The bailout package for the sugar sector announced by the government earlier this week will allow sugar mills to clear 40 percent of the payment owed to farmers but won’t address “structural issues” faced by the industry.
That’s according to rating agency Crisil. The creation of a buffer stock and fixing the minimum support price for sugar will help improve the cash flows for mills to the extent of Rs 3,500-4,000 crore. That constitutes only 40 percent of the Rs 22,000 crore outstanding cane arrears following a record sugar production of 31.5 million tonnes in 2017-18 and plunging wholesale prices, Crisil said in a report.
The supply surplus situation is, however, expected to continue in 2019 as well, and a further build up in arrears cannot be ruled out, the rating agency said. Besides, 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.
The Union Cabinet on June 6 approved a proposal by the food ministry to create a sugar stockpile of 3 million metric tons for one year. The government also plans to impose stock limits on sugar mills until Sept. 30 and implement a minimum benchmark selling price of Rs 29 a kilogram at factory gates. Sugar mills will be given Rs 4,440 crore in subsidised loans from banks for five years to expand ethanol manufacturing capacity, Food Minister Ram Vilas Paswan had said in a press briefing.
“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,” Crisil said.
The cost of producing sugar is between Rs 35-36 per kg, Abinash Verma, Director General at the Indian Sugar Mills Association had told BloombergQuint after the bailout package was announced. A Rs 29 per kg MSP would be insufficient to clear the dues to the cane farmers, he added. Verma said the MSP should be linked to the fair and remunerative price for sugarcane paid by the millers.
The benefits arising out of increased ethanol production capabilities will, however, accrue over the longer term even if it has a limited role in addressing the current liquidity issue of millers, Crisil said.
Under the new National Policy for Biofuels, the central government has mandated the blending of 10 percent ethanol from 5 percent earlier at a price of Rs 40.85 per litre over the next two years. Ethanol generates higher margins and is less cyclical.