Archive for January, 2010

Tightly tucked in several layers of clothing to protect myself from freezing cold of Pilani, I picked up today’s newspaper from my doorstep. As has been the case for past few weeks, the sky high prices of sugar had got huge amount of coverage. So, I tried to find out what has actually been causing this price rise? To understand what actually led to this situation we need to understand the parties involved in the business of sugar production. The sugarcane is bought from farmers by sugar mills, factories and refineries where they are converted first into raw sugar and then refined to white sugar.Thus, farmers, mills/factories and consumers are three parties involved in this.

We Indians are known world over for having sweet tooth. This notion is fully supported by the fact that we are the world’s largest consumer and second largest producer of sugar. The Indian farmers are still heavily dependent on monsoon rains for irrigation and unfortunately, the rain gods were least generous in past thirty five years this time, leading to low production of sugarcane in the country. But, this was where the problem just began. Now to fulfill the demand the sugar mills especially those of UP, the sugar bowl of India, started importing raw sugar at zero duty to process and sell in the domestic market. This move meant farmer’s loss, as he could not get a higher price to compensate for the low production this year.

The Mayawati government now comes into the picture. In order to protect the farmers’ interest, who also are huge vote banks in the state, she banned all raw sugar imports in UP. The motive for taking this decision was to present herself as the savior of sugarcane farmers. Now, retail price of the sugar has reached around Rs 48 per kg, thanks to the marvelous decision of Mayawati. Now, arises a question why the ten lakh tonnes of imported raw sugar is lying on Kandla and Mundra ports is not being refined in refineries of other state and being used to meet the demands of consumers?

Well, this is where central government comes in the picture. The excise & custom notification was amended on 31 June, 2009 and it made it compulsory for mills to give a document bound commitment to the excise authorities that the raw sugar imported will be refined at their own refineries. This made it virtually impossible for mill owners to facilitate any agency other than themselves who was willing to carry out refining. Now, since their coffers are being filled as sugar is being sold at unprecedented levels, they themselves seem to be in no hurry to process the imported sugar.

The provision has been reversed by the centre on 13 Jan, 2009. This step might be of great help in bringing down the prices from existing levels but experts say that it is highly unlikely that sugar will go below the barrier of Rs 38 per kg. For Indian companies, who procured sugarcane at Rs 2,000-2,200 per tonne, the trend looks favourable. Considering a 10-11 per cent recovery rate from sugarcane (translates into a cost of Rs 20-22 per kg), companies will make a profit of more than Rs 10 per kg, the highest in recent history. The ex-mill sugar prices are currently trading at Rs 35-37 per kg, which are expected to move up further if wholesale prices continue to trade at high levels. In this case, analysts believe companies will report bumper profits and, hence, their earlier earnings’ estimates might also get revised upward and provide support to share prices. Bajaj Hindusthan is reckoned to have the highest earnings sensitivity, of about 5 per cent for every 1 per cent change in prices, followed by Renuka Sugar’s 4.2 per cent. In other words, these two companies have been the biggest beneficiaries of rise in sugar prices.

The mill owners seem to be filling up their coffers and farmers also seem to be getting compensated for drought. The consumer seems to be the only one who is gaining nothing out of it and finding it very difficult to ask somebody Kuch Meetha ho Jaye?

–Aviral Utkarsh–

In medieval times, India witnesses one of the greatest dynasty politics in world. Dynasties large and small grew and collapsed, rulers tried to have maximum areas branded with their names in search of glory, all with motives to have their names inscribed on sands of time. But few ones remained memorable no matter how great or mostly ineffective these rulers proved to be.

Fast forward to new world of cutting edge companies and unimagined innovations, the legacy sometimes just keeps on continuing. Our legacy remained preserved in museums and in books while newer thoughts by shrewd businessmen became the order of the day. Still, some legacies continued, eventually which might be written off as well or they might rediscover themselves.

One relatively young legacy which still remains is the Maharaja of Indian skies: – Air India. Born originally in 1932 and rebranded to its present name after nationalization few years later, this legacy is on the brink of being written off. Air India after running into trouble ever since the global aviation business was paralyzed by dual blow of high oil prices and recession that left everyone with less money to spend on everything including travel has never properly recovered. It made losses when everyone made losses and even when not everyone made losses.

As a part of its policy to have one government run enterprise in its hold in all businesses,( where ever they can sustain them through policy incentives ) government has kept Air India in its grabs, even though back in 2001 it was on the brink of a full scale privatization after government kept it on the block which it later withdrew due to lack of interest among corporate houses. However, in light of its operational profitability during those years, it might have been possible to extract some commercial money from the carrier back then. Times changed, aviation industry became increasingly difficult to survive in, with airlines accumulating losses worldwide and investor interest getting wiped out of the business. Faced with industry challenges and highly ineffective and bureaucratic management, Maharaja like its medieval counterparts lost the hold on territories (Read: sky) and faced many rebellions (Read: private sector competitors) who poached key talents and brought it even close to a closure of sorts.

Presently, the finances of the airline are dismal. Its passenger load factor (measure of how many seats are occupied as a percentage of total seats present) is much lower than peers, customers complain of frequent delays and so on. Its merger with Indian Airlines- the domestic career to create National Aviation Corporation limited(NACIL) lead to further bleeding as opposed to possibility of “substantial synergies” . At last count, it had accumulated INR 7200 crore as debt and had sought some INR 10,000 crore as equity infusion from the government. Considering the fact that Union government spending on education in India stood at some INR 6,500 crore (only!) in 2007-08, this figure is pretty much on the higher side. Does it makes sense to nurture a sector which promises the future of young people in a country having highest number of people under the age of 25 or to promote a bureaucratically run organization which in future will also survive on government funded money?

Whole thing makes one point, as always: Government run enterprises are mostly ineffectively run (exceptions like SBI are there), and it is in best interest of all people , whether tax payers or employees to privatize them so as to if not earn from them , at least not have tax payers suffer due to them.

Management of Air India has roped in a couple of consultants, talking big of substantial cuts particularly in its INR 3600 crore wage bill with unleashing an era of new and efficient business. It remains to be seen whether the Maharaja sticks to its promises to buy some more time for its eventual downfall, or becomes grounded with its wings clipped forever in near future!

PS: For those who might be not be knowing what Maharaja has to do with Air India, it is the – carrier`s official mascot.

– Fanatik