safely through
the cyclicality of the business
if an efficient futures trading /
hedging mechanism were available.
Brazilian millers hedge their
produce sometimes one year ahead
of the production
The miller can reduce his
dependence on sugar by converting
h i s p l an t s i n to i n t eg ra t ed
complexes comprising sugar,
power and alcohol manufacturing
units. The scope for making
other downstream fermentation
/ alcohol based products also
need to be examined by the
millers for optimal results. A
long term approach, with a decent
investment in R&D, would be
essential for the purpose.
Central and State Governments
As recommended by the KPMG
report, while the Government
needs to dismantle the elaborate
regulatory system built up over
the years, it can continue to keep
a watchful eye over the industry
to bail it out in the event of any
serious crisis, considering the
large number of farmers involved.
Its role would continue to be
crucial in helping maintain market
price equ ilibr ium at times of
large scale surpluses or during
serious shortages. The buffer stock
mechanism in the current or an
improved form should continue to
be a weapon in the arsenal of the
government for tiding over surplus
situations. Shortage situations
can be adequately handled by the
government by tweaking the import
duty structure appropriately. In
any case, such extreme situations
are less likely to happen, oncethe industry is freed from its
shackles and natural forces of
demand / supply are allowed to
freely operate. Hence, except for
exceptional situations, the industry
should be left to nd its own feet in
order to mature and bloom
Artificial restrictions on
manufacture, movement and sale
of by products like molasses andalcohol need to be eliminated to
help the industry recover market
driven value for its products.
The Government needs to
aggressively support the 10 %
ethanol blending programme
as also purchase of electricity
through cogeneration units and
facilitate the conversion of sugar
plants into integrated complexes.A critical step here would be that
of facilitating free movement of
ethanol between various states in
the country through measures like
that of including ethanol under the
Declared Goods list of the CST
Act. An efcient and well managed
Futures trading mechanism needs
to be put in place to facilitate
price discovery both for farmers
and millers both in the domestic
and global markets. It should
also have a stable, relatively long
term exim policy supportive of the
industry, which helps the industry
to establish its credibility in the
global market.
The government should
continue and sustain the initiatives
currently in place to encourage
R&D and investments in the
development of agricultural
technology / productivity as also
in the plants. Vertical growth in
productivity of land should be
targeted using technology for
optimal use of water. Populist but
counter productive incentives likefree power to farmers need to be
re-examined. Any farmer would
gladly relinquish free power for
assured quality power supply
combined with a better realization
on his sugarcane. The nation would
benefit too, through conserved
electricity. Similarly, it should
actively push for development of
integrated sugar complexes for
maximizing the value of the byproducts. It should also help the
millers improve their on stream
days through better capacity
utilization of their sugar, power
plants and distilleries to enhance
value for all stake holders.
Last, but not the least, it needs
to develop road / rail facilities as
also port infrastructure in order to
help potential exporters / importersto deal with customers / suppliers
overseas on the best of commercial
terms. It should be remembered
that India is situated at a vantage
point to meet the requirements of
sugar decit countries like Pakistan,
Bangladesh, Sri Lanka, etc.
(Email : ramababup@parry.
murugappa.com)
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UGAR INDUSTRY is the
second largest agro-based
industry in the country.
The Indian Sugar Industry
is a key driver of rural
development, supporting over
about 55 million sugarcane farmers,
their dependents and a large mass
of agricultural labourers involved in
sugarcane cultivation, harvesting,machine manufacturing etc. of
almost 607 sugar mills and ancillary
activities, constituting some 7.5%
of the rural population. Besides,
about 0.5 million skilled and semi-
skilled workers, mostly from the
rural areas are engaged in the sugar
industry.
As such, the sugar industry
has been a focal point for socio-economic development in the rural
areas by mobilizing rural resources,
generating employment and higher
income, besides giving a fillip
to transport and communication
facilities. The cooperative sector
sugar mills in Maharashtra have
been instrumental in bringing major
N Sanyal
R P Bhagria
S C Ray
socio-economic changes in rural
areas. A number of cooperative
sugar factories have also undertaken
welfare activities like opening
colleges, technical institutions,
dispensaries and hospitals etc. in
rural areas.
It is often said that sugar is
produced in the eld and extractedin the sugar factory. This is
absolutely correct. In fact, sugar
recovery mainly depends upon
following three factors for its
efciency :-
(i) Sucrose content in sugarcane
(ii) Cane supply arrangement and
(iii) Plant and machinery.
