Political opportunism remains bane of sugar sector

Officials say Brazil sugar-cane body UNICA hasn't considered the damage on our sugar economy by imports of 3.1 mt, raw and white combined

UNICA, the Brazilian sugar-cane sector association, has come down hard on India for extending support to our producers to export four million tonnes (mt) of sugar through the next two years. Considering the distressing state of the world sugar market, which has seen a sharp fall in prices of late, and the Brazilian sector's paramount dependence on exports, the fact the UNICA has decried the export push is understandable.

Brazil, the world's largest producer and exporter, accounts for half the global trade. Whatever UNICA may have against India exporting to the world market, deluged by supplies from other sources, it is only after considerable deliberation that New Delhi has decided to extend a subsidy of Rs 3,500 a tonne for raw sugar exports. This is despite our mills geared to make white sugar. The primary concern of all three senior ministers was to ensure the subsidy was in line with the World Trade Organization norms. To be able to participate in exports, our shore-based factories will have to make suitable changes in the manufacturing system for the raw commodity. The subsidy of Rs 1,400 crore will be borne by the Sugar Development Fund and the exchequer. Agriculture Minister Sharad Pawar reckons the subsidy will not fully cover the premium the Indian material enjoys here over world prices.

Officials from the sector said what UNICA hadn't conveniently taken into account was the damage inflicted on our sugar economy by imports of 3.1 mt, raw and white combined, during the season ended September. Imports were mostly from Brazil. Such large imports come at a time when India has had four consecutive bumper production years, including the current season. No one will contest the compulsion of our port-based refineries to import raws for processing and then export as white. The problem arises because the much-proven grain-to-grain import-export practice has ceased to be in vogue. More, exports of foreign-origin raws processed into white should happen much ahead of the now-allowed 18-month period. When factories have to contend with overflowing stocks, circulation of any amount of foreign sugar could further damage the weak market sentiment.

"Export subsidy should be read as government acknowledgement of the deluge of stocks and the consequent low prices have led to the sector having its back to the wall. As exports of four mt of raws will aid the sector in a major way, imports need to be discouraged by raising duty from 15 per cent to at least 40 per cent. Is there any rationale of supporting growers in other countries when cane bill payment dues of factories here have crossed Rs 10,000 crore, including dues from the last season?" asks Om Prakash Dhanuka, former president of the Indian Sugar Mills Association (Isma).

To enable factories to clear cane bills, in December, the government asked banks to extend interest-free loans of Rs 6,600 crore. But as a whole, the sector has become so financially weak that most of its constituents do not stand a chance to get loans under the mandated conditions. The package will remain a non-starter unless conditions are relaxed. Hopefully, the urgency to settle bills will lead the government to consider Isma suggestions on the modification of terms. Director-General Abinash Verma says in case the new line of credit remains in limbo, factories could run up bills of up to Rs 18,000 crore by March-end. Earlier, M Srinivasan, ex-president, said if sugar prices didn't improve, dues would be Rs 20,000 crore by April-end. This is a recipe for an outburst in the growing regions. The unrest is building when the country is getting ready for elections. About 50 million grow cane.

Why has the non-payment of bills become a regular feature with our sector, unlike in Brazil, Thailand and Australia? According to Srinivasan, all these are spared the pains felt by India because they opted for a linkage between cane and sugar prices. Not only has the formula benefited growers and factories in equal measure, it is also the reason for varietal improvement in cane through tissue culture and a rise in sugar recovery from cane.

Here, in spite of the Rangarajan committee saying value-sharing of sugar and by-products such as bagasse and press mud in 75:25 between farmers and factories will usher "stability in the payment of dues", New Delhi is yet to implement it.

The Centre has taken the stand linkage formula introduction will have to await a consensus among growing states. Unfortunately, Uttar Pradesh and Punjab, which have made it a habit to load big premia on centrally-decided 'fair and remunerative' prices to please farmers, are wary on value-sharing. But as mounting bills will show, farmers are paying a heavy price for the injudiciousness of states.

Bond yields to soften as borrowings tamed

Rupee seen appreciating with CAD at $45 bn for FY14

Government bond yields could fall further as its market borrowing announced in the vote-on-account was in line with market expectations. The rupee, on the other hand, is seen range-bound, as the current account deficit (CAD) is seen narrowing. The yield on the 10-year benchmark bond could even fall to 8.70 per cent before the financial year ends while the rupee can appreciate to 61.50 to a dollar.

In the interim Budget announced on Monday, Finance Minister P Chidambaram said the fiscal deficit would be contained at 4.6 per cent of the gross domestic product (GDP). Chidambaram also announced that gross market borrowing would be Rs 5.97 lakh crore, while the net figure will be Rs 4.57 lakh crore for FY15. Besides, Chidambaram said CAD was seen at $45 billion for FY14. The projection is well below the record high level of 2012-13. In the first half (April-September) of 2013-14, CAD narrowed to $26.9 billion (3.1 per cent of the GDP) from $37.9 billion (4.5 per cent of the GDP) in the first half of 2012-13.

Earlier, the fiscal deficit was pegged at 4.8 per cent of the GDP for the current financial year. For the current one, the gross and net market borrowing was revised to Rs 5.63 lakh crore and Rs 4.68 lakh crore, respectively. Moses Harding, group chief executive officer (liability and treasury management) and chief economist at Srei Infrastructure Finance, said: “The rupee value of around 62 takes into account the switch of dynamics in twin deficits in favour of the rupee. The concerns from adequate flow of quality capital flows, conflicts in growth-inflation dynamics and political risk factors continue to retain the structural imbalance in demand-supply in the system. Taking all cues together, the risk of emergence of bunched up dollar demand is the worry point to put the rupee under pressure, while bunched dollar supplies will be absorbed by the Reserve Bank of India and importers.” According to Harding, the trading range will be 61.50-63.50 to a dollar till the Parliamentary election results are out.

The yield on the 10-year benchmark bond 8.83 per cent 2023 ended at 8.81 per cent, unchanged from the previous close. Said Brijen Puri, executive director and head of markets at JP Morgan: “The interim Budget was pretty much at expectations. The only thing is that the assumptions on the subsidies and tax collections are a bit aggressive. We had a similar situation in the last Budget as well. The yields are expected to be range-bound for the remaining part of this fiscal (FY14). The yield on the 10-year benchmark bond 8.83 per cent 2023 is seen trading between 8.70 per cent and 8.90 per cent.”

According to Puri, the central bank has been looking at reducing the volatility in the rupee. “The rupee may trade in the range of 61.50-63.50 till elections, barring a very large move in the global emerging market universe.”