Indian Sugar Industry

Economic Affairs Industrial sectors

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India is the world’s largest producer of sugarcane and second largest producer of sugar after Cuba. The sugar industry contributes significantly to socio-economic development of the rural population.This industry remains highly regulated and is a source of livelihood for 50 million farmers and their families; and provides direct employment to over 5 lakh skilled and semi-skilled labour in sugar mills and allied industries across the country. The annual turnover of the industry is estimated at Rs.41,000 crore and it pays about Rs.2,500 crore per annum to the government in the form of taxes.

Evolution of sugar industry in India:

India has a long tradition of manufacturing sugar. References of sugar making by the Indians are found even in the Atharva Veda.
India is rightly called the homeland of sugar. But in ancient times, only gur and khandsari were made and modem sugar industry came on the Indian scene only in the middle of the 19th century, when it was introduced by the Dutch in North Bihar in about 1840.Unfortunately, this attempt could not succeed.
The first successful attempt was made by the indigo planters at the initiative of Britishers in 1903 when Vacuum pan mills were started at Pursa, Pratabpur, Barachakia and Marhowrah and Rose in north-eastern U.P. and the adjoining Bihar.
This happened when demand for indigo ceased to exist due to the introduction of synthetic blue in the market. Till 1936- 37, its production increased upto 9.19 lakh tones.
The industry passed through an uncertain phase during and after the World War II and some stability was experienced only after 1950-51. There were 139 mills producing 11.34 lakh tonnes of sugar in 1950-51. After that, the plan period started and the industry made rapid strides. In the year 1994-95, there were 420 mills producing 148 lakh tonnes of sugar.
In, 2015-16 Sugar production is estimated to be around 26 million tonnes (mt), about two mt less than last year and below earlier projections. Consumption in 2015-16 is estimated to be 25 mt, which also means that overall surplus this year could be around one mt, much less than expected. Maharashtra, the country's leading sugar producing state, has projected sugar output to decline to 8.6 mt in the 2015-16 marketing year, compared with 10.51 mt last year

Difference between the Sugar Industry of Northern and Peninsular India:

Previously north India used to produce about 90 per cent of India’s sugar which is reduced to 35-40 per cent now.
Peninsular India has tropical climate which gives higher yield per unit area as compared to north India.
The sucrose content is also higher in tropical variety of sugarcane in the south.
The crushing season is also much longer in the south than in the north. For example, crushing season is of nearly four months only in the north from November to February, whereas it is of nearly 7-8 months in the south where it starts in October and continues till May and June.
The co-operative sugar mills are better managed in the south than in the north.
Most of the mills in the south are new which are equipped with modern machinery.

Problems of Sugar Industry:

Low Yield of Sugarcane: Although India has the largest area under sugarcane cultivation, the yield per hectare is extremely low as compared to some of the major sugarcane producing countries of the world. This leads to low overall production and results in short supply of sugarcane to sugar mills.
Short crushing season: Manufacturing of sugar is a seasonal phenomena with a short crushing season varying normally from 4 to 7 months in a year. The mills and its workers remain idle during the remaining period of the year, thus creating financial problems for the industry as a whole.
Fluctuating Production Trends: Sugarcane has to compete with several other food and cash crops like cotton, oil seeds, rice, etc. Consequently, the land available to sugarcane cultivation is not the same and the total production of sugarcane fluctuates. This affects the supply of sugarcane to the mills and the production of sugar also varies from year to year.
Low rate of recovery: Average rate of recovery in India is less than ten per cent which is quite low as compared to other major sugar producing countries.
High cost of Production: High cost of sugarcane, inefficient technology, uneconomic process of production and heavy excise duty result in high cost of manufacturing.
Small and uneconomic size of mills:Most of the sugar mills in India are of small size with a capacity of 1,000 to 1,500 tonnes per day. This makes large scale production uneconomic. Many of the mills are economically not viable.
Old and obsolete machinery: Most of the machinery used in Indian sugar mills, particularly those of Uttar Pradesh and Bihar is old and obsolete, being 50-60 years old and needs rehabilitation. But low margin of profit prevents several mill owners from replacing the old machinery by the new one.
Regional imbalances in distribution:Over half of sugar mills are located in Maharashtra and Uttar Pradesh and about 60 per cent of the production comes from these two states. On the other hand, there are several states in the north-east, Jammu and Kashmir and Orissa where there is no appreciable growth of this industry. This leads to regional imbalances which have their own implications.
Low per capita consumption: The per capita consumption of sugar in India is 20.2 kg. That's lower than the global average of 24.8 kg. This result in low market demand and creates problems of sale of sugar

