CHAPTER 3

A PROFILE OF COOPERATIVE SUGAR AND SPINNING MILLS

IN TAM1LNADU

Introduction

Sugar and Cotton Textiles are the two main mother industries In India.

They are the largest agro-based processing industries. They have been playing

a crucial role in national economy by creating employment opportunities

to millions of people, providing surpluses for investment in other industries,

promoting socio-economic development of the people, contributing to the

Government exchequer by way of taxes, helping the country to earn foreign

exchange, developing ancillary industries, effectively meeting the home demand

and so on. The healthy -growth and well-being of the industry, thus, not

only promotes the country's interest but also the people at large.

Sugar Mills in India

Sugar is the second largest industry in India, the first being the Textiles

Industry. There was hardly any sugar factory in our country worth the name

prior to the year 1932. The granting of protection under the Sugar Industry

Protection Act (1932) gave the desired fillip to the Sugar Industry. Two

years after the grant of protection, the number of factories rose from 29 to

111 and production from 1.21 lakhs tonnes to 4.61 lakh tonnes. At the end

of World War II, there were 136 sugar mills with a production of 9-57 lakh

47

tonnes of sugar. Thereafter no significant development took place till

the beginning of the planning era.

The progress of the Industry during the Five Year Plans has been

phenomenal. The number of factories increased from 139 in 1950-51 to

338 in 1984-85. The installed capacity of the Industry went up from 16.68

lakh tonnes in 1950-51 to 68.81 lakh tonnes in 1983-84. The sugar production

also went up from 11.34 lakh tonnes in 1950-51 to 84-35 lakh tonnes in 1981-82.

However, the production of sugar declined to 58.94 lakh tonnes in 1983-84

2 and was 61.43 lakh tonnes in 1984-85 season.

During 1930-50 the industry's main location was in Uttar Pradesh

and Bihar. In the next 25 years sugar factories came to be established in

a number of other States mainly in the West and South India. By the mid

seventies Maharashtra overtook Uttar Pradesh for the first position among

sugar producing States while Bihar's contribution became insignificant. In

the meantime Karnataka, Andhra Pradesh, Tamil Nadu and Gujarat emerged

as major producers of sugar. While the share of Uttar Pradesh and Bihar

in total sugar production declined from 74.3 percent in 1950-51 to 32 percent

in 1983-84, that of Maharashtra and Southern States rose from 22 percent

3 to 52 percent during the same period.

Economic Research Department, State Bank of India, "Sugar Industry: Problems and Prospects", SBI Monthly Review, Vol.XXV., NO.4, April 1986, p-186

2 Please see i) The South India Sugar Mills Association, Handbook of Sugar Information, Madras, 1984, p.18.5 (ii) Economic Research Depart­ment, State Bank of India, op.cit., pp.194 and 195

Economic Research Department, State Bank of India, op.cit., p. 198

48

One notable feature of the growth of sugar industry since independence

has been the expanding cooperative sector. Although the history of co ­

operative sugar factories dates back to 1933, this sector remained insignificant

till 1955-56. With the preferential t rea tment given by Government towards

cooperatives in licensing additional capacity for the industry, the coopera t ive

sector in the Indian sugar industry has grown in size and production* From

a negligible number of 3 in 1955-56, the number of cooperative sugar factor ies

increased to 30 in 1960-61, 52 in 1965-66 and further to 178 in 1984-85.^

The licensed capacity in the cooperative sector was 39.37 lakh tonnes

as against the total licensed capacity of about 74.6 lakhs tonnes in 1980-81.

This has increased to 41.67 lakh tonnes in 1984-85 as against the to ta l licensed

capacity of 85.05 lakh tonnes. The sugar produced by cooperat ive sec tor

constituted only 0.5 percent in 1950-51. It slowly increased and accounted

for 41.3 percent in 1971-72, 56.4 percent in 1980-81 and stood at 59.20 percent

in 1984-85. Thus the cooperative sector has come to occupy over this

period a predominant position in India's sugar map.

Spinning Industry in India

Textile industry has been occupying a place of pride in India as India

is the home of textiles since time immemorial. It is the biggest organised

industry in India.

Department of Agriculture and Cooperation, Cooperative Movement in India; A Statistical Profile, New Delhi, 1987, p.71 \

5. Ibid., p.72

4.

49

The first attempt to establish a cotton textile mill in India was made

in the year 1818 under the name of Bowerah Cotton Mills near Calcutta

by an English enterprise. However, it was C.N. Daver, a Parsi businessman

with great enterprise, vision and foresight, who happened to be the first

Indian textile industrialist. He established a mill in Bombay, styled as Bombay

Spinning Mills in the year 1854. It was in this year that foundations of the

industry were truly and firmly laid. By the close of the last century there

were 178 textile mills in India and the city of Bombay became the most

prominent textile mill centre. The capacity of spindles and looms installed

in the 80 odd mills in Bombay constituted 50 percent of the total spinning

and weaving capacity of the mills in the country.

During the pre-independence decades of the current century, the textile

industry in India was provided with a considerable stimulus by the two World

Wars. This apart, the industry also derived indirect support from Swadeshi

movement of the first decade, Non-Cooperation movement of the twenties

and the Civil Disobedience movement of the thirties. The number of mills

during this period increased from 178 with a capacity of 4.84 lakh spindles

in 1901 to 396 with a capacity of 10.02 lakh spindles in 1941.

The cotton textile industry during the post-independence period regis­

tered a spectacular growth. The number of mills increased from 378 in 1951

The Institute of Cost and Works Accountants of India, The Cost Audit in the Cotton Textile Industry, Calcutta, 1983, p.78

Ibid., p.79

6.

7.

50

(103 spinning mills and 275 composite mills ) to 805 mills (525 spinning mills

and 280 composite mills) in 1983. The number of installed spindles increased

from 11 million to 22.53 million during the same period. Tamil Nadu has

come to occupy the first place in terms of number of spindles installed with

26.15 percent of the total spindles installed in the country followed by

Maharashtra with 22.14 percent, Gujarat with 18.47 percent and Uttar Pradesh

with 6.13 percent. Around fifty percent of the spinning mills in the country

9 are in Tamil Nadu.

The emergence of the cooperative sector in the cotton text i le industry

was an important structural change in the industry. The first cooperative

spinning mill in the country was sponsored by Madras State Handloom Weavers

Cooperative Society at Guntakkal in March 1951. The aim of the mill was

to supply yarn at reasonable price to weavers cooperative societies. Similar

schemes were sponsored by other States. In view of this, All India Handloom

Board considered the question of setting up new spinning mills in cooperative

sector and recommended in 1956 to the Government of India to accord

preference to the cooperative spinning mills from which the weaver members

would be required to buy their yarn requirements. The Government of India

supported the programme of establishing spinning mills in cooperative sector

by offering loans to State Government in order to enable them to contribute

share capital to the cooperative spinning mills. "By the end of Second Five

Spinning and Weaving together.

Indian Cotton Mills Federation, Handbook of Statistics on Cotton Textile Industry, Bombay, 1985, pp 18-19

Ibid., p.21

*

8.

9.

51

Year Plan as many as 21 cooperative spinning mills had been organized in

the country".10

With the establishment of National Cooperative Development Corpo­

ration during the Third Five Year Plan the cooperative spinning mill gained

further momentum. During this period, the programme for the establishment

of cooperative spinning mills as processing cooperatives was launched. The

National Cooperative Development Corporation provided loan to the State

Governments for the contribution to the share capital of cotton growers

cooperative spinning mills on the same line as the Handloom Board had done

in respect of mil,ls formed earlier by weavers. In addition to the financial

assistance to the State Governments, the National Cooperative Development

Corporation associated closely with the State Governments in the promotional

work of the growers' cooperative spinning mills. Besides, the cooperative

spinning mills of weavers and growers, a third category came into existence

during the year 1961-62, in which both growers and weavers were enrolled

as members. Such mills were classified as mixed sector mills. These mixed

mills, for the sake of convenience, were included in 'Growers Mills' by the

All India Federation of Cooperative Spinning Mills.

