Sugar industry bailout to clear only 40% of cane arrears

The union cabinet on Thursday approved a number of measures, with a total outlay of Rs7,000 crore, to address the liquidity issues of sugar mills and enable payment of accumulated arrears to farmers. Arrears to farmers stand at record Rs22,000 crore as on May 2018. 

Among the issues cleared by the cabinet are: 
  • The minimum domestic selling price of white / refined sugar to be fixed at the mill gate, initially at Rs29 per kg, which can be revised subsequently based on revisions in fair and remunerative prices (FRP) and other considerations.
  • Creation of buffer stock of 30 lakh tonne for a year, entailing an estimated expenditure of Rs1,175 crore, towards inventory carrying cost, and quarterly reimbursement to be credited to farmers' accounts against mill arrears.
  • To augment distillery capacity through upgradation and setting up new ones, the government will bear a maximum interest subvention of Rs1,332 crore over five years (including a one-year moratorium) on bank loans of Rs4,440 crore, to be sanctioned over three years based on a scheme formulated by the Department of Food and Public Distribution.
According to Crisil, the bailout package, though well intended, does nothing to address the structural issues that have plagued the industry, the most acute being non-linkage of sugarcane prices to end-product realisations. Creating a buffer stock and fixing a minimum ex-factory price for sugar will help improve the cash flows of corporate mills to the extent of Rs3,500-Rs4,000 crores or Rs9,100 crores for the industry over the next one year, which would only account for ~40 per cent of the current cane arrears. 
"Worryingly, with the supply surplus situation anticipated to continue in sugarcane sowing period of 2019 as well, a further build up in arrears cannot be ruled out. The offer of financial support to mills for setting up distillery capacity is unlikely to find many takers, given the financial situation of the industry," Crisil said in a research note.