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Sugar Export Subsidy! Will It Help Sugar Sector?


Posted on 30-Aug-2019 Comments  0

Sugar subsidy

Generous export subsidy for sugar may only solve half the problem

The cabinet last week approved a huge sugar export subsidy of Rs.6286 crore for sugar mills to export sugar. Cost of producing sugar in India is substantially higher than in countries like Brazil and Australia. With global sugar prices falling, the only way for Indian sugar mills to compete in the world market is through government subsidies. While this is good for optics, will this really address the concerns of sugar sector?

Not so sweet sugar problem

For a long time, sugar has been a very sensitive topic; politically and socially. That is the reason governments have gone out of their way to keep the sugar farmers and the sugar mills in good humor. With a global glut of supply, the prices of sugar are falling globally. But India has a larger problem of high cost of production. Apart from structural issues, sugar costs and output also gets impacted by weather related factors. When sugar prices are below cost, it results in burgeoning sugarcane dues to farmers. The government cannot afford an unhappy farmer lobby and cane farmers are very powerful in states like Uttar Pradesh and Maharashtra. The only option is to give subsidies and this year the government has announced export subsidies for 6 million tons at the rate off Rs.10,448/ton. The centre’s bet is that if the subsidy helps boost exports then the funds can be realized faster and the cane farmer dues can also be paid out on time by the sugar mills.

Subsidy may fall short

The subsidy announced by the centre was lower than expected since markets were anticipating a subsidy of Rs.12,000 per ton. In the previous sugar cycle year 2018-19, the sugar mills managed to export just 3.8 million tones out of the target of 5 million tons. Sugar analysts believe that the export performance will largely depend on the global raw sugar prices. These prices are currently lower than 12 cents per lb and the export target can only be met if the global sugar recoveries are above 13 cents. With a global glut in sugar, that looks quite unlikely. In fact, experts estimate that at the current global price recovery, India will only be able to export 3-3.5 million tons as against the target of 6 million tons in the next sugar cycle. That will still leave a lot of unpaid dues to sugarcane farmers across India.

WTO issue could be serious

For India to expand its export basket, adherence to WTO framework is a must. In the case of sugar subsidies, Brazil and Australia have already pulled India to the WTO. While India has justified it, these kinds of thorny issues will continue to become a major challenge over time. India needs to seriously look at its sugar cost of production and work on the efficiency matrix. The subsidy may be good for short term optics, but in the longer term, it is unlikely to give any kind of competitive advantage!

NHAI Debt

Is NHAI debt the next big headache for banks and the centre?

The worsening debt situation at the National Highways Authority of India (NHAI) was being spoken about in hushed tones for long. But it may not have become apparent if the PMO had not summoned the top brass of NHAI and the ministry and asked them to stop road building and focus on monetizing their existing assets. What exactly is the issue and what is the background to this massive pile up in debt?

NHAI debt: the big picture

The NHAI was conceived by Vajpayee government as a catalytic force to give a boost to the Golden Quadrilateral road network across India. It did a great job of catalyzing growth but something has changed in the last few years. Just look at the numbers. In March 2015, the NHAI had total debt of Rs.24,800 crore. In the last 4½ years since then the total debt burden of NHAI has burgeoned to Rs.178,000 crore. Speaking on the topic the former NHAI chairman underlined that this 7-fold increase was due to 3 reasons. Firstly, the government had embarked on an aggressive road expansion drive under Mr. Gadkari. Secondly, the toll fees and the ROI were not growing as fast as the debt of NHAI and created a piquant situation. Lastly, NHAI was caught in litigations and that had seriously impacted its own working capital as well as its contractors. It is in this background that the PMO had intervened and sought to take quick and decisive action on this subject.

Why this is a Catch-22

A Catch-22 situation is one which does not permit a solution. You keep going in circles. The former Chairman of NHAI admitted that Rs.178,000 crore debts was just the tip of the iceberg. NHAI also had contingent off-balance sheet liabilities to the tune of Rs.65,000 crore. Since most contingent liabilities are shown at a percentage, the former head estimated that the actual value of these contingent liabilities could be closer to Rs.300,000 crore. When you add this to the existing debt on the books of NHAI, the gravity of the situation becomes quite clear. Most of these contingent liabilities pertain to legal cases where there have been cost and time over-runs and contractors had demanded compensation. Hence, this was leading to tight working capital conditions for contractors and any solution would mean recognizing these liabilities. That makes it a perfect Catch-22. 

A cost-revenue mismatch

In the last few years, the cost of land acquisition had gone up geometrically. That was adding to the costs. But the problem was that the toll fees and the returns on these projects were not keeping pace and the working capital shortage was making it worse. With funds down to a trickle from banks for infrastructure projects, the PMO is bang on target. It is time to monetize assets and shift to an asset-light model!

Bank Mergers

Bank mergers were long overdue but it also poses challenges

With a sweep of her pen the Finance Minister reduced the number of PSU banks in India from 10 to just 4. Large banks like PNB, Canara Bank and Union Bank became the acquiring banks. The merger was long overdue but there are also some serious challenges ahead.

Helps rationalize costs

PSU banks in India were awful service duplicates. Most banks replicated the same set of banking standards and market insights. In the process, they had to spend much more on branch networks, manpower, administrative costs etc. Now all that can be quickly rationalized. Common services can be shared and overheads can be slashed. The costs so saved can be actually used to give a digital push to banks that is currently lacking. Above all, you now have a handful of banks with a wide reach and are also well capitalized.

Treasury advantages

Treasury operations in most small banks are too small to give them bargaining power in pricing and quotes. Mergers will not only expand the treasury corpus but also help to largely centralize the treasury operations. Rationalization of costs will also happen since duplicate skills will not be required in a larger set up. Being a key profit centre for any bank, this is one area where the advantages are likely to be visible in the short run and will be value accretive.

But, issues are much bigger

The big question that people are asking is whether the merger will really solve the current problems that banks are facing. Banks have just come out of a major NPA restructuring exercise and they still have real problems like IL&FS, Dewan Housing, Jet Airways and NHAI to worry about. These mergers will surely make the banks larger and better capitalized but whether it will really make them more profitable is a moot point. The past experience is that when multiple banks with similar problems merge, it is very unlikely that it would turn out positive unless there is a major revival in growth. That will be the big assumption here. Also, most of these expectations may be belied if necessary changes are not brought in terms of private ownership, greater management leeway and performance incentives.

What about softer issues?

Even as the merger was announced by the FM, the rumblings have already started by the unions. This will result in job losses and nobody wants to bell the cat. Job loss in banks is economically and politically sensitive. With a spate of state elections coming up, the centre may not be keen to rub the powerful unions the wrong way. There is the larger issue of culture because not all PSU banks are the same. A start has been made but practical challenges could be the real stumbling block!

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