As on 30.06.84, there were 78 cooperative spinning mills with a member­

ship of 4.60 lakhs in the country of which 35 were growers' mills and the

rest were of weavers type. The total installed capacity of these mills were

20.27 lakh spindles accounting for 8.25 percent of the country's total installed

10. Kadvekar S.V., Management of Cooperative Spinning Mills in Maharashtra, New Delhi: Indian Book Gallery, 1980, p. 13

52

spindles. The yarn production of the sector was around 1102.97 lakh kgs,

the value of which was estimated around Rs.108.31 crores. This accounts

for 10 percent of the free yarn supplied in the country.11

Sugar Mills in Tamil Nadu

The sugar industry in Tamil Nadu occupies a prominent place and

it is ranked as the third largest in the country in terms of sugar output

and sugarcane production. Three decades ago the production of sugar in

Tamil Nadu was only 0.92 lakh tonnes, constituting 8.2 percent of the total

production. The production shot upto 7.55 lakh tonnes in 1981-82 (a year

of record production) and constituted 8.9 percent of country's total production.

The next two years recorded a fall in production; but the industry was able

to. maintain its rank. The total area under sugarcane increased from 1.35

lakh tonnes in 1970-71 to 1.89 lakh tonnes in 1983-84. The production of

sugarcane also went up from 109.43 lakh tonnes to 152.05 lakh tonnes during

the same period. The yield per hectare has been consistently highest in

Tamil Nadu hovering around 75 to 102 tonnes per hectare between the period

1970-71 and 1983-84.12

Cooperative Sugar Mill in Tamil Nadu

The cooperatives in the field of sugar production in Tamil Nadu came

into existence at the last quarter of 1955 with the registration of three

11.

12.

ALL INDIA FEDERATION OF COOPERATIVE Spinning Mills, Annual Report, part III, Bombay, 1984, pp.2,3,63,65,70,72,73 and 82

The South India Sugar Mills Association, Handbook of Sugar Information, Madras, 1984 ~ ~° —

53

cooperative sugar mills, namely, Ambur, Madurantakam and Amaravathi.

However, the actual production of sugar in cooperative sector started with

the commencement of production by Amaravathi Cooperative Sugar Mill

near Udumalpet on June 22, 1960, followed by Ambur and Madurantakam.

Subsequently 3 more mills were • commissioned in 60's, 3 in 70's and 3 in

early 80's. Of the 25 sugar mills in Tamil Nadu 12 are in cooperative sector,

9 in joint stock sector and the rest in public sector. The growth of sugar

mills in cooperative sector is mainly because of Government's deliberate

policy of preferential industrial licensing backed by financial assistance through

State participation in the share capital and long-term loan by central financing

institutions as well as enthusiastic response from the farmers.

The development and the continued existence of cooperative sugar,

factories largely depend upon optimum level of capacity utilization, producti­

vity and efficiency supported by a committed and .stable professional manage-

ment. This, in turn, requires the support of various factors like a regular,

uninterrupted supply of cane to the factory, reasonable cane price, good

recovery, a steady growth of membership, plant efficiency, better financial

performance and so on. This section of the chapter seeks to analyse the

profile of the cooperative sugar mills in Tamil Nadu.

Objectives: The objectives of the cooperative sugar mills as laid down

in their bye-laws are to "manufacture white sugar from sugarcane and to

* The analysis includes only ten cooperative sugar mills. The remaining two mills, namely, Thirutani and Mayiladuthurai have been excluded as they have started functioning after 1983-84 sugar season and as such they have not come under the reference period of the study.

54

sell sugar so manufactured, along with the by-products to the best advantage

of the members". To achieve this objective, the activities conceived are

to: a) raise finance in the form of share capital, deposits and loans*

b) purchase of sugarcane produced by the members; c) acquire movable

and immovable property to facilitate production of sugar; d) undertake

measures for development of sugarcane including supply of seeds, manure,

implements, irrigation facilities and other production requisites; e) disseminate

among members a knowledge of the improved methods of cultivation of

sugarcane; and f) take any incidental activity conducive to the attainment

of its objectives.

Age of the Mills: The age of the Mills is measured from the year

of commencement of production to 1983-84- (See Table 3*1)

5 5

The age structure of the mills reveals that 40 percent of the mills

fall under the age bracket of more than 20 years; 20 percent under 15-20

years and 10 percent under 10-15 years. Thus, a majority of the mills are

of long standing ones.

Membership: There are two classes of members in the mills, namely,

producer-members and non-producer members. Producer membership is

open to individuals and cooperative institutions who are growers of sugarcane

within the area of operation of the mill. Non-producer membership is open

to Government and cooperative societies other than the producers of sugarcane

in the area of operation of the society. In the beginning even the non-cane

growers (individuals) were admitted as members; however, this practice was

discontinued in 1968.

The membership of the cooperative sugar mills in Tamil Nadu has

registered a spectacular growth of 18 fold increase over a period of 23 years.

The rate of growth was found to be upward between the period of 1961-62

and 1968-69; thereafter it was found to be increasing at a declining ra te .

The sharp rise in the membership may be attributed to: i) establishment

of new sugar mills in the cooperative sector; ii) expansion of the existing

capacity; iii) mills' drive to enrol more number of members to meet its

increasing demand for sugarcane; and iv) growers' desire to find a better

market for their cane. The average increase in membership per year ranges

from 1417 to 5043 (See Table 3.2).

Deputy Registrar's R.C.15757/67-C/dated 29.7.68.

56

Table 3.2

Membership in Cooperative Sugar Mills

57

Funds : The cooperative sugar mills, by and large, need funds for

two main purposes - to acquire fixed assets and to meet working capital

requirements. Fixed capital is raised through long and medium term loans,

share capital and retained earnings. The mills borrow long and medium term

loans from term lending institutions like Industrial Finance Corporation,

Industrial Development Bank of India, Industrial Credit and Investment

Corporation, Life Insurance Corporation and so on. Some times commercial

banks, State Cooperative Bank and State Government also provide long-

term loans to meet the fixed capital requirements of the mills. Share capital

is subscribed by the members and the Government. One special mode of

augmenting share capital in cooperative sugar mills is the non-refundable

deposit collected from cane suppliers. As per the bye-laws, a mill deducts

from the amount due to a member for the cane supplied by him not less

than Rs.7.50 per tonne of sugarcane delivered by him during every season.

The amount so deducted is held to the credit of the member as deposit until

it accumulates to Rs.250 or a multiple thereof when it is credited to his

share capital. The bye-laws also provide for accepting fixed deposits.

The working capital requirements of the mills are met mainly through

short-term loans borrowed from central cooperative banks and commercial

banks. They have also cash credit accommodation with central cooperative

banks. State Government also help the mills through 'ways and means'

The fixed capital requirements of Rs.650 lakh of the Vellore Cooperative Sugar Mill, near Vellore, was fully met by the State Government.

58

advances. Inter mill lending for one week to 6 months is not uncommon

among the mills. (For further discussion see Chapter - 4)

Management : The management of a mill as per its bye-laws vests

in a board consisting of 15 members. The constitution of the board is :

i) Three directors nominated by the Registrar of Co-operative

Societies ;

ii) Three directors nominated by the term-lending institutions ;

iii) One director nominated by the Tamil Nadu State Co-operative

Bank ;

iv) One director nominated by the Central Cooperative Bank of

the District in which the mill is situated ;

v) Six directors elected by the members from among themselves ;

and

vi) The Managing Director (ex-officio).

The board is, thus, represented by various interests in the mills.

But the constitution of the board brings forth the fact that it is being

dominated by the nominees of the various institutions rather than the elected

representatives of the growers, as the elected representatives constituted

only 40 percent of the total number of directors.

The members of the board shall elect from among themselves a

President and a Vice-President. The board may constitute an Executive

Committee, the composition of which will be as follows :

59

i) President ;

ii) Vice-President ;

iii) Managing Director ;

iv) One of the directors nominated by the Registrar ;

v) One of the directors nominated by the term-lending institutions ;

and

vi) Two of the directors elected by the cane growers.

