CHAPTER - I INTRODUCTION AND DESIGN OF THE...
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Page / 1 CHAPTER - I INTRODUCTION AND DESIGN OF THE STUDY 1.1 INTRODUCTION ugar Industry is the second largest agro based industry in India, next to textile. This is the only industry, located in the rural part of the country. About five crores of sugarcane farmers, their dependants and a large mass of labourers are involved in sugarcane cultivation, harvesting and other related ancillary activities. This constitutes 7.5 per cent of the rural population. Besides, over a five lakhs of skilled and semi-skilled workers, mostly from the rural areas, are employed in the sugar industry, and the annual wage bill of the industry is around `1,000 crores, per year. Presently, Indian sugar industry contributes 15 per cent of the world sugar production. Though, there are more than 700 sugar mills in different stages of installation, almost 450 mills alone are in operation. The annual turnover of the industry goes to `30,000 crores, and cane growers, use to get `6,000 crores, as sugarcane price 1 . The area under sugarcane cultivation in India, comes to 44 lakh hectares. The sugar industry contributes to the state and the central exchequers, to the tune of `17,625 crores per annum, as state and central taxes. The sugarcane yield stands nearly 68 M.T. per hectare, with 10 per cent of sugar recovery. It is also noticed, that the recovery of Indian sugar industry is lowering around 10 per cent, since last 50 years. Recently, the industry has gone for cogeneration, and use to supply the surplus power to the national grid, which is based on its byproduct, i.e. bagasse. It has also started producing ethanol, a renewable energy for blending with petrol, at five per cent. ‘Dual Pricing System’ is adopted in the Indian sugar industry, which includes price in Public Distribution System and the free sale sugar price. As the industry is a fragmented one, even leading players cannot control the market in India. However, the situation is changing and the players of late, are striving to increase their market share, either by acquiring smaller mills, or by going for green field capacity addition. 1 Nigam, Dr.G.A. Indian Sugar Industry (2006) Shree Publishers and Distributors, New Delhi. S
Transcript of CHAPTER - I INTRODUCTION AND DESIGN OF THE...
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CHAPTER - I
INTRODUCTION AND DESIGN OF THE STUDY
1.1 INTRODUCTION
ugar Industry is the second largest agro based industry in India, next to textile.
This is the only industry, located in the rural part of the country. About five crores of
sugarcane farmers, their dependants and a large mass of labourers are involved in sugarcane
cultivation, harvesting and other related ancillary activities. This constitutes 7.5 per cent of
the rural population. Besides, over a five lakhs of skilled and semi-skilled workers, mostly
from the rural areas, are employed in the sugar industry, and the annual wage bill of the
industry is around `1,000 crores, per year. Presently, Indian sugar industry contributes 15
per cent of the world sugar production. Though, there are more than 700 sugar mills in
different stages of installation, almost 450 mills alone are in operation. The annual turnover
of the industry goes to `30,000 crores, and cane growers, use to get `6,000 crores, as
sugarcane price1.
The area under sugarcane cultivation in India, comes to 44 lakh hectares. The sugar
industry contributes to the state and the central exchequers, to the tune of `17,625 crores per
annum, as state and central taxes. The sugarcane yield stands nearly 68 M.T. per hectare,
with 10 per cent of sugar recovery. It is also noticed, that the recovery of Indian sugar
industry is lowering around 10 per cent, since last 50 years. Recently, the industry has gone
for cogeneration, and use to supply the surplus power to the national grid, which is based on
its byproduct, i.e. bagasse. It has also started producing ethanol, a renewable energy for
blending with petrol, at five per cent.
‘Dual Pricing System’ is adopted in the Indian sugar industry, which includes price
in Public Distribution System and the free sale sugar price. As the industry is a fragmented
one, even leading players cannot control the market in India. However, the situation is
changing and the players of late, are striving to increase their market share, either by
acquiring smaller mills, or by going for green field capacity addition.
1 Nigam, Dr.G.A. Indian Sugar Industry (2006) Shree Publishers and Distributors, New Delhi.
S
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India represents one sixth of the world population. The country is the largest
consumer of sugar in the world, which generally corresponds to the output, although in
recent years, the production has so far outstripped the consumption level, due to some
aberrations in the sugar policy.
1.2 HISTORICAL RECORD2
Sugar is one of the oldest commodities in the world and traces its origin in 4th
century AD, in India and China. Sugarcane has been known for at least 2200 years.
