3 years

Economy

Bitter Sugar

Madhavankutty Pillai has no specialisations whatsoever. He is among the last of the generalists. And also Open chief of bureau, Mumbai  
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A crisis of oversupply has resulted in Rs 23,000 crore arrears owed to sugarcane farmers, a powerful political constituency that could make its discontent felt in next year’s General Election

SURESH KABADE’S FAMILY switched over to sugarcane farming just as the 1970s began. The cooperative movement was taking off in western Maharashtra and a factory came up in the region. Where earlier farmers used to grow rice, groundnuts, soya beans and other crops, sugarcane gradually became dominant. “Farmers used to get more money from sugarcane. Everyone got attracted,” he says.

After his ninth standard, despite the strong disapproval of his family, Kabade had had enough of formal education. Aged 15, he began heading to the fields and found that it was his calling. His grandfather and father managed to get about 25-30 tonnes of cane per acre on their land, the average of all farms in the area. But he was interested in modern methods of farming and began to implement them. “Farmers used too much water. They didn’t not know so much about fertilisers. Because urea was cheapest, they used it the maximum. They used to throw fertiliser from above. Now, we give it near the root,” he says. Both the density and size of Kabade’s cane began to increase. In 2000, the year he started using new techniques in earnest, he got an average of 70 tonnes per acre. By 2006, he had crossed 100 tonnes and has maintained it since.

The last two years have been especially good for Kabade. The end of a drought in Maharashtra, coupled with bountiful rains, has led to great yields. Not just him, farmers all over, even those who aren’t as efficient as him, have never had it so good. But therein also lie the seeds of India’s sugar crisis, a problem of plenty. “Since two years, the market has been good. In our area we are getting around Rs 3,000 for one tonne this year. Next year, it won’t be so much. Because with Rs 3,000 everyone is doing cane planting. All over India there is record-breaking plantation. Next year, [the] rate will be less,” he says. If the rate goes down by 10-20 per cent, he thinks many farmers might be in for a loss because the costs of inputs like fertiliser and labour are on the rise. For Kabade, it is not an existential issue, but the all-India average yield for a sugarcane farmer, he says, is about one third of what he gets. And they will find it hard to turn a profit if prices drop. “This year and next year, there is going to be so much plantation that production of sugar will [also] be record breaking,” he says, “This year’s sugar has not sold in [its] entirety.”

Farmers sell sugarcane to factories that are located in their region. These manufacture sugar, which is then passed on to distributors and wholesalers, from where it reaches the consumer. It is a simple enough chain if not for the fact that the government exercises control every step of the way, from what price sugar mills must pay farmers for their cane to how much they can export. The crisis begins with these sugar mills unable to make a profit at the rates decided by the government. That makes them unable to pay the farmers. The scale of the issue is gargantuan. At present, farmers are to get over Rs 23,000 crore from mills, the highest figure ever.

Abhinash Verma, director general of the Indian Sugar Mills Association, one of the main bodies that represent sugar businesses, says, “One-third of the payment has not happened to farmers, mainly because revenue realisation is poor. The current ex-mill price of sugar is the lowest in the last two-and-a-half years.” Earlier, the sugar sector went through cycles of profit and loss, but Verma says that a fundamental change has turned the business unviable. “India has now become a structural surplus sugar producer. Earlier, there would be two-three years of surplus and two years of shortage. Since 2011-12 onwards, we have continuously produced anywhere [from] around 25 million to 28 million tonnes, except for the last season when we went down to about 20.3 million. Last year was not because of a cycle, but a drought in Maharashtra and Karnataka. This year, we have produced 32 million,” he says.

Normally, the market would be the corrective, with prices decided by demand and supply. This would lead farmers to shift to other crops that give them more. But because the government sets the price at which sugar mills purchase cane from farmers, it remains inflated and farmers trapped in the crop. There are two such layers of price fixing. The Central Government decides on a price, called the Fair and Remunerative Price (FRP), which mills must pay farmers for their cane. Also, a few states set a price , called as State Advised Price (SA P), which is usually higher for political reasons. Uttar Pradesh, for example, one of India’s biggest sugarcane producers, has a SAP which is always over the FRP, making its sugar mills uncompetitive because of their high cost of production. Even the Centre’s FRP, which is more rational, is higher than what the market would dictate under glut conditions.

