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77th AGM- Presidential Address by Shri Narendra Murkumbi
The Taj Mahal Hotel, New Delhi
21 Dec 2011
SHRI NARENDRA MURKUMBI
AT 77TH ANNUAL GENERAL MEETING OF THE
INDIAN SUGAR MILLS ASSOCIATION
ON 21ST DECEMBER, 2011
AT NEW DELHI
Prof. K.V. Thomas ji,
Officials from the Government,
My fellow members of the Indian Sugar Mills Association, Friends from our National Cooperative Federation and other Associations,
Ladies and Gentlemen
1. On the occasion of 77th Annual General Meeting of the Indian Sugar Mills Association, I feel honoured to welcome all of you today.
2. On behalf of the Association and myself, it gives me immense pleasure and honour to welcome the Hon`ble Minister of State (Independent Charge) for Consumer Affairs, Food and Public Distribution, Prof. K.V. Thomas to our 77th AGM. We thank him for making time in his very busy schedule to come here and guide us as we endeavour to grow and prosper as an important industry in India. Sir, during the last one year, we have received great support and understanding from you. We would look forward to similar help in the years to come.
3. Sir, the two foremost challenges for our industry are the rigid regulations constraining us and the cyclicality in production. Both these problems are inter-linked. The lack of freedom to make decisions on sound commercial basis is amplifying the financial distress in the industry. This leads to ever sharper swings in sugar production from year to year. During the last sugar cycle, sugar production slipped sharply from 26.3 million tons in 2007-08 to14.5 million tons in 2008-09, a drop of 11.8 million tons. This swing was bigger than even the total output of the world`s second largest exporter, Thailand.
4. If one looks at the reasons for cyclicality in sugarcane and sugar production, bad weather is one reason but clearly the predominant cause is the delay in payment of adequate cane price to the farmers, leading to reduction in area under sugarcane and lack of proper care of the crop by the farmers causing lower yields and lower sugar recoveries. After two years of low sugarcane and sugar production in 2008-09 and 2009-10, the sugar production in 2010-11 was substantially more than the domestic consumption. If we look at the past several years, we will notice that two years of high sugarcane and sugar production is usually followed by two years of low sugarcane and sugar production and vice-versa.
5. Not only does this cyclicality in sugarcane and sugar production puts a huge burden on the sugar industry, but also causes harm to the sugarcane farmers as well as consumers. The farmers do not get adequate payment for their cane on time during surplus years and consumers have to pay a high price for sugar during low production years when they are exposed to high import prices of sugar.
6. Our other great challenge is the lack of freedom to operate on normal commercial basis like every other industry in the country.
7. The Central Government continues to exercise major controls over the sugarcane and sugar sector right from the pricing of sugarcane and reservation of cane area to the quantity of sugar each mill can sell every month and levy obligation on sugar industry as also packing of sugar only in jute bags. In addition, we do not have the freedom to export sugar freely. The use and movement of molasses and ethanol is also heavily regulated.
8. Further, some major sugar producing States declare State Advised Prices with no reference to the economics of the industry.
9. These constraints have collectively made the industry weak and poorly-capitalized. We are also seen by investors and banks as lacking the ability to have significant impact on our own well-being and future prospects and more subject to rigid controls.
10. In a free environment, companies would be more competitive and efficient, have better access to capital, invest more in agricultural and technical development and better serve its farmers and customers.
11. The industry has been continuously requesting the Government to allow a phase-wise reform of the sugarcane and sugar sector.
12. In the first phase, we have requested for removal of the sugar industry`s obligation to supply 10% of our production as levy sugar at a discounted price to the Government for the Public Distribution System (PDS) and also the abolition of monthly regulated release mechanism by which each mill is told how much to sell every month. None of these controls are being exercised by the Government on any other agri-business sectors in the country. Sir, similarly none of these controls are applicable to the sugar industry in any of the major producing countries abroad. We are not sure why such controls continue to be imposed only on the Indian sugar industry.
13. The compulsion to supply 26 lakh tons of sugar for the PDS at a discounted price (now coming to only 60% of our cost of production) causes losses of around Rs.3,000 crore to the sugar industry every year. This directly affects the earnings of the sugar mills which, in turn, obviously affects payments to cane farmers. It also has its impact on the price of the balance 90% sugar sold in the open market.