The sucrose content in sugarcaneis very important. However,
scientists have found that sucrose
rich varieties are more prone to attack
by pest and diseases. Therefore, the
farmers sometimes try to avoid
growing sucrose rich varieties.
The second factor, i.e., cane supply
arrangement is also important. The
The authors : N. Sanyal is Joint Secretary (Sugar); R.P. Bhagria is Chief Director (Sugar) and Dr. S.C. Ray is Director
(Sugar Technical), Ministry of Consumer Affairs, Food & Public Distribution.
ECONOMICS OF SUGARVIEW POINT
The entrepreneurs
who are
interested to
invest judiciously
in the sugar sector
should invariably
go for integrated
agro-complexes
Indian Sugar Industry
S
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cut cane must be crushed within
24 hours, otherwise, the sucrose
in cane starts getting converted
into fructose and glucose. Quality
of plant and machinery is equally
important. Whatsoever, sucrose rich
varieties may have come to a sugar
factory for crushing, if the plant andmachinery is outdated, it cannot
extract the full sucrose content from
sugarcane and recovery rate gets
affected adversely. On the other
hand, modern sugar plants have
been able to extract the sucrose
content from sugarcane almost
to the fullest extent. Hence the
importance of modernization of
plan t and machinery of sugarfactories in the country. We should
not forget that the loss in sugar
recovery is a national loss and we
must avoid it.
The problems of sugar industry
include, inter-alia, obsolete plant
and machinery and large numbers
of small sized plants. The High
Powered Committee on Sugar
Industry (Mahajan Committee) in itsreport submitted to the Government
in April 1998 mentioned that
practically half of the sugar
factories are more than 25 years
old. The physical condition of many
of these sugar factories is poor,
resulting in high down time and
loss of capacity. The other main
problem of the sugar industry is the
small size of many a sugar plant.Although it is difcult to indicate
the optimum size of a sugar plant as
the same depends upon a number of
factors which may vary from region
to region, the Central Government
in 1987 declared 2500 TCD as the
minimum economic size of a sugar
plant. A Technical Commit tee
accordingly prepared specications
of a sugar plant capable of crushing
2500 TCD with provisions for
expansion to 3500 TCD.
The trend is now to set up sugar
mills of higher capacity. The large
capacity plant size cuts the xed
cost per tonne of sugar produced,
thus reducing the cost of productionof sugar. The Mahajan Committee
quoted the study conducted by
the World Bank on Indian Sugar
Industry - Priorities for Reforms,
April 1997 which found that With
higher plant size, wages and other
overhead cost per tonne of sugar
get reduced substantially. It is, to
some extent offset bye increase in
cane transportation as mills have to
obtain cane from longer distance.
The lower average size of the
sugar mills thus tends to increase
the cost of production of sugar in
the country. The table gives the
size-wise number of sugar factories
in India.
It can be observed that as many
as 229 out of 607 sugar factories are
still below the minimum economicsize of 2500 TCD. Still only 23.39
% of sugar factories out of total
607 installed sugar factories have
crushing capacity more than 2500
TCD, thus leaving adequate scope
for modernization / expansion.
In Thailand and Brazil, some of
Indias competitors in the world
market, the sugar factories have
higher capacity plants. Therefore,
increasing the size of sugar factory
and replacing the old plant andmachinery of Indian sugar industry
offers a challenging task.
India produces plantation white
sugar predominantly. The sugar
manufacturing process comprises of
juice extraction, juice clarication,
evaporation and crystallization.
