So sweet: party on as levy sugar, release mechanism gone

Dismantling of levy sugar alone will lead to Rs 3,000 crore of savings for the mills, say owners


Prasanna Mohanty | April 5, 2013

Partial decontrol of the sugar sector has spread cheers in the industry. Some of the industry leaders would have liked the government to do more but what has been done is clearly a welcome development that would improve their financial conditions and remove some of the shackles that make their operations economically unviable.

The cabinet committee of economic affairs (CCEA) had, on Thursday night, cleared proposals to dismantle sugar mills’ obligation to sell a part of their production to the government at a substantially lower price for the PDS supply, called levy sugar, and also to free them from the ‘release order mechanism’ through which the government regulates how much sugar the mills can sell in the open market every quarter.

Dismantling of the levy sugar, under which the mills are forced to sell 10 percent of their production at Rs 19 per kg (against the average ex-mill price of Rs 32 per kg), alone will result in a direct saving of Rs 3,000 crore annually. And dismantling of the ‘release order mechanism’ will lead to dilution of the inventory, thereby improving the cash flow.

Delighted at the development, director-general of Indian Sugar Mills Association (ISMA) Abinash Verma said, “The government’s decision to give freedom to the industry to sell sugar on commercial consideration and removal of the burden of levy sugar are extremely important and crucial. As suggested by the Rangarajan committee, these decisions will help the industry achieve its potential growth of 20-25 percent per annum.”

He said removal of levy sugar will give the industry an annual savings of Rs 3,000 crore, whereas abolition of regulated release mechanism will reduce inventories and ensure better cash flows. “These much-awaited reforms will reduce the cost of production and improve liquidity with millers which, in turn, will ensure better and timely payment of cane price to farmers, as also assure better quality sugar at reasonable prices on a sustained basis to the consumers,” Verma said.

He said the reforms will benefit everyone concerned — the industry, farmers and consumers — as freeing the mills from levy sugar and regulated release mechanism would make the sugar industry “more viable as well as attractive and bankable”. This in turn “will attract large scale investments both from within the country as well as from abroad,” he said. “This will improve efficiency, give better returns to the farmers as well as improve sugar availability and quality for the consumers.”

But Siddharth Shriram, chairman-cum-managing director of Daurala Sugar Works, which markets the Mawana brand of sugar, was less effusive in his praise. He said it was clearly a much awaited event but it took 40 years in coming and that too with inbuilt caveats. Referring to the government’s announcement that there would be no levy on sugar for two years, he said this sounded like a bit of experiment, and “not a statutory move as it should have been”.

Shriram said the move could result in the moderation of cane price as also quality of sugarcane over the next few years. He, however, said the centre should have taken another step to improve the profitability of sugar mills — increase in the import duty. He sought to justify this by pointing out to a surplus stock of sugar at the moment.

AK Sharma, chief general manager of the Triveni Engineering and Industries Ltd’s Chandanpur sugar unit, expressed relief that the government had, apart from dismantling levy sugar and release mechanism, decided not to increase the excise duty on sugar to reduce the subsidy burden. Having dismantled levy sugar, the government intends to buy sugar from open market (instead of buying at Rs 19 PER kg from the mills), which would mean an increase in subsidy from Rs 2,600 crore at present to Rs 5,300 crore. The government was considering a proposal to increase the excise duty to offset a part of the increased subsidy.

Sharma said dismantling of the release mechanism would lead to an additional saving of about Rs 125 per quintal of inventory cost to the millers.

Ram Babu, former president of ISMA and currently vice-chairman of CII’s sugar council, welcomed the move, which, he said, would benefit all the stakeholders and address the biggest problem for farmers — the pending cane arrears. With an increased cash flow, the mills would be able to clear the dues to farmers, he said.

BB Mehta, director and CEO of Dalmia Bharat Sugar and Industries Ltd, said: “We welcome the government move on dismantling of levy sugar and regulated release order mechanism, which is adversely affecting the sugar industry. The annual burden of about Rs 3,000 crore on the industry will now be taken off and improve the cash flow. This will also benefit farmers, as the mills can utilise this amount to pay sugarcane farmers.”

Besides suggesting these moves, the Rangarajan committee had also sought free import and export of sugar, which the centre has not addressed at the moment. The committee had also proposed some measures in a phased manner over a period of two to three years — switching from the current sugarcane pricing regime to a revenue-sharing regime and removing cane area reservation and minimum distance of Rs 15 km between two mills to ensure healthy competition among mills and better price to farmers.



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