14. When the Government is directly procuring its requirement of wheat, rice etc. from the market for the PDS and bearing the financial burden of the same, the question is why a similar practice is not being followed in the case of sugar. Why are we being forced to supply levy sugar below cost when we are making losses even though, under the direct procurement route, the additional burden that the Government will have to bear will be just about 3% of its annual food subsidy bill?
15. The archaic control that the Central Government exercises on the monthly sale of sugar by each mill through the regulated release mechanism is again applicable only to the sugar industry in India. As per Food Ministry`s own note to the Cabinet in the past, the regulated release mechanism has not served its purpose of controlling the sugar price and twice in the recent past has recommended for abolition of the same. Sir, due to this control, we cannot plan our cash flows and our member mills are unnecessarily over-burdened with high stocks and consequent high cost of production. Here the weaker factories with less financial capacity are being excessively stretched and get into financial distress especially towards the end of the season.
16. With two high sugar production years in 2010-11 and now in 2011-12, there is a challenge to sustain the high production into the sugar season 2012-13. Sir, for this we need to ensure that the farmers get adequate, remunerative cane price and that also on time. If we do not take adequate steps now, replanting of cane would slow down and area under sugarcane may see a fall in the next sugar season.
17. From a position of an importing country during the previous two years, the country was able to export substantial quantities during 2010-11 season. I must point out here that even during the years of import it was the domestic sugar industry that was responsible for most of the imports. While small quantities of white sugar was imported by traders and bulk consumers, more than six million tons of raw sugar was imported and refined for domestic consumption over two sugar seasons by the sugar industry. Three stand-alone sugar refineries located at various ports have been commissioned in the country since 2008. In addition, over 150 sugar mills across the country have capability to refine raw sugar either in combination with cane crushing or in the off-season or both. The sugar industry has thus shown its ability to be a reliable supplier of sugar to the Indian consumer even in very adverse circumstances of low sugarcane availability.
18. Ideally, the sugar industry and indeed every other agro-industry should be allowed to freely export their produce or sell it in the domestic market based on relative returns. This would allow market forces to balance demand and supply without the need for intervention from the Government. However, we recognise that in the recent past, this has not been possible for the Government due to political sensitivities.
19. The Central Government during 2010-11 sugar season allowed exports of sugar in batches, first against old Advance Authorization Scheme (AAS) obligations and later under OGL in 3 tranches of 5 lakh tons each. This took care of most of the surplus production during the year. It not only ensured that the industry got funds from such exports to clear dues, but also was able to somewhat reduce its very high inventory carrying costs.
20. However, since the exports under OGL were allowed only in April, 2011, the cane price arrears did peak at close to Rs.5,000 crores which caused concern within the industry as well as the Government. But, the industry was able to finally clear almost all the cane price arrears of farmers.
21. The policy of allocating the exportable quantity amongst all the sugar mills in the country on the basis of previous three years` production has benefitted every sugar mill in the country.
22. High prices of cane being paid across the country coupled with a clearing of arrears have encouraged our farmers to plant more cane for this season. We are hopeful that we may be able to pay farmers on time this year, especially if domestic prices can stay above our cost price and the surplus sugar (which we estimate at about 4 million tons) can be taken care of by way of timely exports.
23. Sir, you have been very considerate in allowing 1 million tons of sugar exports at the right time when the peak crushing month has just begun. Exports of 1 million tons would give the industry about Rs.3000 crore of extra cash flow. However, during the months of December to March, the country produces about 60 lakh tons each month against a domestic consumption of about 18 lakh tons every month. In other words, the industry keeps increasing its sugar inventory balance by over 40 lakh tons on a monthly basis, blocking almost Rs.11,000-12,000 crores of funds in inventory every month. This adds to our cost of production due to high interest rate on working capital finance but it also reduces our capacity to pay to the farmers on time especially during the crushing season. Therefore, Sir, it would be very essential that further exports are allowed at the earliest.
