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Impact of Global Economic Crisis on Indian Sugar Industry |

India is the world's largest consumer and the second largest producer of sugar, topped
only by Brazil. Although, according to industry circles, India produces the cheapest
sugar in the world, it is out priced in the international market because of the
interference by the Government and the states. Nearly 2.8 lakh farmers have been
cultivating sugarcane in the vast area of 4.4 lakh acres and over 11 crore people are
directly or indirectly dependent on the sugar industry in the country. This project
presents a holistic study into this sector in the light of the Global Economic crisis. |

INTRODUCTION
Indian sugar industry, second largest agro-based processing industry after the
cotton textiles industry in country, has a lion's share in accelerating industrialization
process and bringing socio-economic changes in under developed rural areas. Sugar
Industry in India is well developed with a consumer base of more than billions of
people. India is the largest consumer of sugar in the world. Sugar industry covers
around 7.5% of total rural population and provides employment to 50 million rural
people. About 4.5 crores farmers are engaged in sugarcane cultivation in India. Sugar
mills (cooperative, private, and public) have been instrumental in initiating a number
of entrepreneurial activities in rural India
India is the second major sugar producing country in the world, the first being Brazil.
Sugar industry occupies an important place among organised industries in India.
Sugar industry, one of the major agro-based industrial in India, has been instrumental
in resource mobilization, employment generation, income generation and creating
social infrastructure in rural areas. Indeed, sugar industry has facilitated and
accelerated pace of rural industrialization. At present, there are 553 registered sugar
factories having capital investment of Rs. 50,000 crores and annual production
capacity of 210 lakhs metric tonnes (ISMA Report, 2008). The annual turnover of
industry is to the tune of Rs. 30,000 crores. The central and state governments receive
annually Rs. 5000 crores as excise duty, purchase tax, and cess. The sugar industry in
the country uses only sugarcane as input, hence sugar Companies have been
established in large sugarcane growing states like Uttar Pradesh, Maharashtra,
Karnataka, Gujarat, Tamil Nadu, and Andhra Pradesh. These six states contribute
more than 85% of total sugar production in the country; Uttar Pradesh and
Maharashtra together contribute more than 57% of total production. Indian sugar
industry has grown horizontally with large number of small sized sugar plants set up
throughout the country as opposed to the consolidation of capacity in the rest of the
important sugar producing countries, where greater emphasis has been laid on larger
capacity of sugar plants. Sugar industry has brought socioeconomic changes in rural
India by way of facilitating entrepreneurial activities such as dairies, poultries, fruits
and vegetable processing, and providing educational, health and credit facilities.
Figure 1: Classification of Indian sugar industry

Indian sugar industry can be a global leader provided it comes out of the vicious cycle
of shortage and surplus of sugarcane, lower sugarcane yield, and lower sugar
recovery, ever increasing production costs and mounting losses. It needs quality
management at all levels of activity to enhance productivity and production. Attention
is required on cost minimization and undertaking by product processing activities.

HISTORY OF INDIAN SUGAR INDUSTRY


Sugar Production In Ancient Period In India

Sugarcane has been one of the major crops of India since times immemorial. Iksu, the
term of sugarcane, is found in the Atharvaveda, Vajasaneyii, Maitrayani and Taittriya,
Samhitas and the subsequent Sutras. The Aryans knew the plant from a very early
time and the fact that sugarcane is indigenous to India is beyond dispute. The word
Iksu has no parallel in any other Indo-Aryan language, which suggests that the Indo-
Aryans only came to know about the plant only after entering India. This is, supported
by the fact that little evidence of sugar or sugarcane is found in any archaeological
site of the prehistoric or early historical period, however, this negative evidence is no
proof that it was unknown.

The cultivation of sugarcane caught the attention of the Greek visitors to India so
something singular and strange. They speak of it as 'reeds that make honey without
the agency of bees. This phenomenon of sweet juice produced from reeds was
ingeniously explained by Megasthenes. According to him, the sweet juice was due to
the water which the cane absorbed from the soil being so warmed by the sun's heat
that the plant was virtually cooked as it grew.

In addition, Indian literature provides enough evidence of availability of sugarcane in


the ancient period. Sugarcane plant and its juice find mention in the medicinal works
of Caraka and Susruta. In the Jatakas, there is a reference to pressing of sugarcane in
machines. The occupation of cane pressing and the machine used in the process are
specifically mentioned. The sugarcane press and allied machines were known by the
name of mahajanta (mahayantra or kolluka). The Vyavahara Bhasya refers to sheds
where such pressing machines were installed. India early evolved the technique of
manufacturing sugar. The Arthasastra includes the manufacture of sugar from cane
juice in a list of works called Simbanika.

Caraka, in his medicinal work states that ksudra guda is formed by evaporating the
juice of sugarcane down to a quarter, a third or half of the original volume. Guda is a
purified product and contain few impurities. Even more refined are matsyandika,
khanda and sarkara, each of which is purer than the preceding one. Caraka notes the
medicinal properties of these four types, which are in fact four stages in the process of
manufacturing granulated sugar Susruta mentions phanita, guda, matsyandika, khanda
and sarkara, these being in order of purity. The Arthasastra, under kasra refers to
phanita, guda, matsyandika, khanda and sarkara.

From early Buddhist works, it seems that sugarcane was a common crop and
sugarcane juice a popular object of consumption. Sugarcane fields greeted the eyes of
a traveller wherever he went.

Kautilya notices it in the list of principal crops cultivated. But, his remarks sugarcane
is the least profitable of crops, for it is subject to various evils and requires much care
and expenditure.

Manu at one place says that garlic and sugarcane grow in the same fashion as seeds.
Probably what Manu means is that these two crops are not normally propagated by
sowing seeds but are grown from offshoots. In ancient works, Iskuda and Iksumati
occur as the names of two rivers. These names indicates that the Indians had a
knowledge of soil that best suited for sugarcane cultivation and recognised that was
the soil irrigated by certain rivers was very suitable for the crop.

