Credit rating and research agencies India Ratings and Research (Ind-Ra) and CRISIL Limited (Crisil) have expressed doubts over the long-term impact of the sugar sector bailout package announced by the Central Government. While Ind-Ra says that the oversupply situation would continue to plague the industry in the current (October 2017-September 2018) and next sugar season (October 2018-September 2019), Crisil states that the package will be enough to clear only 40 per cent of the Rs 22,000 crore cane price arrears sugar mills owe to sugar cane farmers.
The Indian sugar industry has been grappling with falling prices, amid a supply glut, that eroded profit margins and liquidity of sugar mills, and resulted in mounting cane dues.
Ind-Ra quotes the data released by Indian Sugar Mills Association (ISMA) on 11 May 2018, to suggest that sugar production for sugar season (SS) 2017-18 crossed 31 million tonnes at end-April 2018 with the two largest producers, Uttar Pradesh and Maharashtra constituting 11.2 million tonnes and 10.7 million tonnes, respectively.
“With around 130 sugar mills (mostly in Uttar Pradesh) crushing sugarcane as of end-April 2018, the total production for SS2017-18 would increase further to 31.5 million-32 million tonnes, against an estimated demand of around 25 million tonnes, translating into a closing stock of 10.5 million-11 million tonnes (including stock of 4 million tonnes from SS2016-17). However, the normative carry forward requirement for SS2018-19 is only 4 million-4.5 million tonnes, leaving the country with an excess of around 6.5 million tonnes. Successful execution of export quota of 2 million tonnes and buffer stock will reduce this excess to 1.5 million-2 million,” it notes.
The problem, though is continued low international sugar price, which has dampened exports of sugar under the government’s Minimum Indicative Export Quota Scheme, despite an additional subsidy of Rs. 5.5/quintal of cane crushed, Ind-Ra says.
CRISIL observes that the bailout package, though well intended, does nothing to address the structural issues that have plagued the industry, the most acute being non-linkage of sugarcane prices to end-product realisations.
“Creating a buffer stock and fixing a minimum ex-factory price for sugar will help improve the cash flows of corporate mills to the extent of Rs 3500-4000 crores or Rs 9100 crores for the industry over the next one year, which would only account for 40 per cent of the current cane arrears. Worryingly, with the supply surplus situation anticipated to continue in SS 2019 as well, a further build up in arrears cannot be ruled out. The offer of financial support to mills for setting up distillery capacity is unlikely to find many takers, given the financial situation of the industry,” a CRISIL research report notes.
Of the proposed measures, CRISIL estimates the immediate impact of the bailout package to be limited to the first two measures, totalling only Rs 1,175 crore. The remaining amount, comprising Rs 4,440 crore of loans and Rs 1,332 crore of interest subvention to upgrade or set up distillery capacity, would help in diversion of sugar during the surplus phase (diversion will be allowed from B molasses instead of C molasses, allowing more molasses to be produced, as per industry interactions), it says.