24. The State elections in some of the States are round the corner and we apprehend that the Model Code of Conduct may be announced very soon which may cause a delay in further export permissions by the Government. Additionally, the international futures market shows downward trend. Export prices have fallen from the range of US$700 to $800 prevalent in the last 2 quarters and are currently bid at around $600 per ton FOB. We also expect further fall in prices in 2012. It is important to point out that bulk of the exports should be allowed before March so that the industry meets its cash flows during the crushing season when the fund requirement to pay the farmers is the highest. Therefore, Sir, our request to you would be to kindly allow further exports of the surplus sugar starting in the end of December, 2011 itself, so that the sugar can be physically moved from January, 2012.
STATE ADVISED PRICES
25. The current sugar season is certainly a difficult year for all of us not only from the point of view of surplus sugarcane and sugar production and pressure on sugar prices, but also because some of the State Governments have fixed very high cane price in their respective States. The second largest sugar-producing state in the country, namely, Uttar Pradesh is reeling under an unprecedented and historically high State Advised Price of Rs. 240-250 per quintal. In just about 2 years, the cane price has been increased from Rs. 165 to 240-250 per quintal i.e. an increase by almost 50%. On the other hand, if we look at the ex-mill price of sugar in Uttar Pradesh, the increase in two years is not even 10%.
26. Sir, we feel that this is a very dangerous situation where political considerations have completely taken over and cane prices are fixed at high levels without any relationship to the revenue of the sugar industry. If such a high sugarcane price is to be paid, the cost of production of sugar in U.P would be about Rs.33 per kilo. Therefore, in order to ensure that sugar mills are able to recover their cost of production, the ex-mill price of sugar would need to be allowed by the Government to remain at or above Rs.33 per kilo.
27. We have studied all the major sugar producing countries in the world, including, Brazil, Thailand, Australia, Mauritius and some countries in Africa including Tanzania and Kenya. We find that all these countries have established an excellent practice of fixing the sugarcane price in relation to the sugar price and price of by-products. All these countries have expanded their sugarcane production mostly by way of improvement in yields and sugar recoveries, because such a system of linkage of cane price to sugar price with due weightage given to the sugar recovery incentivizes both the industry and the cane farmers to invest in the crop. Further, with such a linkage, major fluctuations in sugarcane and sugar production over the years have got controlled in these countries.
28. Sir, the Ministry of Food had last year set up a Committee under Mr. Nanda Kumar, the former Agriculture Secretary and Food Secretary, Government of India and the Committee had submitted its recommendations to the Government on such a linkage of sugarcane to sugar price. Consequent to the recommendation of the Committee under Mr. Nanda Kumar, the Prime Minister`s office appointed another High level Committee under Dr. C. Rangarajan, the Chairman of Prime Minister`s Economic Advisory Council, to recommend for such a formula linking sugarcane price to the sugar price. We were very hopeful and encouraged by such an appointment of a Committee under the respected Dr. Rangarajan and which included, the Chief Economic Advisor. But to our dismay, this committee is yet to submit its recommendations despite passage of over one year. Sir, through your good offices we would like to request the Government to expedite the report from this high level Committee. We assure you that such a linkage would not only reduce the cyclicality but increase the yield, sugar recovery as well as sugar production faster than with the current distorted system.
29. Sir, the Government approved mandatory 5% ethanol blending with petrol as a National Programme way back in October, 2007. However, due to some doubts raised by certain interested parties, the matter was deliberated again by the CCEA in 2009 and 2010. The CCEA after hearing all concerned, reiterated the decision of 5% mandatory blending of ethanol in its meeting held in November, 2009 and again in August, 2010. The CCEA in its meeting held in August, 2010, while fixing provisional procurement price of Rs. 27 per litre of ethanol ex-factory, appointed an Expert Committee under the chairmanship of Dr. Saumitra Chaudhuri, Member, Planning Commission. The Committee included representatives from Ministry of Food, Petroleum and Chemicals as well as representatives from Oil Marketing Cos (OMCs), CACP and sugar industry.
30. The Expert Committee submitted its recommendations to the Government in April, 2011, on a final ethanol pricing formula, linked to the petrol price at the depot. Unfortunately, the recommendations are yet to be approved by the Government. Meanwhile, the sugar industry continues to supply ethanol at a provisional price of Rs. 27 per litre while the world price has climbed to Rs.38 per litre. The sugar industry and ethanol manufacturers have successfully supplied ethanol to the Oil Marketing Companies in 2010-11 and have contracted for supplying about 60 crore litres again in 2011-12 sugar season. During 2010-11 sugar season, despite 5% blending, the country had to export more than 6 lakh tons of molasses (due to lack of adequate demand within the country) at throw-away prices for use as cattle-feed. This quantity alone could have substituted almost 1% of the annual consumption of petrol in India.