Alexander's army saw sugar cane during its conquest of India, in 326 BC (Purseglove
1979). Nearchus mentioned sugar cane in western India, in 325 BC. Sugar cane was
probably introduced into China around 110 BC, when a botanical garden was founded near
Peking, for the introduction of exotic-plants (Deerr 1949). Theophrastus described “honey
produced from reeds”, while Dioscorides, in the first century AD, described “a honey called
sakkharon collected from reeds in India and Arabia Felix, with the consistency of salt, and
which could be crunched between the teeth”.
The mountains and deserts of Afghanistan, Baluchistan, and eastern Persia served as
natural barriers against the spread of cane to other areas for centuries. It eventually reached
Persia in the sixth century. The Arabs were responsible for much of its spread, as they took
it to Egypt in 641 AD, during their conquests. They also carried it with them, as they
advanced around the Mediterranean. Sugar cane spread by this means to Syria, Cyprus, and
Crete, eventually reaching Spain around 714 AD.
The sugar industry in Spain was very successful, with about 30,000 hectares of cane
being cultivated by about 1150 AD. Around 1420, the Portuguese introduced cane into
Madeira, from where it soon reached the Canary Islands, the Azores, and West Africa
(Purseglove 1979). Columbus transported sugar cane from the Canary Islands to Hispaniola
(now the Dominican Republic) on his second voyage in 1493 (Deerr 1949, Purseglove
1979). The first New World sugar cane mill began grinding in about 1516, in the Dominican
Republic. Sugar production spread to Cuba, Jamaica, Puerto Rico, and the other Greater
Antilles by the end of the 1500's (Hagelberg 1985).
2 http://www.ethnoleaflets.com/leaflets/sugar.htm
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In those days sugar was manufactured only from sugarcane. But India and China lost
their initiatives to the European, American and Oceanic countries, as the eighteenth century
witnessed the development of new technology, to manufacture sugar from sugar beet.
However, India is presently a dominant player in the global sugar industry, along with
Brazil in terms of production. Given the growing sugar production and the structural
changes witnessed in the Indian sugar industry, India is all set to continue its domination, at
the global level.
Indian sugar industry is highly fragmented with organized and unorganized players.
The unorganized players mainly produce Gur and Khandasari, the less refined forms of
sugar. The government had a controlling grip over the industry, which has slowly, yet
steadily, given way to liberalization. The production of sugarcane is cyclical in nature.
Hence, the sugar production is also cyclical, as it depends on the sugarcane production in
the country.
1.3 SUGAR INDUSTRY AT GLOBAL LEVEL
India is one of the largest producer and consumer of sugar in the world. It impacts
the global sugar industry in a big way and vice versa. Global sugar production in 2009-2010
grew 4.23 per cent to 158.2 million tonnes, even as consumption is expected to grow at a
rate significantly lower than the 10-year average (1.7 per cent) to 166.7 million tonnes.
TABLE 1.1
WORLD SUGAR BALANCE IN MILLION TONNES
S.No. Particulars 2009-2010 2008-2009
Changes
In Million
Tonnes
In
Percentage
1. Production 158.2 151.8 6.4 4.2
2. Consumption 166.7 164.0 2.7 1.7
3. Surplus / Deficit -8.5 -12.2 - -
4. Import Demand 52.9 50.2 2.7 5.4
5. Export Available 52.3 49.2 3.1 6.2
6. End Stocks 52.8 60.7 -7.9 -13.0
7. Stocks/Consumption
ratio in percentage 31.7 37.0 N.A. N.A.
Source: ISO Quarterly Market Outlook, May 2010.
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The reasons for this can be ascribed to strong world sugar prices and effects of the
2008-2009 global melt down on consumption growth. Despite this reality, the point of
interest, is that overall consumption was still higher than the global production of sugar,
resulting in a deficit of 8.5 million tonnes in 2009-20103.
Global realizations softened from over US$700 per tonne in January 2010, to under
US$500 per tonne by April 2010; primarily, owing to the increased production in Brazil (17
per cent) and lower imports going into India (now beginning to experience a sugar surplus).
Besides, EU sugar companies were among the largest beneficiaries of Europe‟s Common
Agricultural Policy (CAP) payments. This aid allowed European exporters to remain
competitive, by compensating for the EU‟s higher prices, compared with the world markets.
Sugar prices in Australia will increase in 2010-2011, leading to a 7 per cent increase in cane
acreage4.
TABLE 1.2
SUGAR SURPLUS / DEFICIT (MILLION TONNES RAW VALUE)
Year World India
2005-2006 4.8 0.9
2006-2007 8.2 7.9
2007-2008 5.9 4.1
2008-2009 -11.3 -8.7
2009-2010 -8.5 -2.8
2010-2011
(Estimated) 2.5 2.0
Source: ISO and ISMA
It is expected, that the Thailand‟s sugar exports will drop to 3.5-3.7 million tonnes in
2010-2011, to satisfy rising domestic demand5. India‟s sugar production is subject to high
volatility with its share of world production, ranging from 10-18 per cent across the last
decade. The value of the output of sugar at current prices increased from `10,670 crore in
3 According to ISO, May 2010. 4 ISMA 5 Reuters, 10th August, 2010.
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1994 to `29,500 crore in 2009. The share of sugar in the value of output from agriculture
declined from 5.1 per cent in FY-2004 to 4 per cent in FY-20096.
