7 PM | Managing India’s sugar surplus | 30 March, 2019

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Context

Australia and Brazil dragged India to the WTO for its market-distorting policies on sugar.

Their contention was that the subsidies given by India to their sugarcane farmers far exceeded the norms set by the WTO resulting in higher sugar production/exports which dampen the international prices and, consequently, hurt their domestic producers.

Fast facts

  • India is the second largest producer of sugar in the world after Brazil and is also the largest consumer.
  • Sugarcane is grown as a Kharif Crop. It needs hot and humid climate with an average temperature of 21°C to 27°C and rainfall in the range of 75-150 cm
  • Sugarcane can grow in any soil which can retain moisture. Ideal soil for sugarcane is rich loamy soil.
  • The sugar economy is a highly controlled one. There is a Fair and Remunerative Price (FRP) for sugarcane fixed by the Central Government and State advised prices (SAP) fixed by each State over and above the FRP.
  • India’s exports at 4.64 lakh tonnes last year is a minuscule part of the global trade estimated at 450 lakh tonnes

Reason for sugar surplus

In 2018-19, the sugar industry is expected to have a surplus that will be as high as 48 per cent of the country’s annual consumption. Due to vote bank politics successive government announced high sugarcane prices. sugarcane fetches 60 per cent higher returns than any other competing crop. This assurance of price led farmers to prefer sugarcane even if they periodically face significant delay in receiving payment.

Other Impact of high sugarcane price

  • On market: Due to high cane price the cost of production in India is way above the international sugar prices. Indian mills pay ₹2,890 per tonne of cane compared with ₹1,732 in Brazil, ₹1,739 in Australia and ₹1,842 in Thailand.
  • On export: Very high cost of sugarcane pushes up the costs of sugar which makes it unfeasible in International market. In 2017-18, the production cost was ₹3,580 per quintal of sugar while the international prices averaged ₹2,080.
  • On mill owners: Farmers grow sugarcane and sell it to the sugar mills. Since the price of sugar cane does not reflect the market price of sugar there is a price mismatch and the mill owners are not able to pay the farmers when the market price of sugar is low. This led to accumulation of arrears and affects cash flows of the mill.
  • On Farmers: Due to price mismatch mill owners usually not able to pay the price on time.
  • On government: High price support put extra burden on exchequer. Also, government has to face allegation in WTO as countries like Brazil and Australia accused India that it followed market distortion policies which is against WTO principle.
  • On other crops: Sugarcane fetches 60 per cent higher returns than any other competing crop. This led farmers to prefer sugarcane over another crop
  • On environment: Preference of sugarcane led to monoculture of sugarcane. Lack of crop rotation in some areas, leads to depletion of nutrients in soil and adversely affect environment. 
Other problem faced by sugarcane farmers
• Low yield per hectare: The average rate of sugar recovery from the sugar cane is less than other sugar producing areas like Java, Brazil and Australia.
• Monoculture of sugarcane: lack of crop rotation in some areas, leads to depletion of nutrients in soil and adversely affect cane productivity.
• Water availability: Irregularity in availability of water for irrigation especially in north India, adversely affecting the sucrose content in the crop.
• Perishable nature of crop: Post harvest deterioration in cane quality on account of staling and delayed crushing contributes to low sugar recovery.

 

Steps taken by government

  1. Export subsidy: Government provides export subsidy to sugar but it covers only part of the total cost
  2. Ethanol Blending Program: Government announced ethanol blending program to divert surplus sugarcane for production of ethanol.
  3. Allow use of sugarcane juice in manufacturing of Ethanol: Government now allowed sugar mill to produce ethanol through sugarcane juice and also announced a premium price for the ethanol so produced. 
Typically, ethanol is manufactured from molasses, which is a by-product of sugar. But it can also be manufactured directly from sugarcane juice. Earlier the government did not permit large scale conversion directly to ethanol as that would have hurt sugar production.
In 2018-19, Brazil converted 65 per cent of its cane into ethanol directly. This helped it to keep sugar production at the required level and also reduce significantly its oil import bill at a time when crude oil prices rose sharply.

 

Steps to be taken

  1. Link the sugarcane price to output price: Today, cane price keeps increasing irrespective of the price of sugar. The government should come up with a formula that arrives at the cane price after factoring the value of the output (including price of sugar, ethanol and power generated from bagasse).
  2. Reduce cost of production: Government should popularize innovative methods like Sustainable Sugarcane Initiative (SSI) which uses less seeds, less water and optimum utilization of fertilizers and land for sugarcane production.
  3. Focus more on Ethanol blending program: The government should focus more on Ethanol blending program and try to harness its full potential. As per the estimates given in Auto Fuel Vision and Policy 2025 issued in May 2014, blended petrol is available only in 13 states and the average blend is 2%.

Conclusion

According to the India Sugar Mills Association, India is set to produce 35.5 million tonnes of sugar between October 2018 and September 2019 but the demand is only at 25 million tonnes. Efficient management of surplus sugarcane would benefit everyone including farmers, mill owners and government.


Source: https://www.thehindubusinessline.com/opinion/managing-indias-sugar-surplus/article26665972.ece

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