32 million tonnes India's sugar production this year, which exceeds demand by 7 million tonnes

“If you compare the returns that farmers get from sugarcane now, it is almost about 50-60 per cent higher from a plot of land as compared to any competing crop, be it wheat, paddy, cotton or soya. Obviously, sugarcane farmers will get attracted to this crop even if they get their payment slightly late. Earlier, we were not able to pay the farmers on time and they used to shift to another crop. But they are not doing so now. This is why you are seeing continuously higher and higher sugarcane production. The FRP on sugarcane has increased by almost 100 per cent in the last eight years. In case of other crops, it must have gone up by 30-40 per cent, whereas sugar prices have not gone up by that much. They keep on fluctuating; or it has risen at best in the last eight years by about 30-40 per cent. There is a mismatch between the two, which is the real cause of the problem,” Verma says.

Prakash Naiknavare, managing director of the National Federation of Cooperative Sugar Factories, an umbrella body of cooperatives which are owned by the farmers themselves, also says that the situation in bleak. “Another 32 million tonnes is expected next year. What is more scary is the season starting October 1st, 2019, and ending in September 2020 for which the cane will be now planted. The forecast of a good monsoon is going to enthuse farmers to go in for sugarcane again. In short, we are going to have a glut situation for the current year, next year and the year to follow,” he says.

According to Naiknavare, every kilogram of sugar sold today is at Rs 8 below its mill production cost. “On every kilo, there is a cash loss,” he says. “This cannot be sustained for long. Financials have gone haywire. Accounts might get into [non-performing assets] now. June is when mills want pre-seasonal loans to start the season. Banks have closed their doors. Where will they go?”

Sugar businesses have approached the Centre for assistance and Naiknavare is hopeful. “We have brought everything to the Prime Minister’s Office’s notice. We have asked for certain sops to improve liquidity and cash flow in mills. Otherwise, there is every possibility that the mills will not be able to start their season in October. That will be unprecedented. Sugarcane farmers who have grown cane in fields will come on the streets. It is a very serious situation. The sugar flood is going to become a tsunami. And no government can afford to take the risk of such a tsunami in an election year,” he says.

A TRAILER OF NAIKNAVARE’S warning was seen in the May-end bypoll to the Lok Sabha constituency of Kairana, which is in the midst of western UP’s sugar belt. In 2014, the BJP won the seat by a margin of almost 250,000 votes, polling more than the entire opposition put together. But this time, it lost by 150,000, and the disgruntlement of sugarcane farmers was seen as a major reason. Sugar might decide the electoral fate of political parties in two of India’s biggest states, UP and Maharashtra, in next year’s General Election.

In Maharashtra, historically, cooperatives have been a force behind many a political ascent. They have been a tool for politicians, a constituency that they nurtured and exploited. Most of the state’s chief ministers, from Sharad Pawar to Vilasrao Deshmukh, were associated with sugar cooperatives. In 2011, Sandip Sukhtankar, now an associate professor with the Department of Economics, University of Virginia, had published a paper titled, ‘Sweetening The Deal?’ In it, he had looked at how politicians in Maharashtra used sugar cooperatives as a resource for contesting elections. Of the 183 mills for which data was available, he noted, 101 had current chairmen who stood for state or national elections between 1993 and 2005.

Rs 7,000 crore the government's relief package for sugarcane farmers

Sukhtankar says the extraordinary powers that sugar barons exercised were “a natural consequence of aligned interests of a large number of farmers—a typical cooperative may have 20,000 farmer-shareholders—as well as the importance of sugar in the state’s economy. Politics is all about solving coordination problems, and the sugar barons managed to build on this natural constituency as well as finances to gain power over the state’s politics.” While sugar’s dominance is waning, he maintains it is still an important force in politics. “When cane prices are naturally low, political pressure increases to push up minimum support prices. The artificially high cane prices result in more cane being grown, ultimately leading to a glut in sugar. But this sugar cannot be sold off internationally, because at the same time you have political pressure from consumers to keep sugar prices low. Such cycles are well recognised, with even the UN Food and Agricultural Organization recognising that these come about as a result of political interference,” he says.

In a recent paper, ‘Seeing Mumbai through Its Hinterland’, published in the Economic and Political Weekly, Sai Balakrishnan, an assistant professor of Urban Planning at Harvard University’s Graduate School of Design, looked at the expansion of these sugar elites into the urban real estate space. To trace this, she took two projects as case studies, the township of Lavasa and the controversy-ridden south Mumbai high-rise Adarsh Housing Society. In an email interview, she says, ‘In Lavasa, one of the earliest promoters of the project were Supriya and Dayanand Sule (daughter and son-in-law of Sharad Pawar). In Adarsh, which was investigated by the CAG for the appropriation of apartments meant for war heroes and war widows of Kargil by politicians and bureaucrats, a survey of the improper allotments reveals that some of the non-defence beneficiaries have privileged access to state-level politicians of sugar origins. These two cases are part of a wider movement of agrarian elites out of the sugar heartland of western Maharashtra into the new real estate markets of regional Mumbai. Before liberalization, land was a tightly regulated commodity and the sector of real estate did not exist. Now, with liberalization reforms, former sugar elites are diversifying into the lucrative real estate sector— land is the new sugar in western Maharashtra.’

