India scraps four-decade-old state controls on sugar producers

India, the world’s second-biggest sugar producer, ended state curbs on sugar mills, allowing them to freely sell the sweetener in the local market for the first time in four decades.

The cabinet at a meeting headed by Prime Minister Manmohan Singh also decided to stop buying sugar from producers at below market price to supply to the poor, Food Minister K.V. Thomas told reporters in New Delhi today. The government will still subsidize sales to the poor through September 2014, he said.

Bajaj Hindusthan Ltd. and Balrampur Chini Mills Ltd., the nation’s biggest mills, and other producers may earn about 30 billion rupees ($546 million) annually with the abolition of state purchase of sugar at below market price, the Indian Sugar Mills Association said in an e-mailed statement. A government panel in October recommended scrapping state controls including limits on sales by the mills, first introduced in 1972.

“These much awaited reforms will reduce the cost of production and improve liquidity with millers, which, in turn, will ensure better and timely payment of the cane price to the farmers,” the association said. “These two important reforms will go a long way in improving efficiencies both at farm and mill level and make Indian sugar competitive in the international market.”

Sugar Policy

Sugar makers were curbed by a policy that set limits on sales by each mill to cap prices, while states fixed cane rates to help 50 million farmers. Factories in Uttar Pradesh, set to be the nation’s biggest producer, owed 54.6 billion rupees to growers, Thomas told parliament on Feb. 26, after cane prices rose to a record for the 2012-2013 crop.

The government will spend about 53 billion rupees in subsidies in the year ending Sept. 30 for selling sugar at below the market price to the poor, Thomas said. It will buy 10% of the country’s output at 32 rupees a kilogram (2.2 pounds) from the mills and sell the commodity for as much as 13.50 rupees a kilogram, he said.

Shares of sugar producers rallied in Mumbai before the cabinet decision. Bajaj Hindusthan surged 7.3% to 21.3 rupees, Balrampur Chini rose 3.8% to 47.85 rupees, Shree Renuka Sugars Ltd., the top refiner, advanced 7.1% to 25 rupees, while Dhampur Sugar Mills Ltd. climbed 6.8% to 45.85 rupees.

Production in India, the world’s largest consumer, will fall to 23 million tons in the season beginning Oct. 1 from 24.6 million tons a year earlier as drought in Maharashtra and Karnataka, which together account for 45% of output, curbs planting, a Bloomberg survey published March 28 showed.

Bloomberg News

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