Modern and updated machineries
are required in every stage of the
process of sugar manufacture toensure improved overall technical
efficiency. Modernization is a
relative term. In the early forties
replacement of steam-driven
duplex pump by electric ones was
considered modernization. Now-a-
days the situation has completely
changed. In the true sense of the
term, modernization now would
mean replacement of steam turbinewith variable speed DC drives
for fuel saving and operational
exibility and control, application
of hydraulic drives in milling
Size Range Number of %
Sugar Mills
Below 1250 TCD 63 10.38
1250 TCD 87 14.33
Above 1250 TCD but below 2500 TCD 79 13.01
2500 TCD 236 38.89
Above 2500 TCD but below 5000 TCD 53 8.73
5000 TCD 31 5.10
Above 5000 TCD but below 10000 TCD 50 8.24
10000 TCD and above 8 1.32
Total 607
Source: Directorate of Sugar, Department of Food and Public Distribution
(As on 30.11.2007)
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tandem, modern cane preparatory
devices, automatic cane feeding
systems, self-setting mills, lotus roll
and trash plate with perforated holes
to reduce re-absorption of juice
and to reduce moisture percentage
in bagasse as also to increase mill
extraction substantially. Applicationof high pressure boilers with multi-
fuel, mix burning fluidized bed
furnace and matching condensing
type turbine, installation of latest
technology of bagasse drying system,
etc. have increased possibility of
surplus power generation with less
steam consumption for per unit
power production. Application of
microprocessor based automaticjuice flow stabilization with
automatic pH control system,
clarification of juice by ion
exchange resins, installation of
dynamic juice heater, plate type
heat exchanger in claried juice
heating, short retention clarier,
vapour recompression system,
rising and falling lm evaporator,
etc. have tremendously increasedthe possibility of conservation of
energy.
Installation of Talodura process
for thick syrup clarication which
involves use of phosphate solution
and poly Acrylamide and Flocculant
of colloids helps for better removal of
colouring matters and other impurities
from syrup to get low ICUMSA sugar,
is considered superior technology.Application of continuous pan,
automatic pan control instruments,
vertical continuous crystallizers and
high speed continuous centrifugals
has opened up a new dimension for
the sugar industry to conserve energy
on the one hand and to maintain
quality of product comparable to
international standard on the other
hand.
The Indian Sugar Industry has
not made significant attempt
to use diffusers for extracting
juice from sugarcane bagasse
through the process of diffusion.
It has been observed that bagasse
diffusion or cane diffusion offers
good potential of higher juiceextraction and lower energy costs
for extraction of juice. The diffusers
have reportedly found a very
successful application in the South
African Sugar Industry and their
performance has been comparable
or even superior to the performance
achieved by the Australian Sugar
Industry. The Indian Sugar
Machinery Manufacturers shouldalso explore the possibility of
adoption of such technology to
achieve higher extraction. In India
only a few factories have adopted
such technology and Tanuku sugar
factory in Andhra Pradesh is one
of them.
Notwithstanding signicant
technological development
that has taken place in ourcountry, a lot of scope still exists
in modernizing the process and
equipment design. Some of these
can be in indicative areas like:
(i) Direct determination of pol in
cane: This is one of the most
important aspects from the
viewpoint of assessment of
cane quality and efficiency.
Near infra red measurement
technique needs to be developed
for online estimation of sugar in
cane and other house products
for correct assessment of plant
performance.
(ii) Possibility should be explored
to develop suitable membrane
technology for concentration
of juice by reverse osmosis
process which in turn would
open up new direction for energy
conservation.
Besides, a number of new
designs, innovations and systems
are already being implemented and
tried in some of the existing and newsugar units and the transfer of these
to other factories would enhance
the overall efciency of the Indian
Sugar industry signicantly.
The Central Government
has been alive to this problem
of sugar industry and created
a Sugar Development Fund
(SDF) . The two impor tan t
Acts viz Sugar DevelopmentFund Act, 1982 and Sugar Cess
Act,1982 were enacted. The
Sugar Development Fund Act,
1982 was enacted to provide
for funding of activities for
development of sugar industry and
for matters connected therewith.
The Act authorizes the Central
Government to apply funds for
making loans for facilitating therehabilitation and modernization
of sugar factory. The Sugar
Cess Act, 1982 authorized the
Central Government to levy
cess for the purpose of the Sugar
Development Fund Act, 1982, by
imposition of a duty of excise on
all sugar produced by any sugar
factory in India at such rate not
exceeding Rs. 15/- per quintalof sugar. The rate of cess till
recently was Rs. 14/- per quintal.
Now it has been increased to Rs.
15/- per quintal.
The Sugar Development
Fund Rules, 1983 were framed
prescribing rules for uti lization
of SDF. The loans advanced for
modernization / rehabilitation of
sugar factories till 31.10.2007
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are Rs. 1497.93 crores. Further,
the Central Government has also
set up Sugar Technology Mission
(STM) in 1993 to assist the sugar
industry in preparing scheme
for technology upgradation and
trials of new efcient technology.
