Executive Summary In an era where there is a need for inclusive growth, the sugar industry is amongst the few industries that have successfully contributed to the rural economy. It has done so by commercially utilizing the rural resources to meet the large domestic demand for sugar and by generating surplus energy to meet the increasing energy needs of India. In addition to this, the industry has become the mainstay of the alcohol industry. The sector supports over 50 million farmers and their families, and delivers value addition at the farm side1 . In general, sugarcane price accounts for approximately 70 percent of the ex-mill sugar price2. The sector also has a significant standing in the global sugar space. The Indian domestic sugar market is one of the largest markets in the world, in volume terms. India is also the second largest sugar producing geography. India remains a key growth driver for world sugar, growing above the Asian and world consumption growth average. Globally, in most of the key geographies like Brazil and Thailand, regulations have a significant influence on the sugar sector. Perishable nature of cane, small farm landholdings and the need to influence domestic prices; all have been the drivers for regulations. In India, too, sugar is highly regulated. Since 1993, the regulatory environment has considerably eased, but sugar still continues to be an essential commodity under the Essential Commodity Act. There are regulations across the entire value chain land demarcation, sugarcane price, sugarcane procurement, sugar production and sale of sugar by mills in domestic and international markets. However, fundamental changes in the consumer profile and the demonstrated ability of the sector to continuously ensure availability of sugar for domestic consumption has diluted the need for sugar to be considered as an essential commodity. According to a recently conducted nation wide survey, nearly 75 percent of the total non-levy sugar is consumed by industrial, small business and high-income household segments. Further, even for a low-income household, 10 percent increase in sugar price would result in less than 1 percent increase in the monthly food expense3. _________________________ 1 2 3
Source: ISMA Indian sugar year book 2005-06 Source: KPMG Analysis Source: AC Nielsen, KPMG Analysis
Figure 1: All India non-levy sugar consumption by segments (2007)4 Source: AC Nielsen survey conducted in March 2007, KPMG analysis
Madras School of Economics (MSE) has also raised the need to reassess the weightage of sugar in the wholesale price index (WPI). As per MSE, the share of expenditure within a basket of consumption and investment goods can be used as an indicator for assessing the suitability of WPI weights. While the current weight for sugar and Gur is 3.68 percent, MSE suggests that the appropriate weight for sugar should be 2.02 percent as per the current basis of WPI calculation that excludes services. MSE further suggests that services should be included in the WPI calculation, and in that case the appropriate weight for sugar would be 1.04 percent5. While the sector grows in stature and continues to play a key role in the economy, it is expected to face some significant challenges. There is lack of alignment between sugarcane and sugar prices. As a result, it leads to cane payment arrears and induces cyclicality. The arrears typically result in the eventual need for government support packages, while the pronounced cyclicality destabilizes the sector revenues. The average sugarcane yields have also, at best, stagnated, and the average recovery is amongst the lowest in comparison with key sugar producing nations. Large sugar inventory exposure and sugar price volatility also results in high sugar price risk for the sector. In the past ten years, on an average basis, even the large listed sugar firms have struggled to generate Return on Invested Capital (ROIC) over and above their cost of...