India has been known as the original home of sugar and sugarcane. The Indian sugar industry is the second largest agro-processing industry in the country, contributing Rs 23 billion to the Central exchequer. India is the second largest producer of sugar in the world after Brazil and it is the largest consumer of the sweetener with about 20 million tonnes per annum. In 2007-08, the country produced a record 28 million tonnes of sugar and in 2008-09 the production is expected to be around 27 million tonnes. Besides being the second largest producer, it has also the second largest area under sugarcane cultivation. Presently, about 4.3 million hectares of land is under sugarcane with an average yield of 70 tonnes per hectare. The Indian sugar industry is the most cost-effective, despite small land holdings and low productivity. India is also the fourth efficient processor of sugar despite low capacity of its sugar plants as compared to very large sized plants in other parts of the world. In India, the major sugarcane producing states are Maharashtra, Uttar Pradesh, Andhra Pradesh, Gujarat, Tamil Nadu and Karnataka. These states account for 85-90% of the cane produced in the country. The sugar industry is broadly classified into two sub-sectors, the organised sector consisting of the sugar factories, and the unorganised sector consisting of the manufacturers of traditional sweeteners like gur and khandsari.

Out of the more than 470 sugar mills in the country, about 60% are operating in the cooperative sector, 35% in the private sector and the rest in the public sector. The cooperative sector accounts for about 43% of the total production in the sugar industry. The sugar cooperatives are politically powerful, especially in Maharashtra where most of the sugar factories are owned by politicians. There are more than 50 million farmers engaged in sugarcane cultivation whereas more than 2.5 million skilled and semi-skilled workers are employed by the industry.

Sugarcane is a tropical crop grown in a frost-free and warm climate (with high temperatures for at least 8 months). The crop grows for 8-24 months, depending on the climate. In general, tropical varieties are adapted to an 18-36 month growing period, while sub-tropical varieties are adapted to a 9-12 month period. It grows best on medium heavy soils, but can also be raised on lighter soils and heavy clays, provided there is adequate irrigation available in the former type of soils and drainage is good in the latter type of soils. The crop grows best in the tropical regions receiving a rainfall of 750-1200 mm.

In India, around 90% of the sugarcane cultivation is under irrigated land. The irrigated area under sugarcane cultivation accounts for around 5% of the total irrigated area. Sugarcane is a very water-intensive crop. It is second to paddy in water requirements.

India has ideal conditions for growing sugarcane at a low cost, such as tropical climate, easy availability of low-cost labour, and low-cost of irrigation facilities. More than one crop is harvested from a planting and after the first crop is removed, two or more so-called stubble crops (ratoons) are obtained.

Planting season normally starts from February to April and harvesting starts from the following October. Crushing starts in October, peaks in January and continues till May.

Crushing is not done during the monsoon as sugar recovery will be very less. Sugar production in the country is hampered by low sugar recovery of 10-11% compared to 12-13 % in Brazil and other major global sugar exporting countries.

In India, sugar production follows a 5-7 year cycle. Production increases over a 3-4 year period, reaches a high, which in turn, results in lower sugar prices. As a result of lower sugar price realisations of sugar mills, the sugarcane arrears to farmers increase. This results in lower sugarcane production for the next 2-3 years. Because of lower sugar production, the prices shoot up resulting in increased area under sugarcane cultivation during the next season, following which there will be a glut again.

According to the Sugar Control Order, the Government of India fixes a Statutory Minimum Price (SMP) for sugarcane every year. This is the minimum price the sugar factories will have to pay to the farmers. The SMP is fixed by the Commission for Agricultural Cost and Prices (CACP) in consultation with the state governments. For the year 2007-08, the SMP for sugarcane was fixed at Rs 81 per quintal with a basic recovery of 9%. In order to boost sugarcane production, some state governments fix a higher price than the SMP, called the State Advisory Price (SAP). For example, in Uttar Pradesh the state government has fixed SAP at a much higher level of Rs 125-130 per quintal for 2007-08. This has been challenged by the mills and the High Court has asked the mills to pay Rs 120 per quintal. The mills are not in a position to pay even this amount resulting in huge accumulation of cane arrears to the farmers.