Despite the efforts of the Central
Government, many sugar factories,
especially in the cooperative
sector, have not come forward
for modernization/ upgradation of
their plant and machinery. Often,
they cite lack of cane availability
as a limiting factor. However, I am
of the view that a separate study
may be conducted to determine
as to why sugar factories continue
to live with small sized sugar
plant and are not coming forward
to seek assistance from SDF.
The All-India recovery has been
hovering around 10.30 % for
the last 15 years. Among states,
Maharashtra is achieving highest
sugar recovery of over 11.5%
while Bihar depicts the lowest
recovery of around 9%. Sugar
recovery has remained stagnant
during all these years. The better
sugar recovery in Maharashtra
is partly due to harvesting and
transportation of sugarcane by
the mills which ensures supply of
fresh cane to mills. As an opposite,
the cane growers in U.P and other
North Indian States cut the cane
themselves and wait for their turn
to deliver cane at factory gate or
purchase centre, often for more
than a day.
The Bhargava Commission
in their report in 1974 while
suggesting norms of technical
efficiency for sugar industry,
had suggested total loss of sugar
percentage of cane being restricted
between 2.3 to 2.7 with the
following break up:
(i) Sugar loss in
Bagasse 0.9 to 1.1
(ii) Sugar loss in
press matter 0.1
(iii) Sugar loss in
molasses 1.2 to 1.4
(iv) Unknown losses 0.1
Total 2.3 to 2.7
However, the Government of
India technical norms as set out
in 1988 prescribe total sugar loss
percentage of cane at a maximum
of 2.2% for sugar factory set up
prior to 1972 and 2% for newsugar factories. I understand
that many sugar factories in
India have been able to reduce
sugar losses to even less than
2% with the use of modern plant
and machinery.
S
ugarcane is considered to
be one of the most energy-
efcient crops for conversion
of solar energy into biomass.
Expert findings reveal that the
input-output ratio is highest for
sugarcane in India i.e., 5.6 times
as compared to 1.2 to 1.8 times for
other crops like wheat, rice, etc.
and sugarcane yields maximum
quantity of biomass in the form
of bagasse, leaves, etc. At present
there is potential of producing about
5086 MW power and hardly about
847 MW is being produced. Since
fossil fuel reserves are depleting
very fast, the renewable resource
of biomass energy would play
a key role in future. Ministry of
Non-Conventional and Renewable
Energy is preparing a comprehensive
plan under which 10 per cent of the
total additional power shall be
from the renewable sector by 2021.
Hence the importance of biomass
energy is signicant. Earlier soft
loans from SDF were available
at concessional rate of interest for
captive cogeneration of electricity
only. Keeping the prospectand potential of co-generation
of electricity from bagasse, the
Government has amended the
Sugar Development Fund Act.
Now, the amended statute enables
the Government to give loans to
sugar factories at concessional rate
of interest for undertaking bagasse
based co-generat ion of powerfor export and for production of
anhydrous alcohol or ethanol from
alcohol/molasses.
The State Governments should
take pragmatic view in regard to
feeding the power produced by the
sugar factories to the state grids.
This will not only enhance the
nancial viability of sugar factoriesbut it would also enhance the cane
price paying capacity of the factory
which would ultimately benefit
the farmers. At present due to
installation of high pressure boilers,
project costs have gone up in case
of bagasse based cogen projects.
Accordingly, SDF loan amount
has also been increased from 30%to 40%.
Another area of concern
which significantly impacts the
viability of the Indian Sugar
Industry is the high cost of
cane. A contributory factor for
this is the low sugarcane fields
in India and re la t ively low
overall recovery rates. These
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inhibiting factors combine to
make the per hectare output of
sugar in India much below than
obtaining in other developing
countries like Brazil which is
one of our main competitor in
sugarcane production. Speciallywith the dismantling of tariff
protection and restrictive trade
practices, there is tremendous
scope for India to emerge as a
significant player in the world
sugar trade which so far it has
eschewed. But the sine qua non
for this is that both agricultural
efficiency (per hectare output
of sugar and cost of production)
as well as conversion efficiency
(milling and overheads) needs
significant improvement. If
we can make a fair degree of
progress on both these counts,
India will surely become a major
exporter which will stabilize
the industry and reduce i ts
cyclicality significantly, as wellas open up new vistas of growth
for the Indian sugar industry.