Brazil is among the world leaders in the production of sugarcane, sugar, and ethanol
(fuel alcohol). In addition, it is among the most efficient of all major sugar producers. The
country also produces and exports a diverse number of sugar products. Since Brazil can
produce either sugar or ethanol from sugarcane, it is one of the few countries, which can
adjust sugar production rapidly to potential world sugar shortfalls and high international
prices. In 2000, less than half of its cane production was ground for sugar. In Brazil, out of
the total cane available for crushing, 45 per cent goes for sugar production and 55 per cent
for the production of ethanol, directly from sugarcane juice. This gives the sugar industry in
Brazil, an additional flexibility to adjust its sugar production, keeping in view the sugar
price in the international market, as nearly 40 per cent of the sugar output is exported.
TABLE 1.3
TOP TEN PRODUCERS 2008-2009
Country
Production
(Million
Tonnes)
Exports
(Million Tonnes)
Population
(Millions)
Per Capita
Consumption
(Kgs)
Brazil 38.633 23.685 [1] 198 58
India 16.304 0.237 [15] 1166 19
EU 14.865 0.707 [9] 500 34
China 13.587 - - 1338 10
Thailand 7.717 5.004 [2] 66 36
USA 6.924 - - 307 29
Mexico 5.761 0.707 [9] 111 49
SADC 5.309 1.793 [4] 139 19
Australia 4.810 4.225 [3] 21 45
Pakistan 4.239 - - 176 23
Source: www.worldofsugar/sugar statistics/international
As Brazil is the world‟s largest producer and exporter of sugar, has a significant
effect on the world sugar prices. Brazilian Government policies supporting economic
liberalization, are likely to stimulate greater sugar production, and result in increased Brazil
6 The Financial Express, 6th August, 2010.
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sugar export availability. Brazilian sugar can be expected to remain competitive in the
world market because of increased internal efficiencies, as Brazil deregulates its industry,
modernizes its ports, and reduces its transportation costs from the mill to the port. However,
the main determinant of growth in sugar output and exports is, likely to be government
policies affecting production and use of ethanol. These policies may be affected by trends in
international prices of crude oil, as well as by Brazil‟s approach to the environmental issues
such as air quality.
1.4 SUGAR INDUSTRY IN INDIA - TODAY AND TOMORROW -
PERSPECTIVE
India is the second largest producer of sugar in the world. In terms of sugarcane
production, India and Brazil are almost equally placed. The annual projected growth rate in
the area under sugarcane is at 1.5 per cent per annum, and has doubled during the last five
years. This is, because it is considered to be an assured cash crop with good returns to the
farmers, vis-a-vis other competing crops. India is currently passing through a glut situation,
with closing stocks at the end of the year of over 100 lakh tonnes since 1999-2000.
Sugarcane crop occupied merely 2.2-2.7 per cent of India‟s cultivable land. Cane crushing
starts around October and keeps crushers occupied for, up to six months.
The accounting year in the context of sugar – the sugar season – is October to
September. Around 20 per cent of sugar mill production procured by the government at a
predetermined Price for subsidized distribution, in the Public Distribution System (PDS).
Perhaps, it is the only industry providing subsidized sugar to the Below Poverty Line (BPL)
families, via a nationwide public distribution system7, accounting for around 13 per cent of
the global sugar production. Sugar industry contributed 0.7 per cent to India‟s GDP in 2009.
Around 2/3rd of the sugar produced in India is consumed by soft-drink
manufacturers, candy or toffee makers and other confectioners, among others. Each tonne of
cane yields 300 kg of bagasse and 1.2 barrels of petroleum equivalent. India‟s sugarcane
and sugar production typically follows a 6-8 year cycle, wherein 3- 4 years of glut are
followed by 2-3 years of deficiency. After two consecutive years of declining sugar
production (2007-2008 and 2008-2009), production surged in 2009-2010, and is set to be
robust in 2010-2011.
7 The Hindu Business Line, 15th July, 2010.
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Despite production fluctuations, India‟s sugar consumption increased at an annual
rate of 3.5 per cent over the past decade. Driven by the continuing switch from the
consumption of gur to sugar, rising incomes and growing population, India‟s sugar
consumption is projected to increase at 2.5-3 per cent annually, well into the medium term8.
