Kolkata: Sugar industry was reeling under low prices and unusually high unsold inventory in the recent past. And Modi 2.0 government's move to keep the fair and remunerative price (FRP) for cane unchanged for the 2019-20 season has come as a great relief to the sugar industry. This is the first time since 2009-10 when the government has not increased the FRP. Last year, the minimal FRP — the government-mandated price at which mills have to buy cane from buyers — was kept at Rs 275 per quintal with a base recovery rate of 10 per cent. The sugar industry had been lobbying with the government for the last one year or so, not to increase the FRP as it was "abnormally high".

Similarly, the Cabinet Committee on Economic Affairs (CCEA)'s nod to create a 4 million MT sugar buffer stock for one year, is also likely to support the industry by not only providing cash support to sugar mills (in form of compensation for carrying cost of stock) but also improving the demand-supply situation in the domestic market and the consequent support to the sugar prices. A total capital outlay of Rs 1,674 crore has been made for this stock which would help mills clear their unpaid dues to the farmers.

"According to our estimates, the closing sugar stocks for SY2019 would be high at around 14.5 million MT. The direct impact of this move by way of compensating mills for the carrying cost alone would translate into a higher PBT margin by about 1.5 per cent-1.8 per cent. This apart, the buffer stock creation would result in some improvement in the demand-supply situation in the domestic market in turn resulting in support to sugar prices, although the quantum of the increase cannot be ascertained at this moment. These factors could result in liquidity improvement of the sugar mills, thus supporting the cane payments to farmers," said Sabyasachi Majumdar, Senior Vice President & Group Head, ICRA Ratings.

Talking about production and consumption, Majumdar said, "The domestic sugar production in SY2020 is likely to be decline by 14 per cent YoY to around 28.2 million MT from 32.9 million MT in SY2019 - driven by the lower production in the key sugar-producing states like Maharashtra and Karnataka. We expect the sugar consumption to increase to 26.5 million MT in SY2020 and the production is likely to outstrip consumption by around 1.7 million MT."

On the pricing front, sector analysts expect the sharp reduction in Indian production in 2019/20 to start the recovery in prices. A very poor crop in Maharashtra, triggered by a poor monsoon in 2018 that reduced replanting, will start the process of firming domestic prices in India. Higher domestic prices will reduce the volume of exports onto the world market, experts felt.

Meanwhile, the ICRA report pointed out that the estimated maximum expenditure for the creation of buffer stock is nearly Rs 1,674 crore. The reimbursement under the scheme would be met on quarterly basis to sugar mills which would be directly credited into farmers' account on behalf of mills against cane price dues and subsequent balance, if any, would be credited to the mill's account.