As on 30-09-1984, 9 out of 10 mills were found to have been managed

by the Special Officers appointed by the Government. Only one mill, namely

the Chengalvarayan Cooperative Sugar Mill was managed by the board of

directors constituted as per the provisions of the bye-laws.

Organizational Structure : This is an important means for achieving

the objectives of an organization. While designing the organizational structure

due care should be taken to ensure proper grouping of work teams and proper

division of labour and division of authorities and responsibilities among

different levels. When an organization grows, diversifies into different

activities, adopts new technology, or enters new markets, the organization

structure undergoes changes to keep in pace with the phase of development.

The organizational structure is almost common in all the cooperative

sugar mills and it remains without much change over a period in spite of

their growth and development. The structure of the mills need to be

redesigned as it expands. But this has not happened in any of the mills studied.

The committee of management of mills started in late 50's and found to have been superseded within a period of 5 to 10 year date of their commencement of production. The mills started in the 70's were managed by the Special Officers right from their inception.

60

For instance, the accounts department which could play a meaningful role

in decision making process looked after only the routine finance functions.

Even the head of accounts division had to spend much of his time on routine

function. Cost analysis which plays a crucial role in production was uncared.

No mill has a qualified cost accountant to look after this function. Save

these, it was reported that the existing structure facilitates division of labour

and specialization. (See Chart 1A and IB)

Production : A cooperative sugar mill is a producer's cooperative.

It has twin objectives of i) providing a remunerative price to the cane

supplied by member-growers ; and ii) supplying sugar to the consumers at a

reasonable price. The fulfillment of these objectives are not in the hands of

cooperatives for two reasons : i) they have to purchase the sugarcane at the

price advised by the State Government which is substantially higher than

the minimum priced fixed by the Central Government ; and ii) they have no

free hand in fixing the sale price of the product nor they are free to sell

the product, as the release of sugar is controlled by the Government.

The prices of input and output of sugar are decisive factors in

determining the development of the cooperative sugar mills. But these two

factors can neither be manipulated nor controlled as. they are controlled

by the Government. However, there are several factors like installed capacity,

capacity utilization, cane-crushed days in a season, recovery, manufacturing

cost other than raw material cost, which have their impact on production.

These factors along with cane price and cost of production are analysed

below.

61

Size of Cane Crushing Capacity : A sugar factory with a minimum

of 1250 TCD (Tonnage Crushing Capacity a Day) is considered to be an

economically viable unit. The cooperative sugar mills in earlier years were

s tar ted with a capacity of 800-1000 TCD. Later on the capacity of such

mills was expanded in two or three stages. The mills commissioned in 60's,

70's and 80's had an initial capacity of 1250 TCD. The average capacity

was found to have increased from 800 TCD in 1961-'62 to 1695 TCD in

1983-'S^ - recording a two-fold increase over a period of 23 years. (See

Table 3.3)

The capacity-wise distribution of the mills shows that all the mills

in 1961-'62 and 1964-'65 had less than 1250 TCD. Since then the mills have

expanded their capacity to 1250 TCD and above. In 19S3-'84, 50 percent

of the mills had more than 1750 TCD.

Capacity Utilization : Capacity Utilization is an important indicator

of efficiency and growth. If the installed capacity is fully utilized, a mill

can increase production, thereby the cost per unit may be brought down

provided other factors affecting the cost remain constant. Reduction in

cost would help in improving the operational efficiency of the mills and

thus its overall profitability could be improved. Thus, capacity utilization is

a measure of efficiency in sugar mills.

The average capacity utilization in cooperative sugar mills exhibits

fluctuations. It was as high as 110 percent in 196*f-'65 and as low as 58.15

.percent inr 1980-'81.

62

63

The distribution of mills on the basis of capacity utilization shows

that a majority of the mills in 1961-'62, 1972-73, 1976-77, 1980--81 and

1983-'84 had a capacity utilization of 50 to 100 percent. The number of

mills which had more than 100 percent capacity utilization had come down

after 1968-'69 whereas the number of mills with less than 50 percent capacity

utilization had gone up during the same period. (See Table 3.4)

A comparison of average capacity utilization of the cooperative sugar

mills with that of All India average in 1980-'81 and 1983-'84 shows that 1

the sugar mills in Tamil Nadu fall short of the All India average. The

main reasons for the low capacity utilization in some mills as reported by

the mills were shortage of cane supply, defective cane supply system and

mechanical break down.

Number of Days Cane Crushed : The u tilization of the installed

capacity depends upon several factors like regular and continuous supply

of sugarcane during the crushing season, uninterrupted supply of power,

efficiency of the machinery, discipline among the labourers and employees

and so on. If all these factors exhibit a positive trend, the mills can easily

crush sugarcane throughout the season. On an average each factory has

to crush cane for 172 days in a season to achieve 100 percent utilization.

The All India averages for the years 1980-'81 and I983-'8f were 81.6 and 86.4 percent respectively. See, Cooperative Sugar, January 1985, p.293

64

U l

66

The average number of cane crushed days was at the peak with 214

days in 1964-'65. Thereafter, there was a steady downward trend and it

stood at 120 days in 1983-'84. (See Table 3.5)

The distribution of the mills on the basis of number of 'days cane

crushed' reveals that during the period between 1961-'62 and 1972-73 more

than 60 percent of the mills had crushed cane for more than 172 days.

After that many of the mills could not crush the cane for minimum number

of days. Especially in 1980-'81 not even a single mill was found to have

crushed the cane for all the 172 days. The reasons for the fall in the number

of days cane crushed as reported by the mills were fall in sugarcane production *

and diversion of cane for the manufacture of gur and khandasari.

Sugarcane Production : The fall in sugar production as a cause for

low number of 'days cane crushed' can be explained by going through the

area under sugarcane and production of sugarcane in Tamil Nadu.

There is a production cycle of four years ; two years of lower

production followed by two years of higher production. Similar trend could

be seen in the area under sugarcane also. (See Table 3.6)

It is estimated that only about 30.33 percent of sugarcane grown is routed to the sugar factories and the rest is used for seed, chewing and gur manufacture. See Agarwal R.N., Sugar Industry in India : My Recollection, Bombay : Popular Prakashan, 1976, p. 200. In Tamil Nadu it is 28 percent for the year 1983-'S4. See Cooperative Sugar, Vol. 17, No.8, April 1986, p.648.

67

68

69

This four year cycle is caused by the Jong t ime lag of 12 to 18 months

between planting and harvesting of sugarcane. More cane is planted when

sugar prices are high ; but by the t ime the crop is harvested the addit ional

output brings down prices so in the next planting (often two years af ter

the in i t ia l one) there wi l l be a trend toward lower cane production which

w i l l lead in another one or two years to higher prices and a renewal of the

13 cycle. The occurence of this cycle heavily affects the number of days

cane crushed and therefore the capacity ut i l izat ion.

Recovery : "Sugar is produced in the f ield ; not in the factory" is

an oft-repeated expression heard in the sugar m i l l circles which means

that the production of sugar highly depends on the recovery of sugar f rom

sugarcane. Recovery is the weight of sugar produced from a tonne of cane

expressed as a percentage. It is a common measure of technical performance

of the Industry.

A sugar recovery of 8.5 percent obtained for the whole season is

Ik X considered sat isfactory. ' h e average recovery of the mills in Tami l Nadu

is well above the norm prescribed except for the year 1968-'69, wherein

50 percent of the mil ls were found to have a recovery of less than 8.5 percent.

70

The number of mills with a recovery of more than 8.5 percent had increased

from 50 percent in 1968-'69 to 100 percent in 1983-'84. The average recovery

too increased from 8.42 to 9.64 percent during the same period. (See Table

3.7) The main reasons for the rise in recovery, as attributed by the mills,

are development of proper irrigation and drainage facilities in the area ,

selection of suitable varieties of cane, t rea tment of seed, supply of inputs

and provision of extension services to growers.