31. Sir, we have calculated that the oil companies are able to save around Rs. 20 per litre of ethanol in comparison to supplies of petrol. In other words, at 5% ethanol blend level, the oil companies are actually saving about one rupee on every litre of ethanol-blended petrol in comparison to pure petrol. This one rupee saving could either be retained by OMCs, which will reduce Government subsidies to that extent or passed on to the consumers by way of reduction in price of petrol. At 60 crore litres and a saving of Rs. 20 per litre, the oil companies are clearly saving Rs. 1200 crore in one year. With the approval of final pricing of ethanol, we are sure that more and more sugar factories and ethanol manufacturers would be willing to supply additional ethanol to the OMCs, which can go up to 100 crore litres for the 5% blending programme, from the present 60 crore litres per year. This will give them further savings of Rs. 800 crore per year and total savings of OMCs due to the 5% ethanol blending programme will go up to Rs. 2000 crore.
32. Sir, ethanol is a by-product from sugarcane, and hence renewable. It is an environment-friendly fuel used now almost all over the world by all the developed and developing countries in some proportion. Further, ethanol is a very good oxygenate and because of its extra oxygen molecules it helps the petrol portion of the blend to burn much cleaner, reducing carbon monoxide in the exhaust and hence the overall environmental pollution from fossil fuel.
SUGAR DEVELOPMENT FUND
33. The Sugar Development Fund was started in 1982 by way of collection of cess on all sugar produced by the sugar mills. The rate of cess is Rs.24 per quintal of sugar at present.
34. The SDF Act and Rules lay down that the funds would be utilized to give loans to only sugar mills for cane development, modernization and expansion, cogeneration and ethanol production, as well as for buffer subsidy, export subsidy and interest subvention.
35. Several sugar mills in the country have made major expansions in the capacity, modernized their technology and machinery and set up facilities for better utilization of their by-products, namely, bagasse and molasses, to generate power and produce ethanol respectively. We all appreciate the role of SDF in making the sugar mills more viable and in improving sugarcane varieties in several areas which give better yield and recovery as well as make the mills more efficient.
36. Encouraged by the concessional SDF loan availability on time in the past, several sugar mills have embarked upon setting up new projects for not only modernization and expansion of capacity but also setting up facilities for production of ethanol and generation of power. Several SDF loan applications have been cleared by the Sub-Committee of the SDF and are awaiting final approval of the Government. Sir, you will appreciate that only when the SDF loan sanction letters are issued, we are able to achieve final closure of our projects and even if there is delay in final disbursement of loan due to any reason like shortage of funds or lack of availability of budget etc., sugar mills are able to tie up for temporary bridge loans or some would also like to divert working capital to complete their projects. Therefore, Sir, keeping the excellent track record of SDF in the past, we are hopeful that all the pending SDF loan cases, some of them at an advanced stage, would get early approval of the Government so that the projects can be completed on time and without any major cost overrun. This will not only improve our viabilities but also produce enough of sugar, ethanol and power which the country requires in larger and larger quantities in the years to come.
INTERNATIONAL SUGAR ORGANISATION (ISO)
37. The International Sugar Organisation has recently elected our esteemed Dr. B.C. Gupta, Secretary (Food and Public Distribution) as Chairman for the year 2012. Compared to our size in production and world trade, we as a country have been far less active in international forums. This election goes some way to rectifying our absence on the world stage.
38. India will also be hosting the next Council and administrative committee meetings of ISO in New Delhi in April 2012, when we understand there would be a half day session on the Indian sugar industry too. We assure you, Sir, of our full support and assistance on the occasion. The industry and the Government will work together to make this event a grand success.
39. On this occasion, I would like to say a few words about our Association, which has now completed 77 years of dedicated service to the sugar industry.
