Dec 31, 2016 05:34 PM IST | Source:

COMMENT: Sugar debt recast no solution; farmers and mills need to talk

Restructuring sugar mill loans is a piecemeal approach to a sector that has structural issues

News reports say the finance ministry is considering a proposal to restructure sugar industry debt. Indian Sugar Mills Association (ISMA) members have asked finance minister to intervene as the sugar mills were affected by lower sugar cane production.

The sugar sector is sitting on a total debt of Rs 50,000 crore, with the top five companies accounting for Rs 24,309 crore. Most of the other mills have loan outstanding of less than Rs 500 crore.

ISMA members wanted RBI to lower its sustainable structuring of stressed assets (S4A) exposure limit of Rs 500 crore of value as most sugar mill loans are below this limit. Reports say that finance minister is amenable to the restructuring proposal and has forwarded it to his ministry.

While the sugar mills have a point that they need restructuring to take care of their mountain of debt, such repeated bailouts will not solve the core issue.

At the heart of the problem is sugarcane prices which are state controlled. State governments decide the price which mills have to pay for sugarcane purchases.

A number of committees have suggested to various governments to restructure the entire industry where the fortunes of both farmers and sugar mills are aligned to market forces.

Trouble is that a price acceptable to farmers is not acceptable to the mill owners and vice versa.

Only a year back sugar prices were lower than conversion price of sugarcane. Mills thus had to pile up on loans to stay afloat as they have a commitment to buy sugarcane. As losses mounted, their ability to repay sugarcane farmers went down. Sugarcane farmers incidentally are amongst the richest farmers in the country.

So far, most governments have shied away from the unpopular move of cutting sugarcane prices as it would mean earning the ire of farmers, who constitute a major vote bank.

Farmers in UP are now demanding a 25 percent hike in sugarcane prices ahead of state elections.

Sugar prices have shot up since September 2015 on account of poor rains but sugarcane output has been low. And there is only so much that you can raise prices of a politically sensitive commodity like sugar.

Unlike steel, textile and other sectors that are witnessing restructuring which were affected on account of cyclical nature of the industry, sugar industry has a structural problem. And debt restructuring is not a solution to that. Mill owners and farmers have to agree on a price that serves the interests of both sides. After all, one side cannot hope to thrive at the expense of the other. But that is easier said than done. Till then, the can will be kicked further down the road.

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