UP sugar crisis: Soft loans to mills seen as face saver

The stand off between the Uttar Pradesh state government and the sugar industry over cane pricing is heading for a climax. Around 65 of the 99 sugar mills in the state have stopped operations since Tuesday evening, and slammed the government for what they claim is an "unreasonable, unaffordable and illogical" State Advised Price (SAP) for sugarcane. The mills idling right now include those of industry leaders like Bajaj Hindusthan and Balrampur Chini.

In their closure notice to the government, sugar mills have highlighted the huge cash losses suffered so far because of high cane prices. This has also led to the companies not being able to pay farmers on time, and caused arrears to pile up.

Also Read: UP sugar crisis: Price over Rs 225/qnt unviable, says ISMA
Mills have refused to pay anything more than Rs 225 per quintal for sugarcane based on the Rangarajan Committee's formula. Sugar industry body ISMA has warned that the current SAP of Rs 280 per quintal will lead to at least Rs 12,000 crore of arrears to farmers.
But the state government has ignored the plea and mill owners claim coercive action has begun. The state government is said to have suo moto passed cane allotment orders and announced dates for commencement of operations.
To make matters worse for sugar mills, unlike in 2006 in a similar situation, banks are unwilling to extend credit because of the high debt burden and the distortion between the production cost and the realisable price. ISMA estimates the cost of producing sugar is around Rs 36 per kilogram, and the selling price currently is barely Rs 30 per kiogram, down from Rs 35-36 last year.
The mills too have dug in their heels and are prepared for a confrontation, aware that both the state and central governments cannot afford a long drawn out battle.
This is not the first time the UP sugar industry has sparred with the government on the issue of cane pricing. During BSP supremo Mayawati's tenure, mill owners had moved the Allahabad High Court challenging the State Advised Price (SAP) for the 2010-11 crushing season. In fact, under Mayawati, SAP was hiked over 90 percent, on top of a 32 percent hike by her predecessor Mulayam Singh Yadav. It will be political hara kiri for the Akhilesh Singh government to reduce the SAP. But if mill owners don't relent, the young Chief Minister may be left with no choice but to intervene with a direct subsidy to farmers.
UP is the second largest producer of sugar after Maharashtra.
And much as the Samajwadi Party government in UP wants to woo the 35-lakh strong farmer constituency with higher cane prices, it can't afford to ignore the sugar industry's demands altogether. That could even result in the farmers getting nothing, as well as the treasury losing out on sugar revenues, a key source of income.
And the stakes are high for the central government as well. Already under fire for its inability to curb soaring vegetable prices, the UPA would not want sugar also to be added to that list.
A group of senior Cabinet ministers met to help defuse the crisis. Finance Minister P Chidambaram, Agriculture Minister Sharad Pawar, Commerce Minister Anand Sharma and Aviation Minister Ajit Singh were present at the meeting.Buzz is that the Centre may prevail on banks to give subsidized loans to sugar mills.