Reduced Overall Extraction of Sugar : A bet ter measure of technical

efficiency is reduced overall extraction, a measure of how much of the sucrose

actually present in the cane is extracted and crystaiized by the factory.

This measures the efficiency of the factory more independently from the

quality of the cane which is supplied to it.

The norm fjXed by the Bhargava Commission for reduced overall

extraction of Sugar was 84.32. 1 5 The extraction rates of the sample Co­

operative Sugar Mills have constantly exceeded the norm and also were higher

than the All India average in 1980-'81 and 1981-'82.** (See Table 3.8)

The recovery was better in the case of Cooperative sector and Pubiic sector plants than in private sector. The Cooperative sector was found to have grown more steadily than its counterparts. See Honavar R.M. et.ai., "The Sugar Industry in Tamil Nadu", Mids Bulletein, Vol. XV, No.10, October, 1985, p.536

15 South India Sugar Mills Association, Op.Cit., p.75

** The All India average extraction rates for the years 1980-'81 and 1981-*82 were 82.69 and 83.39 respectively. Figures for 1982-'83 and 1983-'84 are not available. See, Indian Sugar Year Book, 1982, Voi.l, p.132

71

Table 3.7

Recovery of Sugar f rom Sugarcane

(In percentage)

72

Table 3.8

Reduced Overall Extraction of Sugar

(As percentage of sucrose present in cane)

73

Cane Price : Cost depends upon prices of inputs. Sugarcane is the

m a j o r input in sugar industry. The price of the sugarcane has a tremendous

impact on cost of production. The minimum price of sugarcane to be paid

to the grower is f ixed by the Government under the Sugar and Gur Control

Orders (1950). The system of l inking the minimum prices wi th the recovery

of sugar f rom cane was introduced in November 1962. The formula in vogue

since then guarantees a specif ied minimum price for sugarcane upto a certain

level of recovery (8.5 percent) and provides for a premium for every increase

of 0.1 percentage point in recovery above that level. Minimum prices of

sugarcane are f ixed by the Government on the recommendation of the

Commission for Agr icu l tura l Costs and Prices. In practice the cane prices

paid are usually wel l above the minimum price f ixed by the Central

Government. This is because the actual cane price payable to the cane

growers are ent i rely le f t to the discretion of the respective State Government.

The prices f ixed by State Government (known as State advised cane price)

are not linked to recovery. The State Governments in f ix ing these prices

are mainly guided by prices paid in adjoining States. Thus under this pr ic ing

system mil ls are to pay. more than the minimum price.

Dur ing the years 1968-'69, 1972-73 and 1976-77, the excess price

paid by many of the mil ls was less than Rs.20/-. In the next two years

the excess price paid by major i ty of the mil ls ranged between RsAO/- and

Rs.60/-. (See Table 3.9)

7 k

Table 3.9

Cane price paid per tonne in excess of Statutory Minimum Price

(Rs. per tonne)

75

Some mills have paid over and above the State's advised cane price.

This is known as additional cane price and it is paid on the basis of Dhargava

formula, under which the extra realization from sale of free market sugar

was to be shared equally between the factories and the growers at the end

of each season. A provision to this effect was incorporated in Sugarcane

Control Order, 1966.1 6

Cost of Production : Cost of Production determines the price and

profitability. The minimization of cost for maximizing the return is a prime

objective of industrial units. But cooperative mills aim at offering higher

prices for member cane suppliers. The average cost of production for the

industry as a whole steadily increased from Rs.73.52 per quintal in 1961-*62

to Rs.352.72 per quintal in 1980-'81 i.e. about five-fold increase over a period

of 20 years. (See Table 3.10)

Cost-wise distribution of mills indicates that almost all the mills

had kept the cost of production below Rs. 150 per quintal between the period

1961-'62 and 1968-'69. Subsequently their cost of production tended to

increase steeply upto Rs.^50 per quintal.

* Three mills have paid additional cane price of which one has paid for three years, one for two years and the remaining one for one year. Misra, Kama! Kant, Op.Cit., p. 19

76

Table 3.10

Cost of Production per Quintal of Sugar

(In Rupees)

77

Cost Structure : An analysis of the cost structure on the basis of

marginal cost would help in deriving certain meaningful conclusions regarding

contribution, profit and price of the output. But the data available from

th e mills do not facilitate such an analysis because the Cooperative Sugar •x-

Mills do not maintain cost data nor they have trained personnel to keep

cost data in the proper form. Therefore one has to largely depend on financuil

statements for cost analysis.

The cost of raw material, i.e. sugarcane accounts for between 60

and 70 percent of the total cost of production. The cost of stores varies

from 3.27 to 3.55 percent during the period under review. The share of

other manufacturing expenses and administrative overhead expenses shows

a fluctuating trend. The share of depreciation to total cost indicates a

declining trend between 1977-78 and 1981-'82. Interest as a percentage

to the total cost of production has registered over three-fold increase between

197^-75 and 1979-'80 and thereafter it presents a fluctuating trend. The

profit margin w a s negative between 1974-75 and 1979-'80 and in 1982-'84.

Rest of the years recorded a positive profit margin ranging from 1.21 to

5.82 percent. (See Table 3.11)

Total Production : While the total production in cooperative sugar

mills has increased from 2.7'f lakh quintals in 1961~'62 to 17.63 lakh quintals

in 1983-'84, the average production indicates a fluctuating trend. The

phenomenon of four-year cycle similar to sugarcane production is found

to be present in sugar production also. (See Table 3.12)

Of the 10 mills only one mill was found to have appointed a Cost Accountant.

Break-up of Cost of Production in Cooperative Sugar Mills

(Percentage to Sales Turnover)

Oo

80

Sales : Sale of sugar is great ly inf luenced by the policy of pricing

sugar and Government control on sugar prices. Over the years, the sugar

pr icing pol icy has been al ternated between control and decontrol depending

on avai labi l i ty. During twenty six years between 19'/ l- '^2 and 1966-'67

sugar prices were control led for 16 years and decontrolled for 10 years.

T h e present system of par t ia l contro l or dual pricing pol icy was f irst

introduced in 1967-'6s. Since then decontrol has been tr ied twice : f i rs t

between May 1971 and June 1972 and second between August 1978 and

September 1979. In both times the system reverted to control and part ia l

control . Under the system of partial control sugar factories are at present

required to surrender 65 percent of their production to Government as levy

sugar at f ixed prices for distr ibut ion through public distribution system.

The remaining 35 percent of production called "free sugar" is l e f t w i th the

factor ies to be sold at open market prices. But even in the case of free

sugar Government controls the releases month by month thereby retaining

an indirect control over its prices.

The control and regulation of sugar release by the Government are

resorted to for two reasons. First ly, sugar being a seasonal industry, the

production is confined to roughly f ive months in a year. The sugar produced

during these f ive months has to be stored and released in the market over

the fu l l year. Unless the release f rom the factor ies to the market is properly

reguiated, there are l ikely to be wide f luctuat ions in avai labi l i ty and prices

leading to speculative hoarding and manipulation of markets, Secondly,

sugar being an essential commodity, it is the responsibility of the Government

to ensure its avai labi l i ty at reasonable prices throughout the year.

81

Thus the fixation of price of the sugar and the sale of sugar are not

in the hands of factories. This has a tremedous impact on the sale of final

product of the factories. The average sugar price has increased from

Rs.l 10.32 per quintal in 1961-'62 to Rs.392.58 in 19S0-*81. (See Table 3.13)

Majority of the mills, have sold the sugar for less then Rs.200 per

quintal between 196J-'62 and 1972-'73. In the remaining years under review

the mills have sold the sugar at Rs.200 to over RsAOO per quintal.

Cost Price and Sale Price - A Comparison : A comparison between

the cost of production per quintal of sugar and the selling price per quintal

ind i c a t es that the cost of production per quintal has registered a five-fold

increase over a period of 23 years whereas the sale price has witnessed

around three-fold increase during the same period. In some mills the cost

of production has exceeded the selling price. This has led to losses in them.

