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. |

INTRODUCTIONIndian sugar industry, second largest agro-based processing industry after thecotton textiles industry in country, has a lion's share in accelerating industrializationprocess 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 IndiaIndia 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 TIMESFive 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, 2005The 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 industryThe 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, ISMASMP: Statutory minimum PriceSAP: 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 DETAILSGiven 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 INDEXThere 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 IndiaFigure 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 fiscalIndia, 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 SCENARIOAfter 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-productsSugar 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 centrifugationFigure 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 growOnce 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-productsThere are essentially three main by-products generatedby 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 ofcompound 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 SugarSugar 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 burdenTable 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 CRISISFirst, 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 INDUSTRYThe 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 SlowdownGlobal 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, 2009The 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' it27 Oct 2009, 0237 hrs IST, Ram Sahgal & Vijay Gurav, ET BureauBajaj 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 GovernmentConsidering 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 sugarcaneFigure 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 = 17.37Hence, 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 INDUSTRYRaw Materials i. Fluctuation in Sugar Cane ii. Resources iii. InfrastructureProduction of sugarcane i. Fertility of Land is decreasing. ii. Lack of Irrigation Facilities. iii. Low rainfall in sugarcane cultivation areasSugar Policy of the Government of IndiaRising 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 OUTLOOKThe 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