All the talk of cane arrears sells well, but sugar mills paid farmers Rs 19,000 cr extra over the last five years
A Bajaj Hindusthan may owe Rs 2,314cr to farmers, but with 36% of its equity owned by PSU banks, difficult to argue ‘diversion’ of funds is to blame
When the 14-day-deadline for clearing sugarcane dues for the current year expires, and Uttar Pradesh chief minister Yogi Adityanath has to start taking action against sugar mills like Bajaj Hindusthan—over 55% of the Rs 4,200 crore dues are on account of Bajaj—who simply do not have the funds to be able to comply with the UP Cabinet’s directive, he will be faced with a peculiar problem. Nearly 36% of Bajaj’s equity is owned by PSU banks—it used to be 42% but the banks have sold some of their shares—while that of the promoter Kushagra is down to 26%.
With the company running up large debt to fund a capacity expansion from 31,000 tonnes per day in 2003 to 146,000 by 2008 in response to an incentives policy by the then government to augment capacity in the state—these were rescinded by the next government—and not able to repay since the sector didn’t get freed up as it had thought would happen, the banks took a large part of its equity in the restructuring exercise.
Apart from the problem of taking action against PSU banks, the chief minister will be hard put to argue ‘diversion’ of funds—this is what the government terms the actions of the company—when a committee of five banks controls the entire financial operations of the company. Diversion, of course, is an incorrect term. Though mills were supposed to pay farmers 85% of the money they got from sales of sugar, several have ‘diverted’ the money to repay bankers and make other payments related to their sugar operations—it is ‘diversion’, but it is bona fide.
Each sugar mill is different and, since several in the state are able to clear their dues to farmers on time, it is pertinent to ask why the defaulters should be treated leniently. The answer will differ from mill to mill, depending upon how efficiently they are run and how modern their processes are, but the chief minister would do well to keep some basic truths in mind.
To begin with, since farmers sell their cane to the mills over a period of 4-5 months while the latter are able to sell the sugar and other by-products over a period of 12-14 months, there is a big mismatch in revenue streams, and that is what is called ‘arrears’—in most cases, including in the case of defaulters, the bulk of dues get cleared within a year’s time; the compressed 14-day window is impossible to meet unless mills have enough working capital. And mills with high levels of debt, typically, don’t get working capital from banks and, so, delay payments.
Since each business unit has to be responsible for its viability, it is difficult to legitimise delays in payments using the high-debt argument. But, keep in mind that, were the mills not to take on large sums of debt to expand capacity, it is likely Uttar Pradesh’s cane-crushing capacity would be much smaller than it is today—that would have created its own set of problems for farmers.
Ultimately, chief minister Adityanath will have to confront the grim reality that both he and the BJP’s central leadership remained blind to as they campaigned in the state and assured farmers that a BJP government in the state would help them get their dues. And that reality is that there is no way the current system of huge overpayments to cane farmers can continue since this is at the heart of the sector’s problems—in the case of UP, while the Centre has recommended a price of Rs 257 per quintal of cane (based on 10.7% recovery), the state has raised this to Rs 307. This is why the UPA set up the Rangarajan committee to suggest a solution to the sector’s problems. Rangarajan recommended the government move away from fixing cane prices and, instead, mandate that 75% of all the mills’ revenues be shared with the farmers.
In 2016-17, with the mills producing 87 lakh tonnes of sugar, they earned around Rs 31,538 crore. And based on the state price of Rs 307 per quintal of cane, the 838 lakh tonnes they bought cost them Rs 25,727 crore—of course, given the dues, not all of this has been paid. Based on the Rangarajan 75% formula, though, the mills should have paid Rs 23,653 crore or Rs 2,073 crore less. Do the exercise over the last five years, and the ‘extra’ payments total Rs 18,882 crore.
While the logical course for Yogi Adityanath would be to move to the Rangarajan formula, many in the central and state leadership will argue that the formula is not sacrosanct and nothing but a ploy to rob farmers of their due. While they are entitled to their views, it is worth pointing out that a similar argument was made in the context of the Rangarajan recommendation on hiking natural gas prices—when the BJP refused to hike prices and, after two years, when all exploration in the sector came to a halt, the government found it made sense to hike prices. After all the drama, Adityanath may end up doing the same.