Reforms in sugar sector. Presentation before Dr. Rangarajan Committee

Transcription

1 Reforms in sugar sector Presentation before Dr. Rangarajan Committee

2 Submissions to be made today 2 Some important characteristics of Indian Sugar Industry The Government Controls ISMA s views and suggestions for reforms in the sector Recommendations of various Committees/ Authorities

3 The Indian Sugar Industry 3 2nd largest producer of sugar in the world 5 million hectares & 50 million cane farmers and dependants. Rs.80,000 crore industry. Cane payment of Rs.55,000 crore are directly paid to farmers without middlemen. 65% of sugar consumed by bulk consumers Located in rural heartland, directly contributes to rural economic development & employment

4 The Infamous Indian Sugar Cycle 4 Production trend of last ten years ( E) Sugar Production( lakh tons)

5 The Infamous Indian Sugar Cycle 5 Production- Consumption trend of last ten years ( E) Sugar Production( lakh tons) Sugar Consumption( Internal Releases) lakh tons

6 Cyclical sugar trade in last 20 years. 6 Import Export 4.96 million tonne

7 Cane Price Arrears (as on 31 st March in Rs. crore)

8 Cane Price Arrears vis-à-vis Sugar Inventory Cane Arrears( Rs. Cr) Sugar Inventory(lk tn) Cane Arrears( Rs. Cr.) Sugar Invenotry( lk tns) Cane price arrears directly related to sugar inventory which industry forced to carry Industry has no control on cash flow which are need to pay cane price to farmers during crushing season.

9 Controls on Indian Sugar Sector Minimum Distance Criteria between mills Levy Sugar Obligation on mills Cane Area Reservation GOVT. POLICIES Regulated Release Mechanism Dual Cane Pricing: Centre/State State Govt. controls Compulsory sugar packing in jute only Import and Export Central Govt. controls

10 Sugar Industry: No Control Over Its Own Fate 10 Raw Material: Its Price and Availability Sales: Volume as well as Levy Obligation : Stock Limits on Traders, Bulk Consumers etc. : Sugar Inventory Selling Price of Sugar: Below cost of production Packaging Material of Sugar: Price and Quality Export-Import of Sugar: Quantity and Policy Restrictions Cash Flow Planning: Payment to Farmers and Lenders

11 1. Abolition of Levy Sugar Obligation 11 Sugar industry is the only industry in India to bear the burden of social welfare program of Government (PDS) Benefit does not reach the targeted population Price is only 60-65% of cost of production and open market price States should buy levy sugar from open market, similar to other commodities Lower returns (Rs.2500 crore annual losses) to mills adversely impacts cane price of farmers

12 Actual Lifting of sugar Annual levy requirement on paper -27 lakh tonnes Upto April* Levy Sugar released( lk tn) Actual Lifting( lk tn) * Data not available beyond April 2009

13 Carry forward rule of past obligations 13 Levy obligations of mills can be carried forward by 2 years Sugar mills forced to carry physical stocks of levy Blocks cash flow & capital: adds to interest burden, carrying cost, production cost 30/9/2011: Levy sugar obligations of 21 lakh tons, worth Rs crore, carried forward Patna High Court: Levy obligation cannot be carried forward beyond three months.

14 Sugar for PDS should be procured by Government 14 Similar to other commodities in PDS, like wheat, rice etc. Government should buy sugar for PDS Additional subsidy to Govt. would be Rs.1, crore (very small compared to Rs.80,000 crore of food subsidy bill in 11-12) Inefficiencies in present system and diversion will be removed

15 Sugar supplies on market rates: alternatives 15 Sugar industry can deliver the sugar in respective States at specified destinations. Options for payments could be: Central Agency/FCI be made responsible, wherein Suppliers, rates & transportation costs can be finalised through open tenders: annually, quarterly or monthly payments be made by the Agency/FCI to mills Kerala model could be adopted monthly tenders be floated and market rates given by State Govt Mills be paid by States upto issue price and balance be recovered by adjustment against Central excise/duties/taxes