Such a situation arises mainly due to the Government's role in fixing the

price of input and output. The Government, on the one hand, has to protect

the interest of producer while fixing the cane price, on the other, it has

to safeguard the interest of consumers while fixing the price of the

output. In the process of reconciling the interests of the producers and

consumers, the interest of the industry was not properly taken care of.

Total Sales : The total sales of the cooperative sugar mills had

increased from Rs.2.62 crores in 1961-'62 to Rs.99.78 crores in 1983-'84.

(See Table 3.14)

83

Table 3.13

Sugar Sale Price per Quintal

(In Rupees)

M

Table 3.1*

Sugar Sales

(Rupees in lakhs)

85

Effectiveness of Employment of Resources : The effectiveness of

employment of resources can be measured through turnover ratios. A

productive enterprise usually converts raw materials in to f inished products

and sells such f inished products. The signif icance of each business ac t i v i t y

can, therefore, be studied w i th reference to sales. Turnover ratios are

calculated by comparing to ta l assets, f i xed assets, inventory and net working

capi ta l against sales. The result is expressed as the number of times the

to ta l assets, f ixed assets, inventory or net working capital are rotated in

the process of doing business. Higher the ratios the better and more e f fec t ive

is the use of resources. However, too high a ra t io may indicate overtrading

result ing f rom paucity of resources.

Tota l Assets Turnover : As a general guidline a to ta l assets turnover

17 of 1 to 2 t ime is considered sat isfactory for most industrial f i rm . But

the industry average was lower than this norm. (See Table 3.15) Only one

mi l l in some years reached the norm. This means many mi l ls have fai led

to fu l ly ut i l ize their asset base.

Fixed Asset Turnover : A more accurate measure of asset used to

generate a given volume of sales is the net f ixed assets. A net f ixed asset •«

turnover of 6 is said to be sat isfactory. The average f ixed asset turnover

of the cooperative sugar industry has not sat isf ied this norm except in 1983-'84.

Further, major i ty of the mil ls have generally operated at a fixed asset turno\

of less than 3. (See Table 3.16)

Hampton, John 3., Financial Decision Making : Concepts and Cases, New Delhi : Prentice Hall of India Pvt. Ltd., 1983, p.139

Kothari C.R., Quantitative Techniques, New Delhi : Vikas Publishing House Pvt. Ltd., 1978, p.478

17.

18.

86

Tabic 3.15

Total Assets Turnover in Cooperative Sugar Mills

87

Table 3.16

Fixed Assets Turnover in Cooperative Sugar Mills

88

Inventory Turnover : This ratio indicates as to how many times the

stock has turned over. From reference point of view this ratio should be

7 to 8 t imes . 1 9 The average inventory turnover for the cooperative sugar

industry was far beiow this norm. Almost all the mills had an inventory

turnover of Jess than 7. (See Table 3.17) The poor inventory turnover may

be due to fluctuation in production and Government control on sugar sales.

Net Working Capital Turnover : This ratio indicates the efficiency

or otherwise in the utilization of short-term funds in making the sales.

As a general guideline net working capital turnover of 4-5 times is considered

satisfactory. The cooperative sugar industry has achieved this norm. (See

Table 3.18)

Profit and Profitability : Profit should be distinguished from profita­

bility. Profit refers to the absolute quantum of profit, whereas profitability

refers to the ability to earn profit.

Gross Profit ; The average gross profit earned by the mills indicated

an upward trend. (See Table 3.19)

Net Profit : The average net profit of the mills was negative in

1964-'6.5 and 1976-V7. In the remaining years under review net profit was

low except in 1980-'81 and 1983-'84. (See Table 3.20)

89

Table 3.17

Inventory Turnover in Cooperative Sugar Mills

90

Table 3.18

Net Working Capital Turnover in Cooperative Sugar Mills

Note : Figures in parenthesis indicate row percentages.

* Net Working Capital for two mil ls was nagative.

•Net Working Capital for two mil ls was negative.

Activity Ratios in Cooperat ive Sugar Mills - Industry Average

\D

92

Table 3.19

Gross Profit in Cooperative Sugar Mills

(Rupees in Lakhs)

Note : Figures in parenthesis indicate row percentages

93

Table 3.20

Net Profit in Cooperative Sugar Mills

(Rupees in Lakhs)

3k

Prof i tab i l i ty : A measure of prof i tab i i i ty is the overalJ measure of

e f f ic iency. The pro f i tab i l i ty of the mills is studied wi th reference to gross

operating margin, net operating margin, sales margin and return on investment.

Gross Operating Margin : This rat io is calculated by dividing the

gross margin by sales. It is an indicator of the eff iciency of production

operation. As a general guideline a gross operating margin of 30 percent

20 is sat isfactory. Gross operating margin of the mills was less than 30 in

ai l the years under review. The industry average ranged between 7 and

15 percent. (See Table 3.21)

Net Operating Margin : The f i rm's prof i t margin is calculated by

dividing operating income by sales. It is an indicator of the abi l i ty of the

f i rm to withstand adverse conditions l ike fa l l ing prices rising costs and

declining sales.

As a general guideline a net operating margin of 6.5 is considered

21 to be satisfactory. The industry average was negative in 196^-'65 and

1976-77. The prof i t margin was more than the required norm in 1972-73,

1980-'81, and in 1983-'84. Many of the mil ls in 1972-73, 1980-»81 and

1983-'84 had a fa i r ly good margin (See Table 3.22)

95

Table 3.21

Gross Operating margin in Cooperative Sugar Mills

(In Percentage)

96

Table 3.22

Net Operating Margin in Cooperative Sugar Mills

(In Percentage)

97

Sales Margin : This rat io is an improvement over net operating margin

for it explains to what extent margin is lef t over after al l the expenses

including taxes are met. The ra t io is obtained by dividing the net prof i t

by sales.

22 The standard sales margin usually adopted is 3.2 percent. Except

in 196^-'6.5 and 1976-77, the average rat io for all the mills was found to

be posit ive. The industry average for the year 1983-'84 was more than the

norm and it w a s more or less nearer to the norm in 1972-'73. (See Table 3.23)

Return on Investment : The return on investment is the key indicator

of p ro f i tab i l i t y for a f i r m . I t matches operating prof i t wi th the capi ta l

employed. Cap i ta l employed is arr ived at by adding up all f ixed assets (at

98

Table 3.23

Sales Margin in Cooperative Sugar Mills

(In Percentage)

99

Table 3.24

Return on Investment in Cooperative Sugar Mills

I Profitability Ratios in Cooperat ive Sugar Mills - Industry Average

101

L iqu id i ty Ratios : A f i rm 's abi l i ty to pay its debts can be measured

par t l y through the use of l iquidi ty ratios. Short-term liquidity involves the

relationship between current assets and current l iabil i t ies. Two ratios are

commonly used to measure l iquidi ty directIy-,.the current ratio and the quick

rat io .

Current Ratio : The current ratio is a rat io of the f irm's to ta l current

assets to i ts to ta l current l iabi l i t ies. A low rat io is an indication that a

f i r m may not be able to pay i ts future bills on t ime, particularly if conditions

change, causing a slowdown in cash collections. A high ratio may indicate

an excessive amount of current assets and management's failure to ut i l ize

the f i rm 's resources properly.

Conventional current rat io is 2 : 1. The current rat io of the cooperative

sugar industry has recorded a steep fa l l . It has come down from 405 percent

in 1961 - '62 to 109 in 198O-'S 1. Industry was found to have more than the

required norm upto J96S-'69. In the later years it was found to be less

than 200 (See Table 3.2 5)

Quick Rat io : Although the current rat io ref lects the liquid position

of the industry, it does not indicate the quality of current assets and current '

l iab i l i t ies . Current assets include inventory which is not l iquid. Even a

high current rat io may not be of any use. Hence in order to know the real

l iquid posit ion of an enterprise, quick rat io may be calculated. Quick rat io

is calculated by dividing the quick assets by current l iabi l i t ies. Quick assets

do not include inventories.