Describing a sylvan village on the outskirts of the Vindhya forests of Harsacarita


gives a graphic picture of a sugarcane field; this refers to the cultivation of sugarcane
plants in enclosures, to the harm done to them by antelopes and rabbits, and to the
careful tending needed for the crop

Advanced knowledge of sugarcane cultivation is clear from the classification of the


plants into several types, differing according to their qualities. Caraka mentions two
varieties paundraka and vamsaka. The Amarakosa, though by name mentioning only
the pundra and kantara types, implies many others also in the word adayah.
Ksiravamin, the commentator, names some of these. But Susruta mentions twelve
varieties- Paundraka, bhiruka, vamsaka, sataporake, tapaseksu, kasteksu, sucipatraka,
naipala, dirghapatra, nilapora and kosakrt. In the Vedic period it thus seems that,
though the Aryans were acquainted with sugarcane, they had not acquired the
knowledge of manufacturing sugar from its juice. On the basis of the reference to the
word in the early Buddhist literature, one can assign the beginning of sugar
manufacturing in Aryan India to somewhere about the eighth century B.C assuming
some necessary antecedent period for the knowledge to grow.

In 399 A.D., the Chinese Buddhist pilgritu Fa-Hien entered India to the east of the
Indus and he writes, "As you go forward from the mountain, the plants, trees and
roots are all different from those in the land of the of ban except the bamboo, the
pomegranate and the sugarcane".30 Three hundred years later, he was followed by the
Hiuen-Tsang who travelled in 629 AD observed, "They feed themselves generally on
cakes of parchedgram, which they mix with milk, cream, butter, solid sugar and
mustard oil. The juice of grapes and sugarcane is the food of the Khatriyas. The
fermented product of grains is of Vaisyas. The Brahmans drink the juice of grapes
which differs completely from that distilled from wine". Cunningham wrote,
"Gandhara of Swat (Peshwar) produce also much sugarcane of which they make stone
honey". He mentioned, "Punjab (Pounatch) produces much sugarcane but no grapes".
Regarding Kosambhi located on Jumuna thirty miles above Allahabad, he wrotes
"This place harvests a large quantity of rice and somesugarcane."

Hiuen-Tsang during his visit (671-95) to India, "There are sweet melons, sugarcanes
and tubers and abundant....". When strangers are entertained in monastery ghee,
honey, sugar and other eatables are offered." A pill consisting of equal parts of the
bark of yellow myrobalans, ginger and sugar is prescribed for diarrhoea and solid or
dry sugar can satiate hunger and thirst when eaten."

Sugar Production In Medieval Period

In 1213 AD, the Chinese ambassador, Ch-u-ts-ai reported to Jenghiz Khan "In this
century sugarcane is cultivated. The people make wine and sugar from juice”.

In 1498, Vasco de Gama also saw large quantities of sugar at Calicut Ludovico di
Verthema, an Italian who travelled in the East in 1503-8, on seeing an immense
quantity of sugar at Zibit in Arabia, a hundred miles north of Perim and a Bathacala, a
little south of Goa on the Malabar Coasts recorded "a great abudance of sugar
especially candied according to our way.

In Aln-i-Akbari written by Abul Fazal in 1590, cane is stated to have been of various
kinds, but mainly of two sorts, one called paunda, one species is so tender and so soft,
so full of juice that a sparrow by specking could make the juice flow, the other species
is hard. The former was grown for eating and the latter for sugar making-brown sugar
candy, common sugar, white candy, and refined sugar useful for the preparation of all
kinds of sweetmeats.It is evident that cultivation of sugarcane was prevalent all over
India.

DEVELOPMENTS IN THE INDUSTRY IN RECENT TIMES


Five Year Plans And Sugar Industry

The sugar industry was granted protection till 1950. Since independence there has
been an overall increasing trend in sugar production in India. Production of sugar has
increased by leaps and bounds in the planning period. To meet the increasing sugar
requirement during different plan periods targets of sugar production were fixed as
depicted in table 1.

Table 1 Progress of Sugar Industry during Five Year Plans

Before the commencement of First Plan there were 138 sugar factories with an
installed annual sugar production of 19.34 lakh tonnes. During the plan period, to
achieve targets of sugar production, licences were issued for setting up of new
factories and for many of the existing units to expand the size of the units. The
number of the sugar factories increased to 143 in the first plan, 175 in the second plan.
The production increased to 30.29 lakh tonnes in the second plan. During second plan
the target of production was 22.5 lakh tonnes which was increased to 25 lakh tonnes
but the actual production exceeded up to 30.29 lakh tonnes which was slightly more
than demands. This resulted in decontrol up to some extent. In the third plan the target
of production was 35lakh tonnes. Due to short fall in production of the cane in first
three years of the Third plan the target could not be fulfilled but at the end of the plan
the target of production was achieved with production of 35.32 lakh tonnes of sugar.
Although the sugar production upto 3rd Plan was more than target but due to seasonal
variations the target could not be achieved in fourth plan. Again in Fifth plan the
production was more (28.42 lakh tonnes) than target (54 lakh tones). In the Sixth plan
the larget was 76 lakh tonnes but the production was only 61.76 lakh tonnes. Again in
Seventh plan it was more than target. In the Eight plan the target further could not be
achieved. Although the production of sugar decreased in 1992-93 and 1993-94 but it
increased to 146 lakh tonnes in 1994-95 and India became largest sugar producing
country in the world. In 2002-2003 the production of sugar in India was 28 lakh
tonnes which decreased to 170 lakh tonnes in 2003-04. IN 1950-51 there were 138
sugar mills in India but up to 31st March 2004 this number increased to 461. At
present there are 553 registered sugar factories having capital investment of Rs.
50,000 crores and annual production capacity of 180 lakh metric tonnes (ISMA
Report, 2004) and presently sugar industry is the second largest agro-based industry
of India.

PRICING OF SUGAR:
The Government has been following a dual pricing policy for sugar, under which, a
fixed percentage of the total production is to be necessarily sold by the sugar mills to
the Government or its nominees at a pre-determined price referred to as "levy sugar".
The sugar so collected is distributed to consumers through Fair Price Shops under the
public distribution system.