Balakrishnan says that the difference between western Maharashtra and western UP is in the form of sugar production: cooperative versus corporate set-ups. ‘This is linked to the other big difference between the two states—the availability of water. Sugar cooperatives in western Maharashtra are located in an arid zone, and it was only because of heavy irrigation subsidies that the region was able to support a water-guzzling crop like sugarcane. Western UP’s fields are located in the fertile and water-rich Gangetic Plain. But besides these differences, the commonality is caste politics. Because of the big shifts listed above—the withdrawal of agricultural subsidies, the acute agricultural labour shortage— an important agrarian vote-bank [of] the Jats in UP [and] the Marathas in Maharashtra now face a decline in their economic status. The recent agitations of these ‘dominant castes’ to be included as OBCs is a symptom of their declining economic power in a liberalizing and urbanizing economy. The dominant caste landowners whose lands are close to Delhi, Mumbai and other megacities are becoming a new ‘rentier’ class. But others who are left behind in regions which are not seeing a similar appreciation in land price are demanding a ‘backward’ status as a way of securing new privileges in a rapidly changing context,’ she says.

Without addressing the sugar crisis, the BJP will find it difficult to repeat its 2014 Lok Sabha performance in Maharashtra and UP, and without these two states, its chances of winning a majority in Parliament on its own—and of retaining power at the Centre—would be reduced. It therefore came as no surprise that the Centre announced a Rs 7,000 crore relief package in early June that would help clear part of the arrears that farmers are owed. On top of that, the GST Council is exploring the option of a 5 per cent sugar cess. While this would raise a few thousand crore more in the aid of farmers, the consensus opinion is that it is bad economics.

MS Mani, partner, Deloitte India, who specialises in indirect taxes, says that 15 types of cesses were abolished to make way for the GST so that taxation would become business friendly. A sugar cess would set a dangerous precedent. For one, any other sector in distress would demand the same. “If they do it for sugar,” he says, “what is to prevent them from doing it for jute, cotton, textiles, tobacco and other products?” Then there is the danger that if the Centre introduces new cesses, the states will demand the right too. “If Maharashtra and UP, being large sugarcane producers, try to levy a sugar cess, West Bengal will levy a jute cess, Gujarat will levy a cotton cess, and these states will say there was a cess on these products before GST. It is not something new,” he says.

The next GST Council meeting is expected to take a decision on the cess proposal, and if it passes, then sugar could become the Trojan horse that implodes the idea of GST.

Verma says that there is a 7 million tonne surplus of sugar this year and while the Government has allowed 2 million to be exported, that is not enough. “There is still 5 million tonnes of surplus left which is putting pressure on the domestic prices. Because of which we are losing money and are unable to pay farmers. Either you [the Government] buy it and do whatever you want. Or you help us in exporting because we are facing a loss,” he says.

Over the long term, rational sugarcane pricing is necessary. In 2013, a committee under former RBI Governor C Rangarajan had recommended decontrol of both the raw material as well as the product, but the Government had freed prices only of the latter—that is, of sugar—and left the input untouched. “The committee had recommended a formula saying the sugarcane price [what mills pay farmers] should be automatically determined at 75 per cent of revenue from sugar or 70 per cent of revenue from sugar and primary byproducts. That formula has not been accepted and government continues to fix a price. If it is making us sicker, then obviously there is something very seriously wrong in the system of price fixation of sugar. Therefore you need to rationalise sugarcane pricing and adopt the Rangarajan Committee formula,” says Verma.

Turning sugar over to market forces is a risky political decision. On the other hand, so long as controls exist over the commodity, the Government will repeatedly have to come out with bailout packages because farmers cannot be antagonised. It is a bitter Catch 22. The silver lining is that elections being round the corner means the Government has to act. Naiknavare says, “Otherwise, they would have said, ‘It is your business, you handle it.’ Because of elections, we have some hope that they will come to our rescue.” Whether that results in sound economic decisions or makes any long-term difference is another matter altogether.

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