40. The process of restructuring the office of ISMA was undertaken a year back. We have inducted a young team under the leadership of Abinash Verma, our new Director General with new specialists in the fields of communication, crop & market analysis, by-products and legal affairs. The Association has now taken up new activities like satellite mapping, analysis of the price trends both within the country and abroad, better media relations, improving the website, more press conferences, meetings with farmers groups, as well as specialized efforts on by-products, taxation etc. We hope that ISMA would reach new heights of excellence in the service of the sugar industry going forward.
41. Before I end my Presidential address, I wish to acknowledge with a deep sense of gratitude the invaluable advice and assistance that we have continuously received from the Prof. K.V.Thomasji, Hon`ble Minister of Consumer Affairs, Food and Public Distribution.
42. I would also like to whole-heartedly thank the Hon`ble Agriculture Minister, Shri Sharad Pawarji, who has immense experience and knowledge of this sector and who has always shown his readiness to address our issues and help the industry and its farmers at all times.
43. We are very grateful to the Finance Minister, Hon`ble Shri Pranab Mukherjee who has been very positive and helpful to the sugar industry.
44. I am also thankful to Hon`ble Shri Jaipal Reddy, Union Minister for Petroleum and Hon`ble Dr. Farooq Abdullah, Union Minister for New and Renewable Energy who have played a very proactive role in the ethanol blending programme in the country.
45. I am thankful to Hon`ble Anand Sharma, Union Minister for Commerce and Industry for his encouragement and support.
46. I am thankful to Dr. B.C. Gupta, Food Secretary for all the help and encouragement.
47. I am thankful to Shri T.S. Randhawa, Additional Secretary & Financial Advisor, Ministry of Consumer Affairs, Food and Public Distribution for his help and support.
48. I am also thankful to Dr. Ashok Gulati, Chairman, CACP for his help and guidance. I am also thankful to Shri J.K. Sharma, Chairman, Tariff Commission for his support.
49. I am thankful to Shri T. Jacob, Joint Secretary (Sugar), Ministry of Consumer Affairs, Food and Public Distribution for his help and guidance.
50. I am thankful to Shri G.C. Chaturvedi, Secretary, Shri Sudhir Bhargava, Additional Secretary, Shri Vivek Kumar, Joint Secretary, Mrs. Rashmi Aggarwal, Director, Ministry of Petroleum and Natural Gas for their help and guidance.
51. I am thankful to Dr. Saumitra Chaudhuri, Member, Planning Commission for his support and guidance in finalization of ethanol pricing.
52. I am also thankful to Dr. Rahul Khullar, Secretary, Commerce and Industry and Dr. Anup K. Pujari, Director General, Foreign Trade for their help and assistance.
53. I am also very much thankful to Shri P. Uma Shankar, Secretary, Ministry of Power for his help and guidance.
54. I am also very thankful to Ms. Omita Paul, Advisor to Finance Minister for her support and guidance.
55. I am thankful to Dr. Kaushik Basu, Chief Economic Advisor, Ministry of Finance for their help and guidance.
56. I am very much thankful to Shri Adhir Jha, Director (SDF) for his help and guidance.
57. I am thankful to Shri Rajan Sehgal, Chief Director (Sugar), Shri G.S. Sahu, Deputy Secretary (Finance), Ministry of Consumer Affairs, Food and Public Distribution and other officials of the Sugar Directorate and Department of Food for their help and assistance.
58. I am thankful to Shri Jayantilal B. Patel, President, National Federation of Cooperative Sugar Factories Ltd., Shri Indubhai C. Patel, Executive Vice Chairman, Indian Sugar Exim Corporation and Shri Vinay Kumar, Managing Director, National Federation of Cooperative Sugar Factories Ltd. for their help and assistance extended to us from time to time.
59. I wish to record my appreciation of our Past Presidents, including Chairpersons of various Sub-Committees and the Regional Associations for their guidance and support. I would like to make a special mention of my colleagues on the Committee, especially the Vice-President Shri Gautam Goel, my immediate Past President Shri Vivek Saraogi and the members of our Governing Council who have always been available for consultation and advice.
60. I wish to record my appreciation for the hard and dedicated work put in by the officers and staff of Indian Sugar Exim Corporation and ISMA.
61. I thank the distinguished guests who have so kindly responded to my invitation and the Media for giving the industry positive recognition and support during the entire year.
May I request you Sir, to kindly inaugurate our proceedings.
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