Buoyed by government incentives, a shift to ethanol can bring stellar gains and more sustainability to the Indian sugar sector in 2021, especially as economies revive and crude prices surge.
Source: https://bit.ly/38CBS0N
Sugar commonly known as a table condiment that brings a sweet taste to food is more than that. This sweet crystalline substance, apart from finding use in food items, also has non-food applications. It acts as a preservative, preventing the formation of ice crystals in frozen ice-creams, it prevents staleness and helps bakery products retain moisture, and encourages fermentation in yeast-containing products.
From being called ‘the new oil’ in 2009, to having the lowest prices in a decade in 2018, sugar has come a long way. Back in 2009, Brazil was diverting its cane and beet towards ethanol production. And India, which is the second-largest producer, was fighting monsoon challenges. This sweet crop was being traded at 24.85 cents per pound – a 28-year high price.
Since then, the global production of cane sugar has increased from 1.6 billion tonnes in 2009 to 1.9 billion tonnes in 2019. Around 70% of the global production (in the last sugar season) came from the top ten producers – India, Brazil, Thailand, China, the US, Mexico, Russia, Pakistan, France, Australia. Consumption, on the other hand, has increased by an annual rate of 2.01% between 2001 to 2018, from 1.2 billion tonnes to 1.7 billion tonnes. This trend in consumption, however, has slowed to 0.8% in the latter half of the decade (2016-2018), primarily due to the debate on concerns relating to health. India is the biggest consumer of sugar followed by the EU, China, Brazil, the US, Indonesia, Russia, Pakistan, Mexico, and Egypt.
In 2019, exports of cane or beet sugar (HS Code 1701) were dominated by the largest producer Brazil (US$ 5.24 billion), followed by Thailand (US$ 3 billion), and India (US$ 1.5 billion). Brazil alone constituted for 25% of the global exports, whereas Thailand and India had 14.5% and 8.6% share respectively.
On the other hand, the US (US$ 1.7 billion), Indonesia (US$ 1.4 billion), Italy (US$1.2 billion), and China (US$ 716 million) were the largest importers during the same year. The US contributed 7.2% of global imports, but that’s because of lack of enough domestic production and the consequent reliance of its F&B industry on imports to meet requirements.
The sugar industry in India is the largest agro-based industry after textiles. It employs over 5,00,000 farmers directly and acts as a livelihood for about 50 million sugarcane cultivators, supporting over 12% of the rural population directly or indirectly. And this ‘Child of Protection’ as it was called in the 1930s has a very unique harvest pattern.
Its production is ‘cyclical’ which means that three years of the bumper crop are followed by three years of crop failure. And it is also highly ‘politically sensitive’ because its demand is inelastic. Despite forming a relatively insignificant portion of a family’s budget, a small rise in price triggers inflation in all commodities.
Hence, the farmers receive protection in the form of a Fair and Remunerative Price, which the mills pay them. And because domestic production is costly, the industry demands subsidy to export the surplus raw and white sugar to compete internationally. This sugar season (October-September, 2020-21), the cost of production of raw sugar by Indian millers at Rs. 32 per kg has been higher than the international price of sugar contracts at Rs 21-22 per kg. This is why millers are reluctant to export without subsidy.
Last year (October-September, 2019-20), a sum of Rs. 64,000 crore was provided to the exporters to ship surplus sugar through transport subsidy @ Rs. 10.45 per kg of sugar. This year, the government has agreed again, albeit reluctantly, to subsidize exports by giving a sum of Rs. 36,000 crore to millers as international demand seemed stable.
The government took this step when the industry appeared to be on the verge of a virtual collapse unless the excess stock was exported. But there is an obvious need for better alternatives to ensure a vibrant and sustainable sugar industry. According to data, India will need to export 6 million tonnes of sugar in the 2020/21 marketing year that started on October 1, due to a jump in production that is attributed to a higher area. ISMA estimates that India’s sugar production surged nearly three-fold to 14.10 lakh tonnes in the 2020-21 season against 4.84 lakh tonnes in the same period last year.
The search for a better alternative ends at sugar sector’s safety net i.e. ethanol. An advantage of sugar is that its production results in a by-product called molasses. Both the end product (i.e. cane sugar) and the molasses can be used to produce ethanol. The difference lies in the quantity of ethanol produced. One tonne of cane can produce 10.8 litres of ethanol if it is produced from molasses. On the other hand, the same cane can produce 84 litre of ethanol if used directly as an input.
This high-value product has gained a reputation for being a cleaner fuel, that is why it is also called a biofuel. All countries including Brazil divert cane sugar towards ethanol. In fact, Brazil launched its first policy back in 1975. Indian gains however rely on Brazil’s decision to opt for ethanol or sugar in a particular season depending on which is more profitable.
When Brazil increases ethanol production, Indian exporters gain, otherwise surplus supply globally pulls down sugar prices harming the Indian exporters and millers. Brazil has attained this freedom because of the huge investment in ethanol equipment and storage facilities made by the millers. India still lacks in that respect. Brazil diverts 55% of its sugar cane to biofuel, whereas there is nothing fixed in India.
Ethanol is an attractive option for three reasons. First, its demand is elastic and cuts across several industries. It is used as an additive in automotive gasoline, a solvent in organic chemicals, finding space in the chemical industry, used as an intoxicating agent in beer, wine, and other alcoholic beverages. Now, with an inclination towards biofuels, ethanol is mixed with petrol as well.
India also opted for a National Policy on Biofuels in 2018, which targets 20% blending of ethanol in petrol by 2030. Sugar demand on the other hand is highly inelastic, as it forms a very small proportion of an individual’s income. Further, the provision of subsidies lowers the price encouraging the consumption of sugar, which again is not correct.
Secondly, it will relieve the government from the compulsion of subsidising exports. That amount can be allotted to some other productive sector and the sugar industry can become independent. Thirdly, this will save India from allegations at the WTO that its subsidy program is trade distorting – a claim made by countries like Brazil, Australia, and Guatemala in WTO regarding New Delhi’s sugar subsidies in 2019.
The main issue of mills moving towards ethanol was the lack of funding mechanisms. The Government of India has taken several steps to handle this concern.
All these moves are aiming to divert sugar to ethanol. This industry can be expected to become more profitable in the upcoming time as well, as economies return to normalcy and demand for crude oil surges. Further, COVID-19 has made sanitizers a booming industry, which use ethanol as a key ingredient, again, pointing towards the much-needed shift.
Ethanol is the future source of energy. Government should focus in thst area. It will also help government in balancing it’s fiscal deficit. Great article. Good job TPCI and Mahima
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