The balance sugar referred to as "free sale sugar" can be sold in the open market.
Free sale sugar is also regulated to some extent, by way of a release mechanism,
whereby the Government determines the quantum of sugar that can be sold every
month. This helps the Government maintain stability in sugar prices, by regulating the
supply of sugar based on the underlying demand. Thus, the Government statutorily
determines the price of levy sugar, while the price for the free market sugar is market
determined, affected to some extent by the release mechanism. As per Tuteja
Committee, the Central Government decided, in February 2002, to dispense with the
release mechanism with effect from April 1, 2003. However, in March 2003, it was
decided to continue with the release mechanism up to September 2005 and to review
the position in February, 2005. The Tuteja Committee has also recommended that the
Central Government may dispense with the release mechanism for free sale sugar
with effect from October 1, 2005
The levy imposed has reduced from 40% in the 1990s to 10% effective from March
2002. The Tuteja Committee has also recommended continuing with the 10% levy
obligation level. The Committee has also recommended that beyond the initial time
limit, a maximum of 3 months may be permitted for lifting of levy sugar by the
Government, where after, the levy sugar quota would automatically be converted into
free sale sugar, without any recurring levy obligation on this portion of levy sugar.

Table 2: Levy Obligation Over The Years


Year | Levy Sugar: Free sale sugar ratio |
1996-1997 | 40:60 |
1997-1998 | 40:60 |
1998-1999 | 40:60 |
1999-2000 | 40:60 |
2000-2001 | 30:70 (wef. January 2000) |
2001-2002 | 15:85 (wef. February 2001) |
2002-2003 | 10:90 (wef. March 2002) |
2003-2004 | 10:90 |
2004-2005 | 10:90 |

(Source: Government of India Gazette, Sugarcane Directorate of Uttar Pradesh


Government)

SAP and SMP in sugar industry


The central government declares a statutory minimum price for every year, in place of
minimum support price (MSP) that it announces for food grains and essential
commodities. The SMP is actually worked out by the commission on agricultural
costs and prices (CACP) through a structured and streamlined methodology. The
union ministry of agriculture then makes a public announcement of SMP. On top of
the SMP, several state governments announce a much higher State advised price
(SAP) for cane is increased every year by the central government. State governments
further jack up the price .But sadly the regulatory authorities do not allow the industry
to correspondingly and commensurately increase the price of sugar. The following
table brings out this important point:
Table 3: Differences between SMP and SAP Prices for Sugarcane
SMP and SAP Prices for Sugarcane |
Season | SAP*(UP) | SMP( Central Govt) | Difference Between Sap and
SMP | AVG. Wholesale Sugar Price** |
| (Rs. /Qtl.) | %Change | (Rs. /Qtl.) | %Change | (Rs. /Qtl.) |
%Change | (Rs. /Qtl.) |
2003-04 | 95 | | 73.00 | | 22.00 | 23 | 1485 |
2004-05 | 107 | 13 | 74.50 | 2 | 32.50 | 30 | 1760 |
2005-06 | 115 | 7 | 79.50 | 7 | 35.50 | 31 | 1889 |
2006-07 | 125 | 9 | 80.25 | 1 | 44.75 | 36 | 1510 |
2007-08 | 125 | 0 | 81.18 | 1 | 43.82 | 35 | 1502(Upto June’o8) |
CAGR | 5.64% | | 2.15% | | | | 0.23%
|
Sources: GOI, Govt of UP, ISMA
SMP: Statutory minimum Price
SAP: State Advised Price

As can be seen from the table, while the gap between levy sugar prices and free sale
sugar prices had narrowed considerably until 2002-2003, it has since widened due to
high free sale sugar prices.

Figure 2: Historical Free sale sugar and Levy Sugar Prices (Rs. / metric tonne)

FINANCIAL DETAILS
Given below are some financial details of the sugar industry
1. Current assets in sugar industry comprises of 60-70% of the total assets
2. Average current ratio for the years 2002-07 has been 0.8 times
3. Average debt – equity ratio has been 2.5 times
4. Average return on capital employed is 10.3 %
5. Average debtors days is 15.8 days
6. Average creditors days is 114 days
7. Stock– to use ratio – 55%

ROLE OF SUGAR COOPERATIVES:


Sugar cooperatives in India were the backbone of India's sugar sector. Once upon a
time they were very profitable but now, the cooperatives are on its death bed now.
For example in Maharashtra, sugar cooperatives alone contribute 95 per cent of the
total sugar produced in the state, making private sector's presence almost insignificant
in the state. The first sugar cooperative in Maharashtra was formed by Vithalrao
Vikhe Patil in 1950 to resist the uncouth exploitation of farmers by money-lenders
and private mill owners. Patil brought together sugarcane farmers of 44 villages in
Ahmednagar district in western Maharashtra and formed Asia's first cooperative sugar
factory.

At that time, extracting sugar from cane was so expensive that most of the farmers
preferred to convert it to jaggery, which resulted in a glut of jaggery in the market.
The cooperative changed this situation by assuring the farmers of off-take of their
produce at a reasonable price. The unique aspect of the cooperative movement was
that a farmer with a small landholding is also given the same status of a shareholder.

Situation has changed down the years. The major problem being faced by the
cooperative sugar sector is unprofessional management, lack of foresightedness and
absence of decision-making process.
The decision-making is delayed because of the high number of people involved in the
process. Another issue is that of vagaries of nature. Sugar industry is grossly governed
by natural vagaries and the infamous sugar cycle of two years surplus followed by one
year of shortage.

Biggest problem the sugar industry facing today is surplus production -- from 10 lakh
tonnes in 1950 to over 200 lakh tonnes at present. While consumption of sugar is
increasing at a steady pace of 4 to 5 per cent per annum, it does not match the increase
in production. As a result, prices of sugar have been steadily sliding this year. In three
months' time -- from January to March this year -- sugar prices crashed from Rs 1,800
to Rs 1,300 per quintal.

According to S L Jain, the director-general of Indian Sugar Mills Association, the


industry is facing the problem of plenty. Currently, the price of cane is more than the
price of sugar. The impact of the price crash will ultimately be felt by sugarcane
farmers. As mills run into losses, payment to farmers will be delayed. Then, cane
planting will go down and crop patterns will change. As a result, farmers will be
forced to shift to other crops, causing shortage of sugar.

In a bid to rescue the sugar sector, the government recently lifted the ban on exports
and decided to create a buffer stock. But, lifting the ban on exports came at a time
when global prices had crashed. So, despite export subsidy, sugar mills were not able
to ship the commodity to other countries at a competitive price.

While sugar production has increased in the last decade, domestic sugar consumption
has grown at a sluggish pace. This has led to accumulation of stocks with sugar mills
which affected prices. This is one of the main reasons why the margins are under
pressure. This is also true to the global sugar scenario and thus to prevent imports at
low global prices, the government has a high tariff protection in place.