This is the most opportune
time to explore the possibility
of establishing multi-product
i n t e g r a t e d l a r g e a g r o -
complexes . Mode rn i za t i on
alone of a bare 2500 TCD and
even, to say, a sugar plant
o f 5000 TCD may no t be
helpful in bearing the shock
when sugar prices fall due to
surplus production. Hence,
the en t repreneurs who a re
interested to invest judiciously
in the sugar sec tor shouldinvariably go for integrated
agro-complexes in order to
sustain technical and economic
viability of their plant s. Apart
from enhancing the viability
of their projects, this would
a lso s t rengthen the energy
security of the country.
(Email: [email protected])
An MLA rides a bullock cart loaded with sugarcane to attend the Bihar Assembly session in Patna. He wasdemonstrating against the conditions of sugarcane farmers and sugar mill.
WHAT A SIGHT!
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OTTON AND sugar
cane are two agricultural
commodities that provide
raw material for major
industries. In cotton
textiles, consumer tastes and quality
play a very important role. That is,
consequently, a highly competitive
industry. On the other hand, the
sugar market in India has knownonly a certain standard varieties
and there is little by way of market
research or consumer promotion that
is required. That is the reason why
cooperation has generally failed
badly in textiles except in ginning
and spinning. On the other hand,
sugar factories are the favourite
eld of the cooperative barons and
capitalists past their peak as also ofthe politicians. That is probably the
reason why the sugar industry is so
closely regulated and controlled by
the government.
India is supposed to be the home
of sugarcane and sugar. Indians
knew the art of making sugar since
at least the fourth century. The
Sharad Joshi
advent of the modern sugar industry
in India dates back only to mid-
1930s when a few vacuum pan units
were established in the sub-tropical
states of Uttar Pradesh and Bihar.
Until the mid-1950s, the sugar
industry was almost wholly conned
to these states. It was only after late
1950s/early 60s that the industrydispersed into southern, western
and other parts of northern India.
India is the largest consumer and
the second largest producer of sugar
in the world.
Over 50 million farmers and
their dependants as also a large
number of agricultural labourers
are involved in sugar cultivation,
harvesting and ancillary activities.
Even at the height of the
pre-1991 licence-permit-quota-
Inspector Raj, no sector or industry
was more closely regulated than
the sugar industry. Since the
beginning of the planning era,
sugar industry operated under
the policy of partial control in
The author is Founder, Shetkari Sanghatana and Member of Parliament (Rajya Sabha).
ECONOMICS OF SUGAROPINION
Governmentis keener on
stability of pricesfor consumers
rather thanpayment of
reasonable pricesfor cane growers
Sugar : Issues
C
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1950-51 and 1951-52 followed
by six years of decontrol between
1952-53 and 1957-58. This policy
was followed under the pragmatic
leadership of the then Minister of
Food, Shri Ra Ahmed Kidwai.
However, with the departure of
Shri Kidwai, his vision of theregime of decontrol was lost.
After alternating between control
and de-control the government
finally adopted in 1967-68 the
policy of partial decontrol, which
has since, been the mainstay of
governmental policy except for
two short periods of decontrol in
the 1970s. Under this policy, the
government procures, ostensiblyfor supplies through the Public
Distribution System (PDS), a
certain percentage of production of
sugar at levy price xed by itself
and the balance is allowed to be
sold by the mills in the free market
subject to the monthly release
mechanism. The levy quota for
sugar mills has been brought down
from the peak levels of 70% in1968-69 to the present levels of 10
per cent through a gradual process
of deregulation.
The number of operating sugar
mills in the country has increased
from 29 in 1930-31 to 412 by
1996-97 and a little above 475 in
2007-2008. Some 95 factories are
non-operational.
The extent of control over
the industry has been very
comprehensive and inhibitive. It
is the Central government that
decides where and when a sugar
factory can be opened. It decides
what technology the sugar factory
will deploy, what kind of packaging
material it will use for bagging the
sugar and at what prices the bags
can be purchased, what wages it
will pay to the factory workers
as also to the labour employed
for harvesting and transport. It
decides, again, the percentage of
total sugar production that the
factories will deliver as levy sugar
and at what price for the PublicDistribution System, the Statutory
Minimum Price to be paid to the
cane growers, the freesale quota
and the monthly releases thereof,
what quantity could be imported/
exported and at what price and
at what tariffs . In fact, it may
be said that there was hardly any
decision that a management of the
sugar factory, whether cooperativeor private could take without
some kind of intervention by the
government.