Another notable trend is, the shift from Gur and Khandasari to sugar in the rural areas. This
should further increase the per capita consumption of sugar, in India (currently around 15.6
kg).
Moreover, the growth of sugar demand by food industries and other non-household
users, estimated to account for about 60 per cent of total consumption, could provide
additional impetus to longer-term market growth. Sugar consumption was estimated at 23.5
million tonnes in 2009-2010. Per capita sugar consumption increased from 19.9 kg in 2008-
2009 to 20 kg in 2009-2010, while that of gur and khandsari declined from 9.3 kg to 8.9
kg9.
Indian urban market is slowly moving towards branded sugar. The potency in this
segment seems to be very high. With effect from 2009-2010, the term ‘Statutory Minimum
Price (SMP)’ was replaced by ‘Fair and Remunerative Price (FRP)‟.
TABLE 1.4
INDIA’S SUGAR BALANCE
S.No. Particulars
For the Season
2008-2009 2009-2010 2010-2011
Oct.2008
Sep.2009
Oct.2009
Sep.2010
(Estimated)
Oct.2010
Sep.2011
(Estimated)
1. Opening Stock as on 1st October 100.72 44.00 58.50
2. Production during the season 145.38 187.50 250.00
3. Imports 25.00 42.00 5.00
4. Total Availability 271.10 273.50 313.50
5. Domestic Consumption 225.00 215.00 225.00
6. Exports 2.00 - 10.00
7. Closing Stock 44.00 58.50 78.50
Source: ISO and ISMA
8 ICRA Management Consultancy Services. 9 ICRA.
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Exports: India‟s sugar export balance was nil during 2009-2010 from 0.2 million
tonnes in the previous year. The country expects to export in 2010-2011, following a
rise in sugar production in 2009-2010, and a projected surplus in 2010-2011
(October 2010-September 2011).
Imports: To control sugar prices, the government permitted sugar imports at zero
customs duty. For the sugar season October 2009-September 2010, imports were
estimated at 4.2 million tonnes, after taking into account the opening inventory of
1.2 million tonnes of raw sugar. Indian sugar millers cancelled a number of import
contracts, owing to a decline in domestic prices, and are unlikely to sign new deals,
following expectations of a surge in local output10
.
1.5 CONTRIBUTION OF SUGAR INDUSTRY
The sugar industry is amongst the few industries, which have successfully
contributed to the rural economy. The sugar industry generates large scale direct
employment, apart from providing indirect employment to thousands of persons in rural
areas, who are involved in cultivation, harvesting, transport of cane and other services. In
addition to this, the industry has become the mainstay of the alcohol industry. The sector
also has a significant standing in the global sugar space. India remains a key growth driver
for world sugar, growing above the Asian and world consumption growth average. In India
too, sugar is highly regulated.
1.6 HISTORICAL DEVELOPMENT OF THE INDIAN SUGAR
INDUSTRY
It is said, that the first sugar plant in India was established by the French People, at
Aska, in Orissa, in 1824. It stopped its operation, around 1940. However, the first vacuum
pan process sugar plant was set up at Saran, in Marhowrah, in Bihar, in 190411
. Parry set up
the first Sugar Factory in 1842, at Bandipalayam, and currently has one of its units,
established at Nellikuppam, in Cuddalore District, Tamil Nadu. Nellikuppam factory is the
oldest sugar factory, in India. In 1930, the Tariff Board, appointed by the Government of
India, recommended protection to the Indian Sugar Industry, by way of imposing customs
duty of 7.25 per cent, plus surcharge of 25 per cent, on the sugar imported to India.
Accordingly, the Government of India had promulgated in 1932, the ‘Indian Sugar
10 ISMA 11 www.coopsugar.org
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Industry Protection Act’, for a period of 15 years, by imposing heavy customs duties on the
imported sugar. As a result of this, there was a spurt in the establishment of new sugar
factories. By 1933-1934, there were 111 sugar factories producing 4.6 lakh M.T. of sugar12
.
The Indian Sugar Industry Protection Act 1932, had brought about some expansion
in the sugar industry, but, the production was not sufficient for India, to be self-reliant. The
sugar production fluctuated critically, because of the instability of sugarcane supplies.
Policy Resolution was passed on April 16, 1948, under which, the Government has started
giving preference to licensing of new sugar factories, in the Cooperative sector. This policy
was reemphasized, in all the subsequent industrial policy resolutions. The Indian sugar
industry is characterized by the co-existence of Private, Cooperative and Public Sectors.
Production is concentrated in Uttar Pradesh, Maharashtra and the three Southern States,