This situation can be rectified if the government encourages exports. While India is
the third largest sugar producing nation in the world, it is only the seventh largest
exporter of the commodity for 2005-06 fiscal. India produces around 20 million
tonnes of sugar and exports just one million tonnes. The per capita consumption
stands at 18 kg, much lower than 59 of Brazil, which is the largest producer and
exporter of sugar.

This year, Maharashtra government announced an export subsidy of Rs 1,000 per


tonne, which is over and above the export subsidy of Rs 1,350 a quintal announced by
the Central government. The subsidy is for exports up to 10 lakh tonnes.

However, the subsidy came at a time when global markets had crashed, causing losses
to sugar mills and farmers. In India, sugar is under the purview of Essential
Commodities Act, 1955, which means that the government controls sugar capacity
additions through industrial licensing and determines the price of sugarcane and the
quantity that can be sold in the open market.

Sugar export is governed by Sugar Export Promotion Act, 1958, which stipulates that
the government can use 20 per cent of the country's total production for sale abroad.
Import of sugar or export is mainly resorted to when there is a mismatch in domestic
sugar production.

HIGH WEIGHTAGE IN WHOLESALE PRICE INDEX


There is undue hype about sugar prices in India. This is unrealistic and artificial. This
ultra-sensitivity is because of irrationally high weight age given to sugar in India’s
price indices; particularly in computation of the most commonly used Wholesale price
index (WPI).
In WPI calculations based on 1981-82 prices, sugar has a weight age of 2.013.When
the WPI was revised in the mid-90’s taking 1993-94 prices as the base, the weight age
of sugar increased by 78.84per cent to reach 3.6.
The weight age given to a product in WPI calculations signifies its level of
importance in family budget. The weight age given to sugar equals the weight
assigned to iron and steel, the steel that is 3.63. This is absurd as Iron and steel are
significantly more important than sugar in value terms to the economy.

SUGARCANE UTILIZATION:

Not only has the sugarcane acreage and sugarcane production been increasing, drawal
of sugarcane by the sugar industry has also been increasing over the years. In India
sugarcane is utilised by sugar mills as well as by traditional users like gur and
khandsari producers.
In early 1980s, the proportion of sugarcane drawn by the sugar industry was
hovering around 35%, which went upto to 50% in 1990s and to as high as 69% in the
year 2002-2003. The sudden growth in 2002-2003 can be attributed to the fact that
sugar prices in this year were very low and Gur and Khandsari manufacturers could
not effectively compete with the low sugar prices.
Cane Utilization in India
Figure 3: Cane Utilization in India

Source: International Symposium On Bio-Fuels

In the year 2003-2004, percentage drawal of sugarcane, however, declined due to


rising sugar prices and more intense competition from the alternate sweeteners - gur
and khandsari.
Following table gives data on sugarcane utilization for different purposes.
Figure 4: Sugarcane Utilisation

(Source: ISMA)

Figure 5: Sugar contribution in various industries

SUGAR CONSUMPTION IN INDIA:


Apart from white sugar, India also consumes alternate sweeteners - gur and khandsari,
which are placed at about 9 MMT per annum. Taking into account all the 3
sweeteners i.e. white sugar, gur and khandsari, on a per capita basis, Indian
consumption is more than the world average (See the table below). However, white
sugar consumption is much lower than the world average.

Figure 6: Differences in Production and Domestic off take

The consumption of white sugar in India is generally urban based. In rural areas the
alternate sweeteners gur and khandsari are consumed in larger quantities. The
consumption of sugar in urban areas in some of the Indian states with higher GDP and
income levels, matches favorably with various developed countries. The highest per
capita consumption of sugar is in the states of Punjab and Haryana which are
adjoining the sugar producing region of western UP. As income levels and GDP rises,
it can be expected that there will be a gradual shift from consumption of alternate
sweeteners to white sugar. Also, as can be seen from the following table, the total per
capita consumption of sweeteners in urban India is higher than total India average by
around 5 kg per annum. This clearly implies that per capita consumption of
sweeteners in rural India is much lower. It can be expected that this gap will close
with increase in urbanization leading to a growth in the total sweeteners market in
India.

Table 4: Per Capita Consumption of Sugar In Urban India


States | Kgs. Per annum |
Punjab | 71.5 |
Haryana | 68.5 |
Maharashtra | 40.9 |
Gujarat | 40.9 |
Kerala| 41.5 |
Uttar Pradesh | 35.2 |
Tamil Nadu | 29.1 |
Karnataka | 23.3 |
All India | 31.5 |

In India, the glut on the domestic market following the sharp rise in 1998/99
production did not stop importers bringing in huge amounts, given the differential
between world and domestic prices, and low import tariffs. Following protests by the
domestic industry, the government stepwise raised the import duty. But imports
continued because of the sharper fall in world market prices.

Import of sugar this fiscal


India, the biggest sugar consumer in the world, has turned a net importer in 2008/09
due to a sharp drop in the output. India may import about 4.1 million tonnes in the
year starting from 1st October, 2009.
The comparative operating performance of a sample company for the last two seasons
is given below:

WORLD SUGAR SCENARIO


After two consecutive seasons of surplus between world sugar production and
consumption, World Sugar economy is now facing a significant supply-demand
imbalance. There will be fall in global sugar production. The world consumption of
sugar is forecasted to grow by 1.73% to 167.446 mln tones. World production is
expected to increase by 4.817 million tonnes, which is 8.404 million tonnes lower
than world consumption. World export availability is expected to rise due to projected
growth in output in exporting countries. World export availability for season 2009-10
is expected to be 51.964 million tonnes, as against 50.903 million tonnes in the
previous season.
Table 5: World Sugar Balance

PROCESS OF MANUFACTURING SUGAR:


Production Process and By-products
Sugar is primarily extracted from sugarcane and beet. The difference between the
production processes of sugar from the two raw materials is minor. In India the
process of manufacturing sugar is as follows:
1) Extraction of juice from sugar cane
2) Clarification and evaporation of juice
3) Crystallization and centrifugation
Figure 7: Production Process