In the case of the cooperative
mi l l s the governmenta l
control is even closer. The
government decides on their
credit and expansion plans as also
diversication into byproducts. The
cooperative factories have growninto stereotypes that follow the
Open Pan technology and produce
only standard varieties of sugar
with little attention to byproducts.
This is quite contrary to the general
pattern in main producer countries
of the world under which, sugar
invariably was the byproduct and
the derivatives the main revenue
earners. The government ruleswere clearly inuenced by political
considerations and urban consumer
interests. For example, it was
ordained that the delivery of sugar
cane by the members of the
cooperative factory will be treated
as a transaction of sale and purchase
and, consequently, subject to a
hefty purchase tax. The licenses
for factories were doled out for
political considerations. The Levy
prices were fixed to favour the
northern states.
The controls on the sugar
industry have caused more harm
than benets. Imposed under the
Essential Commodities Act 1955sugar has always been subjected
to various controls as per the
provisions of the Act and Rules
here under, the Sugar (Control)
Order 1966; Sugarcane (Control)
Order in 1966; Levy Sugar Supplies
Order, 1979, Sugar Packing and
Marketing Order, 1977, Sugar
Cess Act 1982 etc. Most of these
controls have outlived their utilityif they ever had any. The Now
off-now on sugar export policy
has prevented the development
of a stable and dependable export
market.
From the year 1971 to 2007,
the Statutory Minimum Price was
revised 26 times and the basic
percentage was revised from9.4% to 8.5% in 1972-73 and
then to 9% in 2005-2006. The
levy percentage was reduced
from 70% to 10% in ten steps
from 1972. The Government
made scores of decisions affecting
the control regime in the sugar,
shifting between total control,
involuntary partial control, and
partial control and to completecontrol some 9 times.
The private sector sugar factories
have generally been in favour of
scrapping the levy sugar system
while the dominant school in the
cooporative sector clamours for the
continuation thereof.
The Statutory Minimum Price
(SMP) and its derivative the levy
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prices, for the sugar were based
on a different concept than the
Minimum Support Price (MSP)
for other agricultural produce.
The minimum support price was
based on the cost of cultivation
and certain other social economic
considerations relating to theeconomy as a whole. The Statutory
Minimum Price for the sugarcane/
Levy price for the sugar follow,
even though not expressly so
mentioned, a policy of equalization
of income per acre of sugarcane
amongst different states with
different levels of yield and sugar
recovery. The consequence has
been that the levy price for northernstates where the sugar yield and
recovery are poor, were much
higher than those in the southern
states where the sugar recovery
is much higher and the quality of
sugarcane much better. The sugar
recovery in the southern states is
generally above 10% while that in
the Northern region is generally
less than 10%. The duration ofthe crushing period also varies
from a minimum of 63 days in
West Bengal to a maximum of 160
days in South Gujarat in the year
2005-2006. For the same year the
sugarcane yield per hectare varied
from 42.6 tonnes in Bihar to a 110
tonnes in Rajasthan. Consequently,
the Levy prices varied in the year
2002-2003 from Rs. 1208 pmt in
Gujarat to Rs. 1327 pmt in Uttar
Pradesh. In the year 2005-2006, it
varied from Rs. 1222 in Gujarat to
Rs. 1409 in north Bihar.
The sugar pol icy of the
G o v e r n m e n t o f I n d i a i s
clearly influenced by political
considerations. On the one hand,
the ruling parties have tried to keep
the control of the cooperative sector
Table 1
Cost of Cultivation of Sugarcane per Acre
(2006-07)
Sr. No. Item Cost in Rs.