102

Table 3.25

Current Ratio in Cooperative Sugar Mills

103

Table 3.26

Quick Ratio in Cooperative Sugar Mills

(In Percentage)

Liquidity Ratios in Cooperative Sugar Mills - Industry Average

105

An ideal quick rat io is taken as 1 : 1. The industry average indicates

a poor l iquid posit ion. The industry average was nearer to 100 percent in

1961-'62 ; in all the remaining years it was less than 50 percent. The quick

rat io of major i ty of the mills was less than the norm. (See Table 3.26)

Conclusion

The overall performance of the cooperative sugar industry in Tami l

Nadu was not very satisfactory. The technical ef f ic iency of the mil ls in

terms of recovery and reduced overall extract ion of sugar was found to

be encouraging. But other factors l ike number of days cane crushed, area

under sugarcane, production of sugar, capacity ut i l izat ion and product ivi ty

were subject to a cycl ical phenomenon. Consequert ly cost of production

was rising. The Government policy on sugarcane price, sugar price and sugar

distr ibut ion had adversely af fected the performance of the mil ls. The overall

f inancial performance of the mil ls w i th reference to turnover, prof i tab i l i ty

and l iquidi ty was unsatisfactory.

Cooperative Spinning Mil ls in Tami l Nadu

The idea of start ing of cooperating spinning mills was conceived for

t n e purpose of supplying qual i ty cotton yarn at a reasonable price to weavers.

24. Hamton, John J., Op.Cit., p. 126

106

In the second Five Year Plan period, three cooperative spinning mills were

established at Tirunelvel i , Srivi l l iputhur and Tiruchendur. Following this,

an ambit ious programme of setting up 10 more cooperative spinning mills

was taken up during the Third Plan period. By the end of Third Five Year

Plan period there were 12 cooperative spinning mills in Tamil Nadu w i th

a to ta l installed capacity of 1.65 lakh spindles. The total capital cost of

these mil ls amounted to Rs.9 crores. The mjjJs subsequenty expanded

their capacity and their tota l installed capacity stood at 3.39 lakh spindles

as on 31-12-1984. 5 more cooperative spinning mills were registered in

ear ly 80's in the distr icts of Madurai, Tirunelvel i , Dharmapuri, Pudukottai

and Ramanathapuram and commenced their production either in the fag

end of 1984 or in the beginning of 1985. As such all these 5 new mills do

not come under the purview of the study.

This part of the chapter is. set out to study the working of 12 co­

operat ive spinning mills w i th reference to their objectives, funds, organization,

product ion, sales and f inancial performance.

Object ive : The objective of the mil ls, as stated in the bye-laws,

is to carry on the business of cotton and stable f ibre spinning.

2 5 Government of Madras, Cooperative Spinning Mil ls in Madras - A Report , Madras, 1966, p.3

107

Type of the Mills : Mills are classified generally on the basis of

composition of membership. There are four categories of mills viz : i) mills

whose membership is mainly of weavers ; ii) mills whose members are mainly

growers of cotton ; iii) mills whose members are workers ; and iv) mills

whose members are both weavers and growers. The last category is called

mixed type. Of the 12 mills in Tamil Nadu 10 are Weavers type and the

remaining 2 are mixed type. Whatever may be the type, the emphasis was

mainly on the promotion of the interest of the weavers.

Age of the Mills : Around two third of the mills fall under the age

group of 15 to 20 years. The average age was around 20. Thus all the mills

were older ones. (See Table 3.27)

Table 3.27

Age of the Cooperative Spinning Mills

Membership : The membership is generally open to primary weavers

cooperative societies, Apex Handloom Weavers Cooperative Society, Co­

operative institutions and individuals (preferably cotton growers and handloom

weave rs/ m anu factu rer s).

108

The to ta l membership of the cooperative spinning mills had increased

f rom 2692 in 1961-'62 to 12077 in 1983-'84. The rate of growth in membership

especially af ter 1963-'69 was found to be slow. Mil l -wise growth of member­

ship indicates f luctuat ions, caused by withdrawal of membership by individuals.

(See Table 3.28)

Funds : The long-term sources of finance are share capital, retained

earnings and borrowings. The mills borrowed long-term loan from Industrial

Development Bank of India, Industrial Finance Corporation, Tamil Nadu Text i le

Corporat ion, Tami l Nadu State Cooperative Bank, Tamil Nadu State Co­

operat ive Union, National Cooperative Development Corporation and so

on. Some mil ls have acquired tex t i le machinery on deferred payment basis.

The mil ls met their working capital requirements through cash credit

accommodation f rom Dis t r ic t Central Cooperative Banks and "ways and

means" advances from State Governmenti Inter-lending among the mills

for a very short-period is permi t ted to meet the day-to-day expenses of

the mi l ls . (Finance is discussed in detai l in Chapter k)

Management : The management of the mil ls as per the bye-laws

of the society vests in a Board of Directors consisting of 15 members.

The composit ion of the board was as follows :

i) The Di rector of Handloom or his nominee,

i i) The Director of Industries and Commerce or his nominee,

i i i ) The Managing Director.

109

Table 3.28

Membership in Cooperative Spinning Mills

wm

110

iv) One person co-opted by the Board of Directors f rom any of

the persons connected w i th text i le machinery.

v) One representative of the Tamil Nadu Handloom Weavers Co­

operative Society.

vi) One representative of the Central Cooperative Bank of the

D is t r i c t in which the mi l l is situated.

vii) One representative nominated by the Term lending Inst i tut ions.

vi i i ) Three representatives of the a f f i l i a ted pr imary Weavers Co­

operat ive Societies elected by representatives of such societies

f rom among themselves.

ix) Two representatives of other a f f i l i a ted Cooperative Societies

elected by the representatives of such societies f rom among

themselves.

x) Two representatives of the individual members (cotton growers

and weavers) each having not less than 10 ful ly paid up shares,

e lected f rom among themselves.

xi) One representative of the workers of the mil ls elected f rom

among themselves and co-opted by the board of directors.

The members of the board of management elect f rom among themselves

a Chairman by bal lot.

From the date of inception to 30-08-1975 a l l the mills were under

* the management of the board of directors consisting of non-off ic ial members.

I l l

The Chief Executive Of f icer (Managing Director) was deputed by the

Government of Tamil Nadu who was an ex-of f ic io director in the board.

The non-of f ic ia l board was reconst i tuted on 1-09-1975 wi th the D is t r i c t

Col lector as the Chairman. On 14-06-1976 the boards of all cooperative

spinning mil ls were superseded and special of f icers were appointed by the

State Government. Again the Government reconst i tuted the boards under

the Chairmanship of D is t r ic t Col lector. The Special Off icers were

redesignated as Managing Directors. The composition of the reconst i tuted

board which is in vogue at present is given below :

i ) Col lector of the Dis t r ic t (Chairman).

ii) Director of Handloom and Textiles or his nominee - Director,

i i i ) Special Of f i ce r of the Tamil Nadu State Cooperative Bank

or his nominee - Di rector ,

iv) Special Of f icer of the Tamil Nadu Apex Handloom Weavers'

Cooperat ive Society or his nominee - Director ,

v) Special Of f i cer of the Dis t r ic t Centra l Cooperative Bank in

which the mi l l is s i tuated or his nominee - Director,

vi) The Managing Director of the Mi l l - Ex-Of f ic io Director.

Organization Structure : The formal organization of the cooperative

spinning mil ls in Tami l Nadu is more or less the same w i th one except ion.

Of the 12 mil ls studied, one namely the South India Cooperative Spinning

Mi l l at Tirunelvel i has a separate finance department headed by Financial

Control ler to deal wi th finance funct ion. In the remaining 11 mil ls f inance

funct ion is usually handled by a Head Clerk report ing to the Adminis t rat ive

Of f i cer of the mi l ls . (See Chart 2)

1 12

The author i ty is highly central ised at the top level consisting of board

of management and the Director of Handlooms and Texti les.

