Earlier this month, Australia and Brazil dragged India to the WTO for its market-distorting policies on sugar. Their contention was that the subsidies, including the extent of farmer assistance, far exceeded the norms set by the WTO resulting in higher sugar production/exports which dampen the international prices and, consequently, hurt their domestic producers. This is not the first time India, the second largest producer of sugar after Brazil, has been so accused. While India’s exports at 4.64 lakh tonnes last year is a minuscule part of the global trade estimated at 450 lakh tonnes, what is increasingly worrying the world is its sugar surplus.

Till 2010-11, consistently high sugar surplus was rare in India. A year of high sugar production (and consequently larger surplus) was inevitably followed by a year or two of poor output that used up the surplus. But in the last eight years the sugar cycle has failed and the output has remained high. In 2018-19, the sugar industry is expected to close the season with a surplus that will be as high as 48 per cent of the country’s annual consumption. The government is now grappling with the new reality — how to handle the surplus?

This situation is entirely its own making. In a bid to please the sugarcane farmers, an important vote bank in States such as Maharashtra and Uttar Pradesh (UP), successive governments have announced high cane price. Over the years this has resulted in a huge mismatch between the prices of sugarcane and other crops. Today, sugarcane fetches 60 per cent higher returns than any other competing crop. Assured of both price and market, farmers prefer sugarcane even if they periodically face significant delay in receiving payment.

Sugar surplus is bad for everyone. It depresses the prices apart from affecting the cash flow of the mills. They struggle to pay the farmers and as arrears mount the government is forced to step in and help the mills clear the dues through relief packages.

To avoid this situation, the government typically encourages the mills to export. But that is easier said than done. Thanks to the high cane prices (Indian mills pay ₹2,890 per tonne of cane compared with ₹1,732 in Brazil, ₹1,739 in Australia and ₹1,842 in Thailand) and lower economies of scale, the cost of production in India is way above the international sugar prices.

In 2017-18, the production cost was ₹3,580 per quintal of sugar while the international prices averaged ₹2,080. To get exports going, the government offers subsidies which, at best, cover only a part of the cost. Mills still export at a loss to reduce the stock and release the badly needed working capital. That is why India, despite its significant surplus, is not a serious player in the global sugar market.

Ethanol blending

It is time for the government to look at a more efficient and less controversial way (in line with the WTO norms) of dealing with the sugar surplus. Not all options are politically bitter.

India imports 82 per cent of its crude oil requirements and for the sake of energy security it is imperative for it to reduce this dependence on imports. At times of high crude prices, India’s economy feels the heat as the current account deficit widens putting pressure on the rupee and as inflation rises, the monetary policy tightens, slowing down the growth.

Brazil has shown that blending ethanol with petrol is a good way to reduce dependence on imported crude and, at the same time, manage the sugar surplus.

The Modi government has done well on this front by giving a fresh impetus to the ethanol-blending programme and, most importantly, announcing remunerative prices for procurement by oil companies. It has set a 10 per cent blending rate by 2022.

Typically, ethanol is manufactured from molasses, which is a by-product of sugar. But it can also be manufactured directly from sugarcane juice. This will reduce sugar production and help manage the glut. As India alternated between sugar surplus and deficit earlier, the government did not permit large scale conversion directly to ethanol as that would have hurt sugar production.

It has now allowed sugar mills to do so and has also announced a premium price for the ethanol so produced, compensating for the revenue foregone for not manufacturing sugar. As many as 114 mills are expanding their ethanol capacities, which in the next 24 months will add 90-crore litres of capacity. In 2018-19, Brazil converted 65 per cent of its cane into ethanol directly. This helped it to keep sugar production at the required level and also reduce significantly its oil import bill at a time when crude oil prices rose sharply. This option too has a catch. When global crude oil prices decline, oil marketing companies may not be willing to procure ethanol at a higher price.

Cane pricing

The ideal way to manage sugar surplus is to link the sugarcane price to output price. Today, cane price keeps increasing irrespective of the price of sugar. That is the root of the problem. The government should come up with a formula that arrives at the cane price after factoring the value of the output (including price of sugar, ethanol and power generated from bagasse). That way supply-demand economics will come into play again.

If sugar and ethanol prices rise, it means demand is good and the formula will throw up a higher price of cane and farmers will plant more of the crop to meet the demand. The cane price offered will be low if there is a surplus in the market and the farmers will shift to another crop restoring the balance.

If the government is still keen on keeping the farmers happy, it can pay a higher price (above the one the formula puts out) and fund it from its Budget. That will ensure that the sugar sector is not forced to foot its populism. But it will come in the way of managing the surplus in the most efficient manner.

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