The raw material cost, that is the price paid to the farmers for the cane, is the major cost for the mills in sugar production. This cost is more or less fixed in the form of SMP or SAP. When the selling price of sugar falls due to glut in the market, the mills incur heavy losses and find it difficult to pay for the cane, resulting in many mills falling sick. In Maharashtra alone, where most of the mills are under the cooperative sector, some 100 mills became sick and were saved from closure by the timely intervention of the Centre which offered a package for the revival of such mills through Nabard. All but six mills had been revived and were in operation during the current crushing season. Cane price realisation is a vexatious issue that will take years to resolve. It is obvious that sections of the sugar sector perceive a threat, that is why this has been added as one of the conditions for sugar sector decontrol.

One of the weaknesses of the Indian sugar industry is that despite being an essential commodity, it accounts for only 1% of the GDP. Since sugar is a sensitive commodity, its distribution is being controlled by the government. Mills are required to reserve 10% of their production as levy quota for distribution under the public distribution system (PDS). The remaining 90% is for free market sales through a monthly release mechanism announced by the government. The mills are to strictly follow the release orders every month and are not allowed to sell more or less. This is to avoid hoarding and profiteering on a commodity, which is essential for the common man.

Since the country produces more sugar than its domestic consumption, the prices had been falling in the last two years. In order to promote export of this surplus sugar and thereby stabilise the sugar prices, the Centre is giving export incentives to the mills - Rs 1,350 for tonne to mills located in the coastal areas and Rs 1,450 to mills located in the interior parts of the country. As a result of the incentive scheme, the country is expected to export a record 4.2mt in this crop year ending September, exceeding the earlier estimates of 3.5mt. With the surge in exports, which had never been more than 2mt in a year, India would sell more sugar abroad than Australia, the largest exporter of sugar.

According to Shanti Lal Jain, director-general, Indian Sugar Mills Association, "With India's emergence, the whole sugar exporting community feels threatened." Out of the projected 4.2mt, about 3.6mt had been exported already, Jain said, adding India's efforts to tap the raw sugar export markets had helped raise exports.

"The secret of our success is that we are giving the best quality of raw sugar and making the best out of our strategic location, which gives us freight advantage," he said. India, the world's second biggest sugar producer, entered the raw sugar export market in 2007 by selling to Dubai's Al Khaleej, the world's largest refinery, which has now switched to India from Brazil.

Export incentives evoked sharp criticism from Brazil, Thailand and Australia, top sugar exporters in the world, which accused India of becoming the international rogue of the sugar trade. "Our rising exports are looked at negatively. What we got was WTO-consistent subsidy and we are very transparent about it," Jain said. However, with the exports reaching a record level, the Centre is unlikely to extend the incentives beyond August, when the scheme would expire.

The government may decontrol the sugar industry from the next crushing season beginning October 1. The Tuteja Committee had recommended total decontrol of the sugar industry from October 2005. But the government felt that sugar prices would come under tremendous pressure once the control goes. Besides, there was a sharp fall in domestic sugar production in 2003-04 and 2004-05 when the output reached a recent low of less than 140 lakh tonnes from 201 lakh tonnes in 2002-03. Even the sugar industry was divided, with the cooperative sector not very keen on decontrol. But the private sector wants the monthly release mechanism and the frequent export controls to go so that they could benefit whenever the domestic and international prices rise. However, it is feared that once the release mechanism goes the mills will unload their stocks erratically, creating a glut in the market resulting in crash in prices. It can also lead to hoarding by traders and holding back the stocks by the mills, creating an artificial shortage and rise in prices. However, the government is very cautious about decontrol as it may affect the interest of the consumers. In any case the government cannot compromise on the 10% levy sugar reserved for distribution under the PDS.

The ethanol policy announced by the government has come as a bonanza for the sugar industry which is facing a problem of plenty. Public sector oil companies are required to mix 5% of ethanol with petrol from October last year and 10% from October 2008. Ethanol is produced from molasses, a byproduct of sugar production. The Maharashtra sugar industry, which is mainly in the cooperative sector, has been looking at ethanol as a major revenue source with long-term potential. While blending, or doping, of petrol with ethanol is a globally accepted practice, it is still to take off in the country. Even the 5% doping of petrol with ethanol has not been successful and it is doubtful whether the sugar mills will be able to meet the deadline to hike this to 10% from October this year.

The price of ethanol at 21.50 per litre fixed by the government remains a major area of disagreement. The mills would like ethanol to be priced on par with crude, which is at Rs 32 per litre, much lower than the price of a litre of petrol.

Some mills also utilise bagasse, another byproduct in sugar production, for co-generation of power. In Maharashtra about 200mw of power is produced the sugar factories, which is mainly consumed by the mills themselves. The plan is to produce at least 1000 mw of power by the sugar factories and the surplus from them will be connected to the state power grid.

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