Production : The qual i ty of yarn produced depends on the qual i ty

of cot ton. The fineness of yarn is measured by the number of hanks of

yarn in one pound. This is known as i ts count. A hank is SW yard long

and so, for example, one pound of number 10's count cotton yarn would

unwind to 8400 yards. The breaking load of cotton yarn depends only to

a minor extent on the intr insic strength of a cotton f ibre ; the important

features are count and tw is t . The count to which a given type of cot ton

can be spun commercia l ly , depends mainly on it stable length. The long

cotton yields finer yarns. The rooperat ive spinning mills have boon spinning

f rom 20s to 80s count of yarn and some mills even spin 100s and 120s.

The Production Process : Spinning is an operation of forming the

continuous thread by twis t ing together several overlapping fibres or f i laments.

Before the f ibre is spun, it is cleared, strengthened, the prel iminary process

including carding and for f iner yarn combing is completed. The fol lowing

operation process is generally not iced in spinning cooperatives.

i) The highly compressed cot ton is reduced to a greater possible

state of division af ter removing the impuri t ies. The f ibre is formed into

a rope of sliver.

i i ) The sl ivers are drawn between rollers to a l ternate them

sometimes combed to arrange the f ibres in paral le l rows and to

the regular i ty of the mater ia l .

every spindles shi f t and it brings a net saving of about a lakh rupees for

a mi l l of 12,000 spindles and Rs.2 lakhs for a mi l l of 25,000 spindles.26

The ideal way to ful ly ut i l ize the capacity is to work the mil ls for 2k hours

a day in three shif ts. Taking 7 days as paid holidays in a year, the mil l

s n o u ld work 358 days of 3 shifts of 8 hours each in a year ; 95 percent of

the instal led spindle capacity calculated for 358 days for 3 shifts of 8 hours

11

113

i i i) Suff ic ient twist is inserted into the alternate slivers by row called

roving, to make a f i r m thread.

Installed Capacity of the Cooperative Spinning Mills : A mi l l w i th

a minimum capacity of 25,000 spindles is considered an economically viable

unit. Upto 1977, the sptndlage capacity of major i ty of the mills was less i

than 25,000 spindles. In the subsequent two years most of the mil ls had |

increased their capacity above 25,000 spindles. Thus al l the mills now have ! 1 » I

the capaci ty to operate as economically viable units (See Table 3.29) ,

i1

I1 Capaci ty Ut i l i za t ion : Capacity ut i l izat ion is one of the important i

l

indicators of the ef f ic iency of operation of manufacturing enterprises. Under- I i'

ut i l izat ion of capacity leads to higher cost of production, whereas ful l ?

u t i l izat ion of capaci ty leads to lower cost of product ion. For instance, j

every 10 percent increase in capacity u t i l izat ion is expected to bring an }

average saving in the manufactur ing cost to the extent of 3.5 paise per

1 !»!

1 *m, i IMN ft

5*. • % i

i ' 'if

This was f ixed in 1971 in relat ion to the cost structure of establishing a m i l l . The same size is considered economical ly viable even now. H In 1961 the norm for economical ly viable unit was fixed at 12,000 ;•! spindles. \\ \

26. I f ' The A l l India Federation of Cooperative Spinning Mil ls, Annual Report 1977-78, Bombay, 1979, p.17

114

Table 3.29

Installed Capacity of the Cooperative Spinning mills

(In Spindles)

115

each mill, therefore be standard spindle utilization for cooperative spinning

27 mills. Many mills did not operate at this level. So it was felt that it

was absolutely necessary for the cooperative spinning mills to step up their

28 capacity utilization atleast upto 85 percent of their installed spindlage.

(See Table 3.30)

The average capacity utilization for the mills was much below the

absolute minimum of 85 percent especially in the years 1961-62, 1964-65

and 1972-73. In the remaining years it was around 85 percent and in 1984

the mills had a record capacity of 92.60 percent.

Reasons for Spindles Idleness : There are several causes for the idleness

of spindles or low capacity utilization. Some causes like power shortage,

strike, modernization and cleaning and maintenance as reported by the mills

are uncontrollable whereas causes such as want of back stuff, count change,

absenteeism of workers, etc. are controllable.

Power shortage and want of skilled workers were the main causes

for under utilization of the capacity. (See Table 3.3J)

Cost of Production : Count-wise costing provides a base for deciding

appropriate product-mix. Unfortunately, the mills under review had not given

27. From the Audit Reports of the Cooperative Spinning Mills.

28 The All India Federation of Cooperative Spinning Mills, Op.Cit., p.17

* The increase in percentage of utilization is partly due to standard of working hours and days that has been fixed from time to time. For instance prior to 1970 the standard of working hours and days was fixed at 22 1/2 hours a day and 6 days a week. Between 1971 and 1978 it was 22 1/2 hours a day and 7 days a week. Since 1-03-1978 it has been revised as 2k hours a day and 7 days a week.

I 16

Tabic 3.30

Capacity Utilization in Cooperative Spinning Mills

(In Percentages)

Note : i) Figures in parenthesis indicate row percentages.

ii) Capacity utilization for 3 mills in the year 1964-6:5, 6 mills in 1968-69, 3 mills in 1972-73, 1 mill in _. 1977 were not available.

_ i&g^s^^ sT*i^^*:%%%Q'&4si?&. ̂ ^ ^ ^ Z k t e ^ ^ ^ ^ ^ S ^ - " - - ^ &***>*

i^^^^^^^^^r^i^a^^-^^^fes^^^^^w^-^^^- * j^r^r J v* X ^ S ^ j y f ^ ^ r v 3* - - = „y*-^SE^L--r ^ . ^ - -^3gsg3lHs3S£&S&*I3i?S^ss3**5gsdE J&J2~S5?5B<S'&?^£&*WISS:_- -*az3.-^i -^SKLaiaa^yggggi--' . j i jc•S£f - ^S^ f 1 * «2-

118

Table 3.31

Causes for the Spindle Idleness in Cooperative Spinning Mills

(In Percentage)

119

due at tent ion to this. Production figures were available only for the yarn

converted to 40's. Based on the available figures the cost of production

per kg. is computed (See Table 3.32)

The average cost of production of yarn had steadily increased from

Rs.7.42 per kg. in 1968-69 to Rs.28.26 in 198*.

Break-up of Cost of Production : As in the case of sugar mills,

here also the cost could not be presented in terms of f ixed and variable

cost for want of data in the form in which it was required. Hence, the

cost structure is computed by drawing the data i r om the financial statements.

Over the period of 10 years raw materials alone accounted on an

average for about 62 percent of the yarn selling price.

The percentage of salary and wages ranged between 13.28 and 17.61.

Stores and spares on an average accounted for 2.87 percent. The percentage

of power and fuel consti tuted around 10 percent of the sales. Depreciation

cost as percentage to sales had declined from kA7 in 1975 to 2.35 in 1984.

The proportion of interest to sales ranged between kSfl to 5.86. Other

manufacturing costs and other expenses presented a f luctuating trend. Prof i t

as percentage to the sales revenue provided a dismal picture except for

the period 1978 to 1980. To sum up, the raw material cost and salary and

wages const i tuted a major chunk in the tota l sales of the mills. (See Table

3.33)

120

Table 3.32

Cost of Production per Kg. of Yarn

(In Rupees)

Table 3.33

Break-up of Cost of Production in Cooperat ive Spinning Mills

(In Percentage)

122

Procurement of Cotton and Price : The entire economy of the spinning

mil ls depends on procurement of right type of cotton at right t ime and at

r ight pr ice, as cotton is the main input, accounting for 60 to 70 percent

of the to ta l cost of production of yarn. The procedure adopted for procuring

cotton is described below.

A separate cotton purchase cell has been constituted by the Director

of Handlooms and Texti les for the purchase of cotton in respect of ail co­

operative spinning mil ls. The mills furnish the cotton required by them every

month to the Cel l for spinning dif ferent counts of yarn. The Cell calls

for samples f rom various cotton suppliers. An approved list of cotton suppliers

is maintained for this purpose. Samples are also called from cooperative

market ing federations of Maharashtra, Punjab, Gujarat, and Tamil Nadu.