Steps taken by the government to address the issues of sugar industry

Export subsidy on raw sugar: The Government announces export subsidy from time to time in order to make Indian raw sugar competitive in the international market and ease the liquidity crisis of sugar mills. In February 2015, the Government granted a uniform rate of subsidy of Rs.4,000 per tonne up to 1.40 million tonnes of raw sugar export during current SS14- 15.
Ethanol Blended Petrol (EBP) Programme: Ethanol is an agro-based product, produced from the by-product of the sugar industry, viz, Molasses. The EBP programme, besides lowering pollution levels, ensures utilisation of molasses produced as a by- product during manufacture of sugar and improves the revenue stream of the sugar mills. The Government of India (GoI) has mandated minimum ethanol blending of 5% with petrol from June 2013 and has set aggressive target of increasing the blending ratio up to 20% by 2017 to be in line with other major sugar producing countries. Furthermore, the GOI has incentivised the sugar industry by increasing the price of ethanol to Rs.48.50 per litre for supply to oil marketing companies and waived off the excise duty of 12.60% on ethanol for blending for next SS, ie, 2015-16.
Sugar Development Fund (SDF): The Government has set up SDF under SDF Act, 1982 for financing sugar industry . The sugar mills are required to pay for levy of cess, which currently is Rs.250 per quintal of sugar manufactured to the Consolidated Fund of India. The GoI uses the SDF primarily for advancing loans to facilitate the rehabilitation and modernisation of any sugar factory. Fund can also be used to build up and maintain buffer stocks of sugar.
Proposal for Reinsertion of Release Order (RO) mechanism : The GoI is also considering bringing back of RO mechanism for sale of sugar in the domestic market. Under the RO mechanism, the government decides the quantity of sugar that can be sold by each sugar mill in the open market every month. It is expected to help undue slippage of sugar prices in the domestic market during the peak season.
Creation of buffer stock: The GoI is also proposing to create buffer stock of 10% of current year’s expected sugar production so that the surplus can be absorbed from the market to some extent and amount due to cane growers can be paid directly to the farmers. This will benefit the sugar industry in two ways, the part of excess supply will be absorbed and sugar industry’s debt burden will come down significantly.

Rangarajan Committee’s recommendations on deregulation of the sugar sector

Price of sugarcane: The central government fixes a minimum price, the FRP[1] that is paid by mills to farmers. States can also intervene in sugarcane pricing with an SAP to strengthen farmer’s interests. States such as Uttar Pradesh and Tamil Nadu have set SAPs for the past few years, which have been higher than FRPs. The Committee recommended that states should not declare an SAP because it imposes an additional cost on mills. Farmers should be paid a uniform FRP. It suggested determining cane prices according to scientifically sound and economically fair principles. The Committee also felt that high SAPs, combined with other controls in the sector, would deter private investment in the sugar industry.
Levy sugar: Every sugar mill mandatorily surrenders 10% of its production to the central government at a price lower than the market price – this is known as levy sugar. This enables the central government to get access to low cost sugar stocks for distribution through the Public Distribution System (PDS). At present prices, the centre saves about Rs 3,000 crore on account of this policy, the burden of which is borne by the sugar sector. The Committee recommended doing away with levy sugar. States wanting to provide sugar under PDS would have to procure it directly from the market. This is accepted and implemented by Government.
Regulated release of non-levy sugar: The central government allows the release of non-levy sugar into the market on a periodic basis. Currently, release orders are given on a quarterly basis. Thus, sugar produced over the four-to-six month sugar season is sold throughout the year by distributing the release of stock evenly across the year. The regulated release of sugar imposes costs directly on mills (and hence indirectly on farmers). Mills can neither take advantage of high prices to sell the maximum possible stock, nor dispose of their stock to raise cash for meeting various obligations. This adversely impacts the ability of mills to pay sugarcane farmers in time.The Committee recommended removing the regulations on release of non-levy sugar to address these problems. Government of India has partially deregulated the sugar industry in June 2013 by eliminating the monthly release mechanism of non-levy sugar.
Trade policy: The government has set controls on both export and import of sugar that fluctuate depending on the domestic availability, demand and price of sugarcane. As a result, India’s trade in the world trade of sugar is small. Even though India contributes 17% to global sugar production (second largest producer in the world), its share in exports is only 4%. This has been at the cost of considerable instability for the sugar cane industry and its production. The committee recommended removing existing restrictions on trade in sugar and converting them into tariffs.