1 Casual Labour 5,775.00
2 Permanant Labour 5,000.00
3 Domestic Labour 8,728.004 Bullock Labour 1,000.00
5 Machine Labour 3,600.00
6 Seed 3,960.00
7 Chemical fertilisers 5,407.00
8 Manure 2.000.00
9 Insecticides 1,220.00
10 Irrigation charges 4,350.00
11 Interest on Current capital ---- ----
12 Rent of Land 15,000.00
13 Education Cess 110.00
14 Depreciation of plough etc. 252.00
15 Interest on xed capital 5,640.00
Total Cost of Cultivation per acre 62,042.00
16 Per Acre production 35 tonnes
17 Cost of production 1,722.62/tonne
18 Cost of Harvesting and Transporting 200.00/tonne
19 Prot 10% 177.00
20 Expected Rate 2,149.62/tonne
in sugar industry where the cane
prices have remained generally
lower than the statutory minimum
price. In the Northern region, in
the absence of the cooporative
movement, it has taken direct
control of a large number of sugar
factories and introduced the concept
of State Administered Prices (SAP),
which are much higher than thestatutory minimum price and are
paid through the budgets of the
state governments. The government
is keener on ensuring the stability
of prices for the consumers rather
than payment of reasonable prices
for the cane growers.
The crunch between the prices
of sugar and the prices of sugar
cane reects itself in the shape of
low prices - often lower than the
statutory minimum price, in the
southern states and, particularly,
in the cooperative sector. On the
other hand, in the northern states
it reects itself in the form of huge
backlog of payment to farmers.
The prices that the cane growersget for their produce have to be
viewed from three angles. Under
any circumstances, the farmers
expect and should get a price that
will cover the comprehensive
cost of production. The statutory
minimum price fixed by the
Central government is very
often much less than the cost
of production calculated by the
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Table 3
Sugar and Byproducts produced from 1 tonne of Sugarcane
Recovery Production in (Kg) of
percentage
Sugar Molasses Pressed Surplus
mud Bagasse
10 100 40 50 60
11 110 40 50 60
12 120 40 50 60
13 130 40 50 60
Table 2
Factories with sugar recovery of (%) Statutory Minimum Price Payable
(Rs. / Tonne)
10 811 + 93 - 180 = 728
11 811 + 2 (93) - 180 = 821
12 811 + 3 (93) - 180 = 914
13 811 + 4 (93) - 180 =1007
Table 4
Revenue obtained from product and byproducts by sugar factories from 1 tonne of sugarcane crushed
Recovery percentage Factorys revenue in Rs. Less extraction
cost Rs. 400
Sugar Molasses Pressed Surplus Total
@ Rs. @ Rs. mud Bagasse Revenue
12,000 1,500 @ Rs. @ Rs.
pmt pmt 100 pmt 800 pmt10 1200.00 60.00 5.00 48.00 1313.00 913.00
11 1320.00 60.00 5.00 48.00 1433.00 1033.00
12 1440.00 60.00 5.00 48.00 1553.00 1153.00
13 1560.00 60.00 5.00 48.00 1673.00 1273.00
Agricultural Price Committees of
different states. It is imperative
to calculate the cost of cultivation
of sugar cane in a typical nodal
farm. The averaging methodused by the Central governments
CACP often results in very
ridiculous computations. Table
1 gives the details of cost of
cultivation of sugar cane in
any typical holding in southern
Maharashtra.
Secondly, it is useful to see
what would be the Statutory
Minimum Price payable in case
of factories with varying levels
of sugar recovery. Table 2 gives
the statutory minimum prices
payable in a Maharashtra- like
situation where the harvesting andtransportation is ensured by the
factories.
The final question is - can a
reasonably efcient factory afford to
pay at least the statutory minimum
pr ice to safeguard the cost of
cultivation?
The Tables 3 and 4 gives
the quantity of various products
and by-products produced from
1 tonne of sugar cane and the
incomes obtained from there. It
is quite clear that there should be
no difficulty for a new factoryto pay the farmers the statutory
minimum prices prescribed by the
Central government. The protest of
both the sugar barons in the South
about inability to pay the statutory
minimum price and that of the mill
owners in the North who amass
huge backlogs have no justication
whatsoever.
(Email: [email protected])
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The Central Government
constituted an expert group
headed by Prof. Radhakrishna
has focussed on the present state of
agricultural indebtedness in the
country in its totality.
The recommendations are
highly relevant given the enormous
interest the subject has evoked and
its seemingly intractable nature.
agrarian crisis - in the making for
at least two decades and brought
about by the neglect of agriculture
in the planning process - the
expert group has analysed theproblems in their entirety. There is
an agricultural crisis, characterised
by low growth and declining
productivity, as well as an agrarian
crisis, marked by persistently high
agriculture, increasing production
and marketing risks, collapse of
the extension system and a growing
institutional vacuum, and lack of
livelihood opportunities are foundto be the primary causes.