16 2. Problems of Regulated Release Mechanism 16 Only industry in India to be told how much to sell each month Mills can t plan their cash flows High inventory burden on sugar mills adding to cost of production Food Ministry has accepted in a note to PM & FM and also in a note to CCEA in 2008 that the present system has not quite achieved its objective of keeping the market prices at a desired level

17 Surplus releases by Sugar Directorate almost every month vis-a-vis actual consumption Releases Carried forward

18 3. Export-Import Policy of Government 18 Timing of permissions is important International prices and domestic price situation Export bans in past when exports were actually viable Effect of exports on cane arrears & sagging domestic prices India should have presence in global market on regular basis Control of Government be restricted to controls over tariff rates, and on not quantity restrictions Objective should be to ensure India becomes net exporter on continuous basis and becomes self-sufficient for domestic needs

19 World Sugar Market Settlement Quotation on day of EGoM (White FOB- London*- USD / tonne) 19 Mar, 2011 May, 2011 Aug, 2011 Oct, 2011 Dec, th Dec, Mar, rd March, May, th April, Aug, 2012 Oct, 2012 Dec, st Nov, nd Dec, th Feb, Mar, nd Feb, th March, Today's Future Lead time between actual issuance of notification on export mandate by EGoM creates pressure on margins

20 4. Compulsory jute packaging order 20 Jute Packaging Materials Act, 1987 covered food-grains, cement, fertiliser and sugar. Cement excluded in1998 and fertilizers excluded in Food-grains being in public sector, FCI/State agencies procure 60% of jute bags at an administered price announced by Government every month. Sugar being in private sector, strictly under JPMA and no price protection provided. Not enough raw jute in India to require compulsory packing of sugar in jute bags. Cost of 50 kg. HDPE bag is Rs. 15 per bag and cost of 50kg. Jute bag is Rs. 35 per bag. Translates into increase of 40 paise/kilo of sugar. Loss of Rs crore revenue to sugar industry. Loss of Rs. 700 crore to cane farmers approx. Sugar should be completely removed from JPMA. Treat sugar industry at par with other private industries like cement and fertilisers

21 5. Pricing of Sugarcane 21 Central Government fixes a uniform FRP (SMP till Sept 2009) FRP is based on CACP recommendations & fixed criteria But 5 States fix SAP (on political considerations, without any transparent laid down criteria and no relation to sugar price) Dual cane pricing distorts cane and sugar economy and is contributing majorly to cane price arrears and cyclicality Present system leads to major swings in cane price payments Ranges between 55% to even over 100% of sugar price

22 Cane price arrears during last 5 years: Uttar Pradesh & Maharashtra (in March Rs. crore) 22 U.P. Mah Cane arrears are higher in case of UP because of a political SAP and no relationship with returns on sugar sales

23 Indian sugarcane prices are the highest in the world $ / tonne Avg. sugarcane prices prices from from Oct- Mar India USA Bangladesh Pakistan South Africa Brazil Mexico Thailand Australia

24 Indian sugar price amongst the lowest in the world Rs. per kg Avg. sugar prices from Oct- Mar Most of the benefits goes to bulk consumers, who consume 65% of total sugar

25 High cost of production: Low ex-mill price: Two largest cane producing states Uttar Pradesh Maharashtra Cost of Production Ex-mill Rates ( Rs/ Qtl) (Rs/ qtl) Cost of Production( Rs./Qtl) Maharashtra Ex-mill rates (Rs/ qtl)

26 Cane price Sugar price linkage 26 Presently, there is no relationship between cane & sugar price in India Major sugar producing nations like Brazil, Australia, Thailand, Mauritius, even Kenya and Tanzania have such a direct linkage Nandakumar Committee recommended such a formula in 2010 Recommends for a fixed % of sugar, bagasse & Molasses realisation Guarantees share to farmers of hike in sugar prices in off-season Ensures a fair return/ savings to sugar mills too Will reduce cyclicality in sugar production