Extraction of the cane juice from the sugar cane, usually by crushing the sugar cane
(at this stage the sweet juice contains many impurities - the soil from the fields, some
small fibers and green extracts from the plant). After settling out much of the dirt and
other impurities, the juice is thickened into syrup by boiling off much of the water
(evaporation) The syrup is placed into a very large pan for boiling and more water is
boiled off until conditions are right for sugar crystals to grow
Once the crystals have grown the resulting mixture of crystals and syrup is spun in
centrifuges to separate the two (like spinning clothes in a washer). The crystals are
then given a final dry with hot air before being stored.
The final raw sugar is like a soft brown sugar and is stored in a large sticky mountain.
It can be used like that but usually it gets dirty in storage and has a distinctive taste,
which most people don't want. That is why it is further refined to produce white sugar
for human consumption. Additionally, because one cannot get all the sugar out of the
juice, there is a sweet by-product made - molasses.
By-products
There are essentially three main by-products generated
by the sugar industry.
Bagasse: It is the other major by-product of the sugar industry. It is used for
generation of steam and power required for processing of sugarcane.
Molasses: It is a prime input for the manufacture of alcohol and Alco chemicals like
acetic acid, acetic anhydride. It is also an important constituent for the production of
compound cattle feed.
Press-Mud: It is rich source of manure for crops. A ton of sugarcane crushed produces
around 350 kg of bagasse, 45 kg of molasses and 510 kg of press mud.
Substitutes and complimentary products of Sugar
Sugar substitutes can be divided into two major categories:
i) Gur and Khandsari: Gur is unrefined sugar and khandsari is non centrifuged sugar.
These are mostly used in villages and by rural folk as sweetners and also as important
sources of nutrition.
ii) Artificial sweeteners: These are compounds providing the sweetnerss of sugar
without the calorific value. It is mostly used by diabetics, heart patients and obese.
FACTORS THAT AFFECT SUGAR INDUSTRY
There is a marked improvement in the financial performance of the Company for the
year under review when the Company has earned a profit (before Depreciation and
Tax) of Rs. 1611.57 lacs as against loss of Rs. (956.03) lacs during the immediately
preceding financial year. A sharp fall in the sugar production in the country has
resulted in a revival of sugar prices and has improved profitability. The financial
performance of a sugar factory mainly depends on the following:
1. Demand-supply position and its impact on prices
2. Sugarcane prices
3. Utilisation of by-products
4. Plant size and location
5. Working capital requirement and cost of funds
6. Interest burden
Table 6: Demand and Supply of sugar in India

Effect of Ethanol production on Sugar industry:


The world is experiencing yet another energy- and fuel predicament as oil prices are
escalating to new hights. Alternative fuels are being promoted globally as the
increasing gasoline prices trigger inflation. Basic food commodities are some of the
goods hit by this inflation. Sugar cane prices can be impacted significantly by ethanol
production. Consequently, ethanol’s rise in the fuel market could be a result of
increased maize input, rather than sugar.

