The ‘interest-free’ loan perpetuates the states’ mess
While stocks of sugar mills rose after the Cabinet cleared a Rs 6,000 crore ‘interest-free’ loan, the so-called package—an interest subvention of R600 crore for just one year—is just a way to ensure, in a farm-distress year, the sugar mills clear their dues of R21,000 crore to farmers; it does not deal with the real issues that plague the industry. Indeed, the package may even disintegrate since it is contingent upon units clearing at least half their dues by the end of this month—so units that are in the red need to borrow at least R10,500 crore in the next 20 days in order to avail of the R600 crore interest benefit.
The benefit which is of any consequence, in fact, was the hike in ethanol prices from R32 per litre to R42—effective for the mills—last December. As a result, ethanol supplies rose from around 62 crore litres in 2014 to a likely 83 crore in 2015. And, in May, the government exempted ethanol supplies from excise duty payments, which meant another R5 of extra realisation for the mills, effective October 2015. Given the potential to supply ethanol for blending with petrol is around 220 crore litres, this is a big boost since mills can now produce ethanol directly from the first cut of molasses—this will likely increase revenue realisation per tonne of cane by around 8-10%.
In the long run, however, ethanol won’t cut the trick either since 75-80% of the industry’s revenues will come from sugar even if the maximum amount of ethanol is produced. When the Rangarajan committee was set up, the problem used to be that the State Advised Price (SAP)—at which mills were mandated to buy all cane produced—was much higher than the Centre’s Fair and Remunerative Price (FRP), especially in states like Uttar Pradesh (UP). If mills did not have to, by law, buy all the cane, there would be no problem of arrears since, once the mills ran out of funds, they would simply not buy more cane. That is why Rangarajan recommended that cane pricing be linked to the revenues sugar mills got from processing sugar and that the FRP be paid upfront to cane farmers—but only Maharashtra and Karnataka have adopted the formula. Today, however, even the FRP is higher than the market price of sugar which includes the cost of processing the cane. The ultimate solution lies in linking FRPs to market prices of sugar and, finally, completely freeing up the mills—farmers must grow cane only if there is a market for it. By giving ‘packages’ like it does from time to time, the Centre is only allowing states like UP, primarily, to continue to play cane politics.