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Sugar: Govt will focus on checking price rise

June 29, 2009 18:03 IST

On the back of demand supply mismatch, the India's sugar prices have again begin rising up. The medium grade sugar prices in June 2009 inched up to Rs 2,539.62 per quintal (average prices until June 17, 2009), 62% higher on Y-o-Y basis. The prices in June 2009 have touched Rs 2,580 per quintal on June 8.

On M-o-M basis the sugar prices in June 2009 increased by Rs 100 per quintal in absolute term and 4% in percentage terms. The prices in January 2009 were at Rs 2100 per quintal and now the average monthly prices have been surged up about 21%.

The sugar production in the country in the current sugar season (Oct08 to Sep09) is expected to be just 14.5 million tonne, against 26.3 million tonne production in sugar season 2007-08. The sugar production during the season, including about 2.5 million tonne imports, would be 17 million tonne, significantly lower than the expected consumption of 23 million tonne during the same period. However, availability of sugar for consumers is still not an issue as India was carrying 9.7 million tonne of stock from previous seasons as at Sep08. But as the consumption will grow at steady rate of about 4-5%, there may be a problem for sugar in next sugar season.

Industry expectations

The premier sugar body in the country Indian Sugar Mills Association (ISMA) has raised certain demands as expectations from Union Budget 2009-10. They are as follows:

  • Inclusion of Ethanol in Declared Goods

Industry expects Ethanol to be included in the bracket of the declared goods. That would result in uniform sales tax implied on Ethanol at 4% across the country. Some state governments impose various levies including sales tax under their respective Trade Tax Acts. The Trade Tax rates/VAT rates vary from 4% to 12.5%.

In addition, the exporting states levy an export pass fee and the importing states levy import pass fee. In some states it is levied in the form of Permit Fee. Multiplicity of taxes by the State Governments, cut across the objective of National Ethanol Doping Programme adopted and mandated by the Central Government.

  • Service Tax on Goods transport

Service Tax is levied on the sugar mills and paid by them on sugarcane transportation. No doubt the Service Tax paid as above qualifies for CENVAT credit. Nonetheless it entails enormous and avoidable paper work. While perishable goods (fruits and vegetables) enjoy exemption under Notification No.33/2004 dated 3.12.2004, the same is not extended to sugarcane transportation.

It is therefore urged that as sugarcane is also an essential commodity and is perishable in nature, exemption from service tax should legitimately be extended to cover transport of sugarcane as well.

  • Income Tax Exemption for Cogeneration Projects

Presently, Cogeneration Projects get the benefit of tax exemption for 10 years u/s 80-IA of the Income Tax Act. This benefit is available if power generation begins before 31st March 2010. Considering the gravity of power shortage, there is a need to extend this facility. As Cogen Projects take more than 18-24 months to commission, it is necessary to send the tax incentive signal well in advance and right now to encourage fresh Cogen investment. In view of above, the association requests for the extension of this facility by another 5 years i.e. upto 31st March 2015.

  • Income Tax Exemption for Ethanol Projects

Ethanol from molasses is a biofuel and renewable energy. The Government is already committed to enhance ethanol doping from 5% to 10%. However, Ethanol Projects have become increasingly capital intensive. In particular, large investment is required in effluent treatment area.

In order to give a fillip to large-scale investment in ethanol production, the industry expects the government to cover the ethanol projects under section 80-IA of the Income Tax Act and extend the income tax benefit to the Ethanol Projects as well in form of income tax exemption.

  • Need to Promote Ethanol as Bio-fuel

A reduction in special additional excise duty on ethanol blended petrol of Rs.0.30 per litre, which had been allowed vide Notification No.16 dated 1st March, 2003 was withdrawn on 29.2.2004 without any justifiable reason. The industry seeks reintroduction of the same.

  • Weighted Deduction for Construction of Roads in Rural Areas

Sugar factories are located in the rural areas and undertake rural development activities including construction of roads but are seriously constrained to limit such activities due to lack of resources. The Association is of the considered view that sugar factories that undertake construction of roads in rural areas, should be allowed a weighted deduction of 150% of the cost incurred. It is also suggested that a suitable amount should be earmarked as subsidy for this purpose.

Analyst expectations

As the sugar industry is witnessing an up cycle, the government may not give due consideration to the demands of the Industry. Rather the government is already focusing on curbing the rising sugar prices. So the government may come with some other policies, which would enable the government in checking the rise in sugar price considering the sensitivity of sugar prices to overall inflation index.

Sugar millers continue to seek the fulfillment of their long pending demand for de-controlling the sugar industry. However, no change is expected in cane procurement policies, though the government may alter the policies relating to sugar release. Currently, 10% of the sugar produced has to be sold to the government at notified prices for distribution through PDS and the rest is sold through a release order issued by the government.

As the government has already shown its commitment towards green fuel and taken few initiatives in this regard like mandatory blending of ethanol with petrol, it can declare the ethanol as 'declared goods'. 

The government is toying with the idea of bringing back Gur (Jaggery) under the Sugar (Control) Order 1966; giving itself powers to regulate its production to ensure adequate cane supplies to sugar mills. The government is also considering extending the existing policy of raw sugar imports under open general license from July'09 to March'10. The aim of extension is to encourage millers to make available white sugar for domestic market and thereby helps keep the prices under control.

The other proposals include a two-month levy holiday in order to encourage mills to start crushing by end-September or early-October (instead of normal schedule of mid November or starting December). The levy holiday is meant to compensate for lower sugar recoveries and millers may get an exemption on levy portion of 10% for two months. This way they will be compensated for the possible recovery loss of 1.5 - 2% by selling that sugar in open market.

The Government has increased the statutory minimum price (SMP) for sugarcane by over 32 percent to Rs 107.76 per quintal for the 2009-10-sugar season from Rs 81.18 a quintal in 2008-09 sugar season. Above this guaranteed price, farmers will also get a premium of Rs 1.13 for every 0.1 percentage additional recovery over 9.5 per cent.

The levy price, or the price at which sugar is sold to the government, which is 10% of production, is based on SMP prices. Such an upward revision in cane SMP may increase levy prices by Rs 2-3/kg from the current Rs 13.8/kg. 

Companies to watch out for

Balrampur Chini, Shree Renuka Sugars, Triveni Engineering & Industries, Bajaj Hindustan, EID Parry (India)

Outlook

We find that players with export obligation have not been permitted to export sugar, considering the domestic requirements and the looming shortfall.  As a result, it is likely that the government extends the time limit for fulfilling the export obligation of the sugar sector.

Riding on the rising price scenario, the sugar sector can hardly expect any benefit from the Union Budget 2009-10. The increase in SMP before the budget itself, though expected, should not impact the players at least in next sugar season, as the players paid more than revised SMP in last sugar season SS 2008-09.

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