Table 7: Sugar and Molasses production

CAUSES OF THE GLOBAL CRISIS


First, the United States and some other European countries enjoyed prolonged boom
in house prices since the early 1990s right up to end of 2006. People began to believe
that house prices can only go up; they would never fall. This led to massive amounts
of lending by banks for home purchases, often to borrowers who did not have jobs or
steady incomes. In other words, many of these borrowers were “sub-prime” or, more
simply, not credit worthy. This housing bubble was part of a massive borrowing binge
in the United States and some European countries by households and financial
institutions that was fuelled by the “easy money” policies of their central banks and
huge inflows of funds from capital surplus countries such as China, Japan, Germany
and oil exporters. These big exporting nations sold their products to American and
European consumers and then parked their surpluses (over and above their imports) in
American and European government securities. As an indicator of this huge
borrowing binge, the ratio of gross debt to GDP of US households, businesses and
government more than doubled from about 160% in 1982 to 340% in 2007. Most of
this massive increase in borrowing was accounted for by households and financial
firms (like banks).
Secondly, this huge increase in borrowing was encouraged by rapid financial
innovation which supposedly reduced and transferred the risks (of default) by
borrowers, such as sub-prime home loan borrowers. In fact, of course, these financial
innovations actually spread the risks of the underlying weak credits throughout the
Western financial system. Not for nothing has the billionaire Warren Buffet termed
these complex “financial derivatives” as WMDs or weapons of mass destruction! The
explosion of financial innovation fuelled excess growth of the finance industry and
built an enormous house of financial cards on a weak base of shaky credit risks. To
give you another number, the share in the total US corporate profits of financial firms
(like banks) increased from less than 10% in 1980 to 40% in 2007.
An important reason why this massive expansion of complex financial products, built
on a foundation of shaky housing loans, could go on for many years is because of a
growing culture of weak regulation of financial institutions and markets that prevailed
in the US, UK, and some other countries for the past two decades. Finally, the
enormous increase in imprudent borrowing and excessive lending was fuelled by old
fashioned greed, which fuelled the huge asset price bubbles in housing, stock markets
and commodity prices. Nature and dimensions of the crisis In the winter 2006/7 US
housing prices started to fall for the first time in fifteen years. As a result many of the
sub prime housing loans (mortgages as they are called) became bad loans. This meant
that hundreds of billions of dollars of financial derivatives which were based on these
underlying mortgage loans also lost most of their value. Thus, by the summer of 2007
“the house of financial cards” began to collapse and a growing number of American
and European banks announced huge losses on their mortgage related securities and
investments. This process of financial collapse gradually gathered steam and came to
a boil in September 2008 when major American investment banks (like Lehman
Brothers) collapsed and others (such as Merrill Lynch) were saved through forced
mergers with healthier banks. The financial melt-down of September 2008 led to a
freeze of credit markets in the US and Europe and transmitted the sudden liquidity
squeeze throughout the financial world. Governments in these countries launched
massive bail-outs of their banks and increased government spending to contain the
impact on the rest of the economy.
Despite trillions of dollars of bail-outs and fiscal stimulus, bank credit continued to be
almost frozen, leading to sharp falls in consumer spending, investment, production
and foreign trade. The sharp slowdown in economic activity in the US and Europe
quickly spread across the world through the channels of a global credit squeeze and a
massive drop in demand for goods and services from major exporting nations like
China, Japan, Germany and several other Asian countries, including India. In this
way the financial crisis in the US and parts of Europe not only damaged production
and growth in these countries but led to sharp drops in exports and production
throughout all those countries which for many years had relied on the US and
European markets for their export growth.
By the beginning of 2009 it had become quite clear that the current global recession is
the worst since the Great Depression of 1929–32. The latest estimates and projections
by the IMF and the OECD (an organization of 30 advanced economies) indicates that
the global economic growth will fall from about 4% in 2007 to minus 2.5% in 2009;
the growth of the rich advanced economies will drop from about 3% in 2007 to minus
4% in 2009; the growth of developing and emerging countries will slow sharply from
about 8% in 2007 to less than 2% in 2009 (with some countries such as Russia, Brazil
and Mexico experiencing negative growth); and world trade growth will drop from
7% in 2007 to an astounding minus 11% in 2009.
Nothing like this has been experienced by the global economy in the last 75 years. It
really is an extraordinary economic crisis.
Impact of Global crisis on India
Although the global financial crisis had begun to gain force in the US and Europe by
the autumn of 2007, in India it was mainly perceived to be rich world problem right
up till August 2008. It is true that there had been a steep correction in Indian stock
prices in January 2008. But our main concern throughout the first 7–8 months of 2008
was with the sharp increase in inflation because of the commodity price shock that
had hit us (and the rest of the world) from early 2008. I am sure you will all
remember how the rate of inflation jumped from about 5% in February 2008 to over
10% by April 2008, and this despite the Government keeping the issue prices of food
grains, fertilizers, petrol, diesel, kerosene, and LPG largely unchanged during that
period. In fact, the steep increase in global commodity prices of oil, metals,
fertilizers, food grains that had accelerated from late 2007 was much more a product
of the global economic boom during 2002 to 2007 than of any recession in Western
countries, which began in the spring of 2008.
Indeed, right through the summer of 2008, there was a widespread view that the
economic growth of Asian developing countries like China and India was
“decoupled” from the slowdown in advanced countries of the West.
This view seemed to gain some support from the fact that rate of India’s economic
growth in the first half of 2008/9 was still close to 8%. Yes, this was a little less than
the 9% growth that the country had enjoyed in the previous five years but it was still a
very rapid rate of economic expansion by global standards. This sense of
complacency and illusion of decoupling from the global slowdown was shattered by
the events of September 2008. With the collapse of huge Wall Street banks and the
resulting freeze of bank credit flows in the West, there was an immediate worldwide
liquidity crunch and a massive amplification of the recessionary forces in the US,
Europe and Japan. The liquidity shock was immediately felt in India, with foreign
institutional investors withdrawing their money, credit for foreign trade vanishing and
loans from foreign banks drying up. Even before the end of 2008, exports and
industrial output had began to decline and overall economic growth slowed sharply to
just 5.3 % in the final quarter of October-December, 2008.
Growth in January-March, 2009 is unlikely to be much better, implying the full year
growth of around 6-6.5% in 2008/9. Faced by the sharp credit crunch and the sudden
slowing down of the economic activity after September 2008, the Government and
Reserve Bank responded quite swiftly. Over the four months of November--March the
RBI quickly loosened its monetary and credit policies, reversing all the anti-
inflationary tightening it had done in the previous four years. The Government, for its
part, had already pumped up spending (even before September 2008) on Sixth Pay
Commission pay increases, the farm loan waiver, higher spending on National Rural
Employment Guarantee Programme and, of course, much higher subsidies for
petroleum products, fertilizers and food grains. These large expenditure increases had
been driven mainly by political or populist reasons but, fortuitously, their economic
effect was the same as for “fiscal stimuli” like the ones Western countries had already
launched to combat recession. The Government announced additional spending
increases and tax cuts in December and January. The net result was that the combined
fiscal deficit of Centre and States doubled from 5.5% of GDP in 2007/8 to about 11%
of GDP in 2008/9. But for this massive increase in fiscal stimulus, undertaken for
whatever reasons, India’s growth slowdown in the second half 2008-09 would have
been greater.
With foreign capital flowing out and export earnings dropping, the exchange rate of
the rupee came under pressure. Fortunately, with over US$300 billion of forex
reserves in its coffers at the beginning of the year, the RBI was able to contain the
slide in the value of the rupee and avoid any currency crisis. The external balance of
payments situation was also helped by the sharp drop in oil and fertilizer prices from
their July 2008 peaks, as global demand for all commodities suddenly deflated with
the deepening of the recession in major industrial countries.
In summary, by the end of the year 2008/9, the global crisis had taken a substantial
toll of India’s economic performance but it was by no means catastrophic. Yes, the
rate of economic growth had slowed to the 5-6% range in the second half of the year
from the 9% average of the previous five years, but it was still much better than the
negative growth rates in industrial countries and better than the performance of most
significant developing countries with the exception of China. Furthermore, with
global commodity prices falling sharply the rate of inflation was also dropping
quickly in India although food prices were still uncomfortably high. However, with
the sudden shrinkage in world trade after September 2008, India’s exports in January-
March, 2009 were about 20% lower than in the previous year. This meant that
hundreds of thousands of jobs were lost in sectors like garments, textiles, footwear
and leather products and gems and jewellery.
One more very important point: thanks to RBI’s conservative approach to financial
liberalization, India’s banking sector was not significantly exposed to the trillions of
dollars of toxic assets that were swirling around global financial and credit markets.

IMPACT OF THE CRISIS ON THE SUGAR INDUSTRY


The impact of the Global Economic Crisis on the sugar industry is not as direct as its
effects on other industries. Still, the slowdown had its own share of contribution to the
dire conditions faced by the sugar industry at present. To explain the impact of the
crisis on the industry one has to consider several other factors. The main factors that
affect the price of sugar commodities are the demand for sugar and supply of
sugarcane. Over the year these two factors have actively contributed to the price
changes but later on an additional factor has taken shape due to globalization, ie, cost
of processing or production.
Due to the above mentioned factors the prices of sugar have been following a ‘sugar-
price cycle’. This cycle explains how variation in sugarcane availability affects the
production of sugar as well as the global sugar prices, which in turn affects future
sugarcane cultivation. ‘Sugar-price cycle’ also includes the returns from sugar trade
which in turn accommodates the processing or production costs of borne by the sugar
industry.
The following diagram schematically explains the ‘Sugar-price Cycle’:

The ‘sugar-price cycle’ effect explains the price fluctuations for the last as well as the
present centuries. The following graph shows the price as well as inventory variations
of sugar globally:
Figure 8: Global Inventory Variations of Sugar

