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Why sugar farmers remain under the stress of mounting payment dues

Topics Sugar  | sugar mills | Sugarcane

India’s sugarcane dues accruing to farmers have remained stubbornly high despite the government announcing a series of measures in the past few years to provide alternative revenue streams so that reliance on sugar and the volatile nature of the commodity's prices is minimised.

According to senior industry officials, as the 2019-20 sugar season (October-September) draws to a close, around Rs 16,000 crore still remains to be paid to farmers for sugarcane purchased from them in the previous years. Of this, a  maximum of about Rs 11,000 crore is due to be paid to Uttar Pradesh farmers alone.

UP and Maharashtra are the two largest sugarcane producing states, accountimg for over 80 per cent of output in India.

While UP's sugar sector is dominated by the private sector, it is the cooperatives that hold sway in Maharashtra.

The reasons: Part 1

According to sugar industry sources, the main reason for sugarcane dues not getting cleared this time around is a mismatch between the cost of production and the rate at which sugar is selling in the market. This is something that has happened several times in the past as well.

At present, the all-India average production cost of sugar is Rs 35-36 per kilogram and includes depreciation and interest on loans taken from banks, while the all-India average realization from sugar sale so far in the 2019-20 season is somewhere around Rs 32.25 a kilogram.

Therefore, for every kilogram of sugar sold in the market, mills are incurring a loss of Rs 2.75-3.75.

With sugar still accounting for almost 80-85 per cent of the annual revenues of mills, a per-kilogram loss of Rs 2.75-3.75 is bound to impact  earnings and cash flows.

The Central Government mandates that sugar mills will not be allowed to sell sugar at a price below Rs 31 a kilogram in the 2019-20 season, something which the mills want to be revised upward to at least Rs 33 a kg.

Not only the mills, even the government's own think-tank, the NITI Aayog, has recently called for increasing the average minimum sale price by Rs 2 per kg.

Major sugar producing states Uttar Pradesh, Maharashtra and Karnataka too have demanded a revision in the minimum sale price.

While UP wants a three-rupee increase in the sale price to Rs 34 per kg for 2020-21 season, Bihar had demanded it to be raised to Rs 36 a kg, Maharashtra Rs 35-36, and Karnataka Rs 35 a kg.

Not only that, even a high-powered panel of experts constituted by the Centre has advised raising the MSP to Rs 33 a kg so as to enable mills to clear their cane dues swiftly without putting much burden on consumers.

The Reasons: Part 2

The second reason for rising sugarcane dues this time around according to the sugar mills is a mismatch in cash flows.

Sugarcane farmers are paid for five months of a year, that is, during the peak harvest time when the freshly harvested cane is brought to the mills, but the revenues are realised from sale of sugar in 15-18 months.

To address this time gap, sugar mills need working capital from banks to keep the business operational.

The working capital should be good enough to cover all the sugar stocks lying with the mills.

But banks are reluctant to fund 100 per cent of the stocks of even good and well-running sugar mills and are instead insisting on looking at the turnover of the sugar mills as well, before funding their requirement.

This intense scrutiny further dries up the cash flow as mills aren’t able to get 100 per cent working capital against the stocks lying with them.

There are some sugar companies both in the private and cooperative sector that don’t get any working capital at all from the banks because of their poor balance sheets and it is these who have made the least amount of payment to sugarcane farmers in 2019-20.

They are also the ones who own bulk of the Rs 17,000 crore sugarcane dues to farmers.

The Reasons: Part 3

The third reason mills are unable to pay farmers on time is the delay in the release of funds that accrue to them from the government by way of various subsidies and service provided by the mills.

Sources said a sum of around Rs 12,000 crore is stuck with the government on account of unpaid buffer subsidy, export subsidy and interest subvention on soft loans availed by the mills in previous years.

For 2019-20, the Centre has budgeted around Rs 4,000 crore out of these dues, leaving a gap of Rs 8,000 crore unpaid.

If this Rs 8,000 crore is cleared by the Central government by way of supplementary demand for grants in the coming monsoon session of Parliament or otherwise, farmers’ dues will straightaway come down by this much amount as the buffer, export and interest subvention subsidies are directly credited into the bank account of the farmers by way of DBT.

In addition to Central government dues, some state governments too have unpaid power dues amounting to another Rs 1,500 crore towards the sugar mills.

This too, if it gets cleared, will help them pay the farmers.

Mills say an easier and quicker option could be to raise the MSP by Rs 2 per kilogram. This would immediately raise the value of some 12 million tonnes of unsold sugar stocks lying with the mills by Rs 2,400 crore. 

Of this, 85 per cent can be availed by way of working capital, which is around Rs 2,000 crore. This amount can then be used to pay farmers.

Consumer price 

But the question is if the Centre raises the MSP by Rs 2 per kg from the current Rs 31 to 33, won’t it push up consumer prices and make the sweetener costlier for the end consumer, that too just ahead of the main festival season?

Mills say that it won’t lead to price escalation because two years ago sugar was retailing in the domestic markets at Rs 37-38 a kg and there were no consumer complaints so now if it goes up to Rs 35 a kg there will be no backlash.

The other take

Sudhir Panwar, a former member of UP Planning Commission and a long-time observer of India’s sugar economy has an entirely different take on the issue of recurring cane dues and mills' inability to clear them for the benefit of farmers.

Panwar says that mills deliberately try to withhold due sugarcane payments so that farmers get agitated and the mills are able to squeeze concessions and rebates from the Centre and states.

“To me all these look like a well-planned strategy to deny farmers their dues so that it leads to some sort of unrest and governments under pressure grant all sorts of discounts to the sugar mills. Stopping payment also helps in keeping the balance sheet of sugar mills steady,” Panwar said.

Whatever, be the truth, unless the sugarcane dues are cleared to the farmers, a large segment of India’s rural economy particularly in states such as UP and Maharashtra will continue to remain under stress as sugarcane forms an integral part of their livelihood.

Table: India’s Sugar Production in past five seasons (October-September) in million tonnes
Year Production Year  Production
2015-16 25.1 2018-19 33.1
2016-17 20.3 2019-20*  26.0
2017-18 32.5    
*Estimated; Source: Sugar Industry and Traders

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