With the crisis in the sugar industry continuing in the current season (which began in October), the Modi government is in a dilemma over the question of extending export subsidies for the sweetener.

Sugar exporters across the country are demanding extension of the export subsidy on raw sugar, but the government is wary about international reaction. Other major sugar producing nations including Brazil (the world’s largest producer of the commodity), Thailand and Columbia, besides the European Union and Australia have opposed the export subsidy scheme.

In sugar year 2013-14 (which ended on September 30, 2014), the government extended subsidies to help sugar mills clear dues to farmers and to reduce their stockpiles. Earlier in the year, the government announced a subsidy of Rs3,300 per tonne for February and March. The subsidy was reduced to Rs2,277 a tonne for the following two months.

The export incentive for June-July was raised to Rs3,300 a tonne and there was a further hike to Rs3,371 a tonne for August-September. But the new BJP government, which came to power in May, has not taken a decision on extending the scheme or scrapping it.

The scheme, however, did not really take-off. While the government was offering the subsidy for exports of four million tonnes of raw sugar during 2013-14 and 2014-15, in the first year India exported a mere 700,000 tonnes of raw sugar, much of it by mills in Maharashtra. Total sugar exports from India — both white and raw — added up to 2.1m tonnes last year. Raw sugar exports alone added up to 1.2m (including 700,000 tonnes with export incentives).

With opposition from many other sugar exporting nations, the Indian government claimed that the subsidy policy was meant to encourage diversification from white sugar to raw sugar and that it was within the policy framework of the World Trade Organisation’s norms for developing countries.

Indian mills mostly produce white sugar, but with export incentives, many switched to raw sugar. However, in the absence of export incentives, production of raw sugar has virtually come to a halt.

In August, the WTO rejected the Indian argument, forcing the government to reconsider the scheme.

Last week, Food Minister Ram Vilas Paswan said that the government was considering the industry’s demand for extending the scheme in sugar year 2014-15. “We are reviewing whether to extend the scheme, which was originally meant for two sugar seasons,” said Paswan.

The sugar industry lobby has been demanding an extension of the export incentives. The Indian Sugar Mills Association (ISMA) claims that the subsidy should be extended in the current year to help stabilise the domestic price of sugar, a highly, politically-sensitive commodity. It will also help the industry clear the stockpile, it argues.

India’s sugar stock added up to 7.5m tonnes at the start of the new season in October. Good rainfall and an increase in acreage of sugarcane is likely to result in a bumper crop this year, leading to pressures on domestic prices.

Both the government and the ISMA have projected total production of around 25 million tonnes of sugar in the current marketing year, as against 24.4m tonnes last year. Sugar production in October and November soared to 1.78m tonnes, nearly a third more than in the corresponding period last year.

ISMA and other lobbies have not only demanded extension of the export subsidy scheme, they also want the government’s help in creating a buffer stock and a hike in import duty to 40 per cent. In August, the government raised the import duty on sugar from 15 per cent to 25 per cent.

According to the association, with sugar prices dipping to Rs28 a kg, the lowest in 2014, mills are sustaining huge losses as the cost of production itself is upwards of Rs35. The government itself pays Rs32 a kg while buying sugar for its public distribution system.

Of course, because of the wide variations, sugar mills are unable to clear their dues to cane farmers. Sugarcane arrears had peaked at Rs140 billion in May. According to the government, they fell to around Rs77.6 billion in September.

International sugar prices have also fluctuated for much of 2014. After declining to five-year lows in the beginning of the year, they perked up in recent months. The International Sugar Organisation (ISO) recently has predicted “the beginning of a new deficit phase in the world sugar cycle,” which could result in increased prices.

The global sugar body expects a shortfall in output next year mainly because of drought in key areas of Brazil which account for 90pc of its production. The ISO expects a deficit of about 2 to 2.5m tonnes of sugar, heralding the start of a new deficit phase.

Last week, in a bid to help the sugar mills, the Indian government decided to sharply hike the price for ethanol. Oil marketing companies will now have to pay between Rs48.5 and Rs49.5 a litre of ethanol, which is blended with petrol. Oil companies were earlier paying just Rs29 a litre for ethanol.About two years ago, the Indian government had made it compulsory for refineries to blend five per cent of ethanol with petrol.

The sugar lobby, however, is not satisfied with these measures by the government. The Uttar Pradesh Sugar Mills Association has warned the government of a crisis in the sector, which could lead to further arrears and delays in payments to cane growers this season.

Source:dawn.com