The last ‘Sugar-price cycle’ started with the ‘Asian Financial Crisis’ of 1997 and
came to a close during the current Global Slowdown of 2007. The reasons for the
‘Asian Financial crisis 1997’ being considered as the starting-point for the sugar
cycle:
1. Asian Financial crisis affected the economies of all major sugarcane cultivating
as well as sugar producing countries like Thailand, Brazil, Mexico, Colombia,
Philippines etc.
2. This crisis also affected several countries which are the primary consumers of
sugar and sugar products.
3. The crisis affected the commodities market and various Sugar-based Commodity
funds

Impact of Asian Financial Crisis on the sugar industry


1. Availability of sugar rose owing to weak economic situation of sugar-exporting
countries
2. Fall in sugar prices worldwide
3. Due to low returns and rise in fuel prices, ethanol production from sugarcane
increased as in Brazil.
So with the gradual fall in production and increase in worldwide sugar consumption,
the prices started to gradually increase after a nadir point in 2000 and reached a peak
point by 2006. With global consumption gradually picking up, more attention spends
on sugar production.
Figure 9: Global Sugar prices

Impact of Global Slowdown


Global slowdown contributed to several changes in the sugar market as well as sugar
industry. The following are some of the significant changes:
To fill the gap between sugar demand and supply many of the sugar refineries were
going for expansion plans but the slowdown led to lack of financial funds and thus
most of the refineries had to stick to their current production capacities.
The commodities market also suffered the heat of the slowdown. When the credit
bubble burst most of the investors sold their funds at cheap prices leading to a fall in
sugar markets which thereby led to fall in global sugar inventory. According to Credit
Sussie, the world could witness a severe sugar drought by 2010 due to this shortage.
The impact of the slowdown on India includes:
1. Fall in sugar production from Indian sugar mills
2. Governments declaring high Minimum Support Price (MSP) and State Advised
Price (SAP) for sugarcane inorder to counter the slowdown and the Indian General
Elections of 2009.
3. Fall in sugarcane cultivations in Western and Northern parts of India owing to
higher returns from wheat and rice cultivation
4. More farmers supplying to ethanol producing industries due to low prices from
sugar mills.
5. Increase in sugar inventory deficit in India, thus leading the country to go for
large scale import of sugar from Brazil, Thailand etc
6. Increase in sugar prices in India.
The present situation of the sugar industry in India can be connected to the effects of
the global slowdown which started off in 2007. India could play a key role in
recharging a global commodity market in the thick of an economic downturn. India’s
role would be as a crucial market, not as a producer. India's eight million tonne sugar
production is projected to suffer a shortfall in the 2008-09 sugar year and its projected
7-9 million tonne sugar output deficit in the 2009-10 season beginning October 1. The
decline in sugar and wheat prices during the last six months has helped fast-moving
consumer goods (FMCG) companies that make bread, biscuits and beverages to reap
higher realisations. Wheat prices have slumped due to an increase in output from 69.5
million tonnes last year to 73.7 million tonnes and sugar prices have also dipped over
the same period owing to a 45 per cent jump in output from 19.2 million tonnes to 28
million tonnes. The wheat-based industry was incurring losses when prices of these
inputs were high. The beverages industry, including Coca-Cola and Pepsi, has been
another gainer from the crash in sugar prices. According to sugar industry estimates,
both companies, on an average, consume 150 thousand tonnes of sugar annually. At
an average monthly consumption of 25,000 tonnes, the two companies would be able
to save Rs 7.5 crore every month.
Recent Media reports on sugar industry:
As per recent media reports, the situation of the sugar industry needs serious attention,
which can be inferred from the following reports:
‘Govt may raise duty-free refined sugar import cap by 1 MT’
Press Trust of India / New Delhi October 28, 2009
The government is planning to raise the cap on duty-free refined sugar import by one
million tonnes once the current limit is exhausted, to prevent upward spiral of
domestic prices triggered by supply concern.Earlier, the Centre had allowed traders to
import up to one million tonnes of duty-free white sugar till November 30.
Sugar buyers fret as prices rise, but investors lovin' it
27 Oct 2009, 0237 hrs IST, Ram Sahgal & Vijay Gurav, ET Bureau
Bajaj Hindusthan, the nation’s biggest sugar producer led a rally in the sector’s stocks
as investors lapped up the shares in anticipation of higher prices for the commodity
due to lower supplies and a government rule that may free the companies from states’
clutches in terms of prices paid to cane producers.
Relief Measures by Indian Government
Considering the situation of falling production rates and rising demand, which has
been aggravated by the global economic slowdown, the Indian Government has taken
various measures:
1. Special Committee for Minimum Support Price determination
2. Government advisory to state regarding the fixing of State Advised Prices
3. Government permission to import 2 million tonnes of raw sugar
4. The Centre is likely to fix the fair and remunerative price of sugarcane at close to
Rs 130 a quintal based on a sugar recovery rate of 9.5% for the sugar year 2009-10
5. Govt regulations to reduce ethanol production from sugarcane
Figure 10: Forecast of India’s sugar inventory

DEMAND FORECASTING:
Table 8: Demand forecasting
Year (x) | Production (in Million tonnes) (y) | Time deviations from 2004 - 05
(x-µ)=X | Square of time deviations (X2) | Product of time deviations and
sales (Xy) |
2004 – 05 | 237.09 | -2 |4 | -474.18 |
2005 – 06 | 281.17 | -1 |1 | -281.17 |
2006 – 07 | 355.20 |0 |0 |0 |
2007 – 08 | 348.19 |1 |1 | 348.19 |
2008 - 09 | 290.45 |2 |4 | 580.90 |
n=5 | ∑y=1512.10 | ∑X=0| ∑X2=10 | ∑Xy=173.74 |
*Data from ministry of agriculture, India

Regression Equation of y on X:
Y = a + bX

For finding the values of a and b,


a (constant variable) = ∑y / n
= 1512.10 / 5
= 302.42

b (rate of growth) = ∑Xy / ∑X2


= 173.74 / 10
= 17.37
Hence, the regression equation is Y = 302.42 + 17.37(X)

