Mills to gain from Rangarajan's levy sugar plan

Last Updated: Tue, Sep 04, 2012 19:12 hrs

Sugar companies like Bajaj Hindusthan, Balrampur Chini and Triveni Engineering, among others, would improve their yearly revenue by a combined Rs 4,400 crore if the government accepts the Rangarajan committee’s recommendation of doing away with the ‘levy sugar’ obligation, wherein mills have to sell a tenth of their produce at a regulated price for the government’s public distribution system (PDS).

Set up in January, the panel has asked the government to buy sugar for PDS from mills at market rates. Earlier, the Commission for Agriculture Costs and Prices had made the same recommendation. Currently, the average open-market price is Rs 36,000 a tonne, while the government pays only Rs 19,050 a tonne to the mills for levy sugar. This does not even cover the cost on sugarcane — the raw material — above which mills have to incur processing costs, interest cost and wages. Moreover, the cost of cane has been rising sharply, year on year, while there has been no corresponding increase in the levy price.

A significantly lower realisation on a tenth of the sugar produced impacts the industry’s profitability and restricts the capacity to make payments to cane farmers. No other industry is subjected to such an obligation. Even the government-owned oil marketing companies that sell diesel, cooking gas and kerosene at subsidised rates get compensation for the losses incurred in the process.

The government also follows a hawkish strategy on open market sugar prices. Every time prices go beyond a certain level, the government intervenes with an additional sale quota.

Under the release mechanism, it is the government that decides the quantity each mill can sell every month. So, even as the central and state governments raise the sugarcane price every year, the Centre keeps sugar prices under check. This is despite several studies noting more than 60 per cent of the sugar is consumed by bulk buyers like beverage manufacturers, the pharmaceutical industry and confectioners.

Abinash Verma, director general, Indian Sugar Mills Association, said the sugar industry’s financial losses would narrow once the levy obligation was removed. “It is often witnessed that while the government or its agencies fail to lift the entire levy sugar from mills every year, mills are expected to carry forward the unsold sugar for up to two years, leading to additional carrying cost. This also restricts open market supply of sugar,” he said.

The Food Corporation of India, he added, in distributing levy sugar in certain states, deducts five per cent from the price to offset its transportation losses.

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