The cot ton selector appointed by the Cell examines the samples received

through f ibrographic electronic tester and grades i t . The Cell then negotiates

the price wi th suppliers wi th reference to the offers made and the current

rate prevai l ing in the market and f inal ly prices are settled for di f ferent

counts according to the grade of cotton. Al lotment is made to each mil l

and basic samples are sent to the mills along with the test results. On receipt

of the cot ton bales, lot samples are drawn and sent to the laboratory for

test ing. If the test results of the lot sample agree wi th the test results

of basic sample, cot ton is passed for payment without allowance. The cotton

is passed w i th allowance at a tolerance level of 5 percent and if it exceeds

5 percent, the cotton wi l l be rejected.

123

This centralised system of procurment of cotton, it was reported,

helped in buying quality cotton at a competitive price.

The average price of cotton has increased from Rs.10.09 per kg in

1975 to Rs.18.15 in 1984. (See Table 3.34)

Production : The cooperative spinning mills produced various counts

of yarn ranging from 20s to 80s and above. The average production per

mill during the first four years showed fluctuations. Thereafter it witnessed

an increasing trend. The rise in production may be attributed to increase

in installed and utilized capacity and modernization of machinery. (See

Table 3.35)

Selling Arrangements and Sales : The yarn produced by the co­

operative spinning mills is sold to the weavers cooperative societies through

the depots of coopetex units run by Tamil Nadu Handloom Weavers' CCK

operative Society on consignment basis as per the allotment made by Director

of Handiooms and Textiles. The price of the yarn is fixed by yarn price

sub-committee constituted by the Government which normally meets once

in a month. After fulfilling the allotment made by the Director of Handloom

and Textiles, the surplus yarn is sold in the open market through brokers.

It was reported that the selling prices were mostly fixed below the

cost which mainly accounted for the losses in many spinning mills in co­

operative sector. The periodically revised selling rates giving effect only

to nominal increase was quite incommensurate with the abnormal increase

in the various items of overhead.

124

Table 3.3*

Average Cotton Price per Kg.

(In Rupees)

125

Table 3.35

Quantity of Yarn Produced

(In Lakh Kgs.)

126

The total value of the yarn sold increased from Rs.0.63 crores in

1961-62 to Rs.10.92 crores in 1972-73 and further went up to Rs.62.23 crores

in 1984. The average annual growth ranged between Rs.0.67 crores to Rs.2.00

crores. (See Table 3.36)

Financial Performance : The financial performance of the mills

is analysed in terms of turnover ratios, profitability ratios and liquidity ratios.

The norms considered for spinning mills are same as those of cooperative

sugar mills.

Turnover ratio : The average total assets turnover for the mills

had increased from 0.52 to 1.19 over the years. The performance of the

mills in terms of total assets turnover was satisfactory especially during

the later period under review. (See Table 3.37)

The average fixed assets turnover had increased from 1.24 in 1964-65

to 4.17 in 1983-84, but it was nowhere near the norm of 6. (See Table 3.38)

The inventory turnover of the mills had surpassed the norm of 7 - 8

times in all years. (See Table 3.39)

The average net working capital turnover of the mills in 1964-65,

1977 and 1981 has satisfied the norm. The ratio was exceptionally high

in 1983-84. (See Table 3.40)

Profit : The average gross profit ranged between Rs.3.07 and Rs.17.87

lakhs. (See Table 3.41)

127

Table 3.36

Value of Yarn sold by Cooperative Spinning Mills

(Rupees in lakhs)

Note : Figures in parenthesis indicate rate of growth over the years.

128

Table 3.37

Total Assets Turnover in Cooperative Spinning Mills

129

Table 3.38

Fixed Assets Turnover in Cooperative Spinning Mills

30

Table 3.39

Inventory Turnover in Cooperative Spinning Mills

131

Table 3.40

Net Working Capital Turnover in Cooperative Spinning Mills

133

Table 3.41

Gross Profit in Cooperative Spinning Mills

(Rupees in Lakhs)

134

Since 1964-65, more mills had incurred losses. (See Table 3.42)

Prof i tab i l i ty : The prof i tab i l i ty of the mills is examined w i th reference

to four major pro f i tab i l i ty ratios namely gross operating margin, net operating

margin, sales margin and return on investment. The prof i tabi l i ty of the

mills w i th reference to gross operating margin and net operating margin

shows a very poor performance. (See Tables 3.43 and 3.44)

The sales margin for the industry as a whole had declined from 6

percent in 1961-62 to 1 percent in 1968-69 and increased to 2 percent in

1972-73. (See Table 3.45)

The average return on investment was less than the norm of 10 percent

between the period 1961-62 and 1972-73. In the succeeding years it was

negative. The position in 1983-84 was far f rom satisfactory. '(See Table 3.46)

Liquidi ty of the Cooperative Spinning Mil ls : The average current

ratio was more than the norm of 200 percent between the period 1961-62

and 1972-73. In the subsequent three years the current ratio was around

the norm. (See Table 3.47)

More than 75 percent of the mills have a quick ratio of less than

100 percent during many of the years under review, indicating their poor

l iquidi ty position. (See Table 3.48)

Sickness in Cooperative Spinning Mills : Sickness is a serious problem

in spinning industry. A mi l l is considered sick if it incurs loss for three

135

Table 3.42

Net Profit in Cooperative Spinning Mills

(Rupees in Lakhs)

36

Table 3.*3

Gross Operating Margin in Cooperative Spinning Mills

(In Percentage)

137

Table 3M

Net Operating Margin in Cooperative Spinning Mills

(In Percentage)

138

Table 3.45

Sales Margin in Cooperative Spinning Mills

(In percentages)

139

Table 3.46

Return on Investment in Cooperative Spinning Mills

(In percentage)

Profitability Ratios in Cooperative Spinning Mills - Industry Average

-c-O

141

Table 3.47

Current Ratio in Cooperative Spinning Mills

(In percentage)

142

Table 3.48

Quick ratio in Cooperative Spinning Mills

(In percentage)

Liquidity Rat ios in Cooperative Spinning Mills - Industry Average

V j J

29 consecutive years. According to this definition 50 percent of the co­

operative spinning mills falls within the sick category in 198*. This is a

distressing trend. But sickness cannot be judged with one variable. Some

more factors need to be considered. The South India Textile Reserch

Association (SITRA) has quantified some of the symptoms to forewarn sickness

in a mill as follows :-

i) Fixed assets lower than Rs.100/- per spindle.

ii) Salaries and wages relative to turnover greater than 18 percent.

30 m) Sales turnover lower than Rs.600/- per spindle.

SITRA has also laid down norms that a mill should have in order to earn

good profits during normal trading condition. They are :-

i) fixed assets of more than Rs.^00/- per spindle,

ii) Salaries and wages relative to turnover lower than 12 percent ;

and

31 iii) Sales turnover higher than Rs.l,500/- per spindle.

The rate of fixed asset per spindle shows that the mills had vast

scope for earning profit as per the norm of SITRA. No mill had less than

Rs.100 as fixed assets per spindle.

Commerce Research Bureau, "Industry Profile : Cotton Textiles" Financial Express, Nov. 21, 1986, p.2

South India Textile Research Association, 25 Years of Research, Coimbatore, 1981, p.138

Ibid., p.138

29.

30.

31.

Table 3.49

Symptoms of Sickness/Profitability in Cooperative Spinning Mills

1*6

Most of the mills had a salary and wages of more than 18 percent

of turnover as against the norm of less than 12 percent.

Sales turnover per spindle reveals that a vast majority of the mills

had Rs.600 to Rs.1,500 sales per spindle betweent the period 1975 and 1981.

Since 1980 most of the mills had more than Rs.1,500 as sales per spindle.

(See Table 3.49)

If all the three guidelines are considered together, the mills had no

chance of becoming sick. On the other hand they had vast scope to improve

their profitability.

Conclusion : The low capacity utilization, high production cost,

control on sales, poor financial performance have rendered many of the

mills profit-less, in spite of their strong capital base and better sales per

spindle.