With the help of this equation, we can find out the trend values for the next five years
as follows:
Table 9: Forecast of sugar industry for next 5 years
Year | X | Y= 302.42 +17.37(X)(In Millions) |
2009 – 10 |3 | 354.53 |
2010 -11 |4 | 371.90 |
2011 – 12 |5 | 389.27 |
2012 – 13 |6 | 406.64 |
2013 -14 |7 | 424.01 |
CHALLENGES FOR THE SUGAR INDUSTRY
Raw Materials
i. Fluctuation in Sugar Cane
ii. Resources
iii. Infrastructure
Production of sugarcane
i. Fertility of Land is decreasing.
ii. Lack of Irrigation Facilities.
iii. Low rainfall in sugarcane cultivation areas
Sugar Policy of the Government of India
Rising prices of sugar has caused concern to the Government and it has intervened
substantially to control the prices of the sugar, because it is one of the essential
commodities. The Government brought in measures such as weekly quota for free
sale, weekly reporting mechanism to monitor sugar dispatches and sale, liberalized
raw sugar import under Advance Authorization Scheme [with change in export
obligation norm from ‘grain-to-grain’ to ‘tonne-to tonne’ basis] and finally the facility
to import raw sugar without export obligation as well as import of white sugar up to
10 lakh tonnes by Government agencies, both at zero% customs duty. The Centre is
also planning to bring back Gur under the Sugarcane (control) order, 1996 to ensure
adequate cane supplies to sugar mills.
i. Enhance share of Indian sugar industry in global trade
ii. Enhance quality and quantity of sugar.
iii. Sugar recovery is also lower in comparison with other sugar manufacturing
countries.
iv. Due to water shortage shift of farmers to multiple crop cultivation.
v. Industry has a great challenge of existence in global market
vi. Lack of funds, organisation and managerial ability
vii. Biggest problem the sugar industry facing today is deficit production

India ranks first in sugar consumption and second in sugar production in world but it's
share in global sugar trade is below 3%. Indian sugar industry has been facing raw
material, and resource as well as infrastructural problems. Globalization has brought a
number of opportunities but at the same time posed certain challenges before sugar
industry. Most of sugar units in India utilize production capacity below 50%. Low
capacity utilization and inadequacy of raw material led to closer of 100 sugar factories
in India. Mounting losses and decreasing networth of sugar factories have been
responsible for sickness of sugar industry. Sickness in sugar industry has reached to
an alarming proportion. Indian sugar industry has been cash striven for decades. Low
cash inflow due to piling stocks leads to serious financial crisis and finally to closing
sugar factories.Sugar prices have been a political issue rather than economical issue.
Many a times it worsens economy of sugar factories.

The main concern of sugar industry in India is fluctuations in sugarcane production


due to inadquate irrigation facilities, lower sugarcane yield, and frequent droughts in
tropical and sub-tropical areas where sugarcane is grown ona large scale. In addition,
sugarcane yield has been lower (59 Mts per hectare). Sugar recovery is alsolower in
comparison with other sugar manufacturing countries. This leads to escalation of
production costs and weakness competitive edge of the industry. Most of sugar
millsin India are having daily sugarcane crushing capacity of 1250 tonnes. These
mills cannot have economies of scale so they have to incur high production costs.
Indian sugar industry is characterized by high production costs. Therefore, daily
crushing capacity should be extended to 2500 tonnes. Obviously, industry has a great
challenge of existence in global market. In recent years, sugarcane production in India
has decelerated to a great extent due to water and power shortage. Special attention is
needed to be given on water resource management. All the area under sugar
cultivation should be brought under drip irrigation to conserve water as well as
fertilizers. Adequate and regular power supply to sugarcane growers and sugar
factories would increase production and productivity. To enhance share of Indian
sugar industry in global trade, quality and quantity of sugar needs to be enhanced.

FUTURE OUTLOOK
The sugar industry seems to be finally coming out of the worst ever recession that it
had seen over the past few decades. After successive years of surplus production and
uninhibited capacity addition, the sugar output in India has started declining. While it
may be still premature to comment on the production estimates for 2008-09, it is
evident that production will not exceed consumption as area under sugarcane
plantation has fallen significantly. This development has witnessed a smart rally in
sugar prices that have come back to the levels that were prevailing in 2006. There is
still uncertainty about the sugarcane prices as the matter is under litigation and will
have a significant impact on the profitability of the industry. Furthermore, with the
fall in sugarcane production, prices of byproducts such as molasses and bagasse have
also started strengthening.
The growth of sugar demand by food & beverage industries and other non-household
users, estimated to account for about 45% of total consumption, could provide
additional impetus to longer-term market growth unless in the meantime the
Government allows the food & beverage industry to import its sugar requirement
directly and putting a ceiling on their stock holding. Although gur and khandsari are
still consumed in rural areas, demand for white sugar is expected to continue to
increase. Indian sugar industry can be a global leader provided it comes out of the
vicious cycle of acute shortages and surplus of sugarcane. A stable long term policy is
needed in which the shackles are removed which constrain this industry from growing
in a healthy manner. Against the backdrop of skyrocketing crude prices policymakers
have become aware of sugarcane as an energy crop and are encouraging mills to go
integrated and produce ethanol and power.
BIBLIOGRAPHY
1) ‘Sugar - Sector Update’ - India Equity Research by Edelweiss - March 9,2007
2) ‘Indian sugar industry :A strong industrial base for rural India’ by Adya Prasad
Pandey, Banras Hindu University (MPRA Paper No. 6065, posted 03. December 2007
/ 12:26)
3) The World Sugar Trade :TRADE UNION BRIEFING NOTE AND
RECOMMENDATIONS (7th World Sugar Trade Conference, Singapore)
4) ‘SSI:Sustainable Sugarcane Initiative - Improving Sugarcane Cultivation in
India’ An Initiative of ICRISAT-WWF Project
5) ‘India Sugar Sector’ - Equity Research - Agricultural Products & Agribusiness-
Asia Pacific/India by Credit-Suisse (dated 11 August 2008)
6) ‘India Sugar Sector’ - Equity Research - Agricultural Products & Agribusiness-
Asia Pacific/India by Credit-Suisse (dated 3 September 2009)
7) www.indiansugar.com
8) http://dacnet.nic.in
9) Sugar: Futures Contracts - NCDEX
10) Maize and sugar prices: the effects on ethanol production - Bachelor Thesis in
Economics by Federico Porrez Padilla
11) INTERNATIONAL SYMPOSIUM ON BIO-FUELS - Ethanol: Economics,
Pricing & Incentives - P Rama Babu, President, ISMA
12) Sector Review - India Sugar Sector – Credit Suisse, India Research Analyst
Team
13) A Case Study of Sugarcane Farming and Sugar Industry in Bihar - Centre for
Trade and Development (CENTAD), New Delhi