Some of its other interesting
ndings are :
l average household borrowings
Highlights of Report
Agricultural indebtedness is
not the root cause of the crisis but
only a symptom and hence needs
to be dealt in its totality.
Though immediate credit
and non-credit relief measures
addressing the farming community
are essential, the design and delivery
system should be strengthened.
Rescheduling of loans and
relieving of interst burden upto
two years in the case of farmersaffected by natural calamities,
drought conditions in rainfed
areas and farmers in distress due
to production crisis resulting from
a multitude of risks are essential
one time measures.
In many parts of the country
farmers are burdened with high
proportion of indebtedness to high
interest bearing informal sources
like moneylenders.
The expert group recommends
the initiation of the process in the
distressed districts by creating
Moneylenders Debt Redemption
Fund.
Recommends institutional
nancial inclusion of the farming
community on a mission mode.
One of the key recommendations
of the expert group is improvement
of the rural nancial architecture
that would improve timely and
adequate delivery of credit to
farmers by reducing transaction
costs and improving the credit
absorbtive capacity.
A major recommendation of
the group is improved deployment
o f R u r a l I n f r a s t r u c t u r e
Development Fund (RIDF).
The Expert Group recommends
that based on the model of self
held group (SHG) federations
of poor in Andhra Pradesh, the
state governments should make
efforts to facilitate the formation
of federations of SHGs for
farmers, especially for small andmarginal.
Expenditure on health is one of
the sources of farmers distress and
the group recommends farmers
health insurance scheme on the
lines of the one implemented in
states like Karnataka.
Rural indebtedness
In his Independence Dayspeech this year, Prime Minister
Manmohan Singh had reiterated
his governments commitment to
an agriculture. He had announced
a special programme for the
sector, entailing an investment of
Rs.25000 crore, to be launched
shortly.
Against the backdrop of the
dependence of the population onagriculture.
On the most obvious and tragic
manifestation of the crisis - the
large number of suicides by farmers
in different parts of the country -
the expert group has come to the
conclusion that the root cause is not
indebtedness alone and that suicides
are only a symptom. Stagnation in
by themselves have not beenexcessive.
l In fact , in the wake of
m o d e r n i s a t i o n a n d
expansion, the credit needs
of agriculture have expanded
enormously.
l T h e d e f i c i e n c i e s i n
agricul tural credi t - on
account of banks not meeting
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their targets, poor performance of co-
operatives and regional rural banks - have
been well documented.
l In the long term interests of the nancial system, a
positive repayment culture for bank loans should
be encouraged. Those who repay promptly must
be rewarded.
Suggested measures
Immediate remedial measures recommended by
the expert group include :
l better monitoring and implementation of the
existing package of relief measures covering 31
distress affected districts;
l
rescheduling of loans and waiver of interestburden up to two years as well as grant of fresh
loans to farmers affected by natural calamities.
The Centre and the States should share the burden
equally.
l a one time
re l ie f to
f a r m e r s
who a r e
p a y i n gexorbitant
interest to
money lenders should be provided by banks
through long-term loans. A special fund, to be
called the Money Lenders Debt Redemption Fund
with a corpus of Rs. 100 crore to operationalise
the scheme must be created.
Finally, the committee nds that more than one
half of the farm households do not borrow eitherfrom institutional or non-institutional sources.
Institutional agencies should be placed on a
mission mode to extend coverage. The group has
made some valuable suggestions to improve credit
delivery in rural areas and enhance the quality of
nancial architecture.
(From the Report of the Expert Group on
Agricultural Indebtedness)
It is declining earnings that
result in the inability to repay
debt that triggers farmers
decision to commit suicide
hence indebtedness of farmers
becomes a key issue.
YE-4/08/5
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ITH INVOLVEMENT
of large human factor
in the sugar sector,
on the one hand, 50
million sugarcane
farmers and on the other teeming
million of sugar consumers,
economics and politics have co-
existed over the long history of the
Indian sugar sector.
Evidently, all important policy
measures weaved by the Indian
Government governing the sugar
sector evolve around the aforesaid
consideration. The interest of
sugarcane farmers is protected by
a statutory minimum price payable
to the sugarcane farmers notied
by the Government of India based
on farmers-centric considerations.
On top of this,
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