27 6. Cane Area Reservation 27 Followed in most States except Maharashtra, Gujarat Obligation under reserved area is mutual: Farmers are required to supply all cane to the mill Mill to procure all cane produced in the area, even if incurring losses Arguments in favour Mills are assured of an area and thereby cane supply Reserved cane area encourages investment in farm & extension activities Farmers have an assured buyer, esp. in surplus years Avoids unhealthy competition amongst mills

28 Cane Area Reservation (contd.) 28 Arguments against Assured area and supply can lead to complacency and lack of investment etc. in farm Farmers will get freedom to choose buyer for their cane Few States revise area annually (political considerations) causing uncertainties of re-allocation of area Some members of ISMA support cane area reservation, while others have no problems if areas are de-reserved. But if reservation is continued, should be long term.

29 7. Minimum Distance between Mills 29 Minimum distance criteria should be continued, but depending upon capacity of mills and cane density, States should revise distances as and when need arises. 25 kms prescribed in Punjab, Haryana and Maharashtra whereas other States have a distance criteria of 15 kms Minimum distance prescribed to ensure adequate cane area and sugarcane for each mill since cane cannot be carried over long distances to check unhealthy competition

30 Views of various Committees & Authorities 30 Mahajan Committee (1998) Tuteja Committee (2004) Thorat Committee (2009) Finance Ministry, Commerce Ministry, Planning Commission and Food Ministry (2008 note for CCEA) Nandakumar Committee (2010) CACP (2011)

31 Mahajan Committee (1998) 31 Cane area reservation should be on permanent basis. Decontrol of sugar in a phased manner over two years period. Levy sugar first to be reduced to 20% for two years and then complete decontrol. Interest to be paid to mills for non-lifting of levy within time limit. If Govt. wishes to continue sugar under PDS, required quantity to be purchased from industry by tendering/fixed price. Regular annual export quota of one million tons. Maintenance of buffer stock on regular basis.

32 Tuteja Committee (2004) 32 Payment of SMP along with price sharing benefits as per Clause 5A to continue. Present system of 10% levy. Maximum three months for lifting of levy, after which levy quota automatically be converted to free sale. Dispense with the release mechanism for free sale sugar w.e.f. 1 st October, Distance between two factories to be fixed at 25 Kms.

33 Thorat Committee (2009) 33 Government should withdraw from fixing price of sugarcane. Mills and farmers should settle prices and terms of raw material supply. Factory-wise cane area reservation policy should be scrapped. Abolition of levy sugar mechanism. Government should procure sugar from open market for supply under PDS. Removal of sugar from EC Act. Complete deregulation of sugar sector. Monthly release mechanism should be completely done away within a phased manner. Minimum distance between factories at 25 Kms. Sugar packaging order should be withdrawn. Long term and stable EXIM policy.

34 Nandakumar Committee (2010) 34 Recommended revenue sharing formula for cane price i.e. fixed % of sugar, bagasse & molasses realisation.

35 Proposal of Food Ministry to CCEA on decontrol of sugar sector (2008) 35 Abolition of levy sugar obligation w.e.f. 1 st Oct Authorise State Govts./UT Admns. to procure sugar from open market for PDS. Dispense with the regulated release mechanism for non levy sugar w.e.f. 1 st October, To approve ten year validity period for the above policy changes.

36 Views of Finance Ministry, Commerce Ministry, Planning Commission on Food Ministry s proposals. 36 Finance Ministry Levy sugar obligation be abolished and Government to purchase sugar from market for distribution under PDS. Abolition of regulated release mechanism to give greater freedom to producers but initially with quarterly releases. Commerce Ministry Concurred with the proposal of Food Ministry buying sugar from open market for supply under PDS. Planning Commission Concurred with the proposal of Food Ministry regarding removal of levy obligation and dispensing with release mechanism with slight modification.

