Sunday, July 11, 2010

Sugar To Become Sweet For Indian Companies

Indian Agriculture Minister has finally given a hint that Indian Government is considering to decontrol the sugar prices. This is sweet music to sugar sector, and upon hearing this news sugar stocks gave a thumbs up  in the last session of trading on Indian bourses. Now there is hope that the most controlled sector of the Indian Industry will be able to come out of its shackles.

When we talk of shackles we need to realize the gravity and complexity of chains that Indian Government has put on this very important industry of Indian economy. To fathom the depth of the situation let us face some hard and harsh ground realities:-
  1. India is the biggest producer of sugar in the world along with Brazil. It is also the top consumer of sugar in the world.
  2. Indian sugar mills are totally controlled through various Acts and notifications by Central Government. Take a peek at some of the chains that Indian Government has tied  this vital industry with:-

    (a)   Price to be paid for cane controlled through state advisory price (SAP).
    (b)  Procurement of cane by sugar mills allowed within a stipulated radius only.
    (c)  Price controlled for sale of sugar in free market.
    (d)  Quantity and duration of sale in free market controlled.
    (e)  Limit on quantity to be lifted by bulk consumers like soft drink manufacturers.
    (f)  Price and quantity of levy sugar to be distributed through Public Distribution System.
Levy sugar is sugar that mills have to sell to Government at a price fixed by the government. This price is generally less than half the free market price. The quantity is at present 20% of the total production of the sugar mills. Levy sugar is distributed by the government through its Public Distribution System(PDS).

Sugar mills have to pay a fixed price to cane growers through system of state advisory price (SAP). Earlier Supreme Court had ruled that SAP should be taken into consideration while fixing the price of levy sugar with effect from1983-84. The honourable court had further directed that Central Government should refund the legitimate dues to sugar mills accruing out of this order. Now Bajaj Hindustan has filed a petition with Supreme Court that Government has violated the honourable court's order by not taking SAP into consideration while fixing the levy price, leave alone legitimate dues to be paid to sugar mills. Now Supreme Court has issued notice on 8th July 2010 to central government to submit a reply to this petition.

In this issue of levy sugar, one fails to understand as to why only sugar industry has to bear the burden of subsidy. On top of that you are not ready to pay legitimate prices to sugar mills for levy sugar!! No wonder this industry is making losses day in day out. The following vicious cycle is happening in this vital industry of Indian economy:-
  1. Sugar mills are forced to reduce production below their capacity in order to cut their losses.
  2. Lower production means lower procurement of cane.
  3. Lower cane procurement induces the farmers to grow less cane and switch to other cash crops.
  4. This generates scarcity of sugar, sending sugar prices to skyrocket. This compels the central government to import sugar to meet domestic demand, and in the bargain lose precious foreign exchange.
  5. In this scenario it is a lose-lose situation for all. Cane growers lose, sugar mills lose, the exchequer loses and ultimately the Indian economy loses along with the public in general.
May be now the Indian Government will wake up to the realities of economics in sugar industry. By decontrolling the sugar prices it will allow this industry to flourish and make India the Sugar King of the world, which is its rightful place given the god-gifted fertile land that it possesses.

Reliance Industries is the biggest industrial empire of India and this group has still not stepped into sugar sector. With freeing of sugar industry of its shackles, Indian Government may create the right conditions for Reliance Industries to join the bandwagon of sugar sector in times to come!!! Keep a strict lookout for sugar sector for long term investment even if the sector is partially decontrolled by the government.