37 CACP RECOMMENDATIONS ( ) 37 Central Government should persuade State Governments not to fix SAP. Government to review present controls of sugar sector. Initiate decontrol of release mechanism of free sale sugar and removal of levy sugar obligation in phases. Formulation of policy on all aspects of EXIM policy on sugar to enable Indian sugar industry s competitive presence in world market Distance between two sugar factories to be kept as 25 Kms.

38 Controls are out-dated, archaic & no longer good 38 Industry is of strong opinion that Government controls are contributing/ aggravating Cyclicality in sugarcane/sugar production Depressed sugar price, below cost of production High burden of sugar inventory on mills Cane price arrears Lack of research and investment in the sector Low cane yields and low sugar recovery Urgent need for reforms

39 Growth of the Brazilian Sugar Sector Presentation before Dr. Rangarajan Committee

40 The Brazilian Story 2 The National Intervention Period: 1930 to : State intervention in sugarcane sector started with establishment of the IAA (Sugar and Ethanol National Institute*) During the 70 s, the national program had a twofold objective, namely: increasing sugar exports and reducing energy dependency: Sugarcane Breeding Program to improve productivity Proálcool (Ethanol Program) began in 1975 as a response to the oil crisis established an E-5 mandate and encouraged development and demand of pure ethanol-fueled cars (E-100)

41 3 Brazil: Government Intervention period Four major pillars Production: plan & regulate annual sugar and ethanol production; the amount of sugarcane delivered to each industrial plant; the amount of ethanol and sugar to be produced in each state Seasonal plans were released every year informing farmers and millers about the sugarcane quantity to be processed and the price to be paid. Exports: manage raw and white sugar exports

42 4 Brazil: Government Intervention period Four major pillars (contd.) Prices: Set prices for all products (sugarcane, sugar and ethanol), based on their production costs Government set parity prices between sugar and ethanol to make it financially indifferent for the mills to produce either sugar or ethanol; pure ethanol prices at the pump should not be higher than 65% of gasoline prices Consumption: Set mandatory blends for ethanol with petrol, plus incentives for establishment of ethanol distilleries attached to existing sugar mills

43 Deregulation of Sugar Sector: A gradual process 5 During early 90 s, the Brazilian economy dramatically moved towards liberalization, openness and privatization. Sugar sector ran along the same pathway: the first movement was the closure of IAA, in This was followed by a gradual process of liberalization of the sector: Elimination of public production and exports controls (1990) Sugar and Ethanol Inter-Ministerial Council(CIMA) established in 1997 for policies for self-sustaining economic growth of the industry; recommend for the ethanol level blending in gasoline (20-25%);

44 Deregulation of Sugar Sector: A gradual process 6 Effective measures regarding liberalization of ethanol and sugarcane prices started only in Given the social, economic and environmental importance of the sector, it was established a phasing-outprocess, concluded just in February of 1999 One of the major constraints for this process to move faster was the resistance of the sector on how to price the feedstocks

45 Model for cane pricing: Consecana Model : creation of sugarcane payment model named CONSECANA It is a private sector arrangement which main objective it to share risks between sugar and ethanol producers and sugarcane growers Main rules: (1) the revenue of the sugarcane grower is proportional to the industrial revenue; (2) price of sugarcane supplied by each grower depends on the level of sucrose that the product contains

46 Main Rules of Consecana Model 8 Revenue of cane grower is proportional to industry s revenue Cane costs account for 60% of total sugar and ethanol production costs. Therefore, the sugarcane grower receives on average 60% of the agro-industrial revenue. Price of sugarcane supplied by each grower depends on the level of that the product contains. Quantification of the sugar contained in sugarcane is determined in terms of TRS ( Total Recoverable Sugar *). A dynamic model, subject to revisions (general revisions conducted every 5 years)

47 9 Slide 7

48 10 Slide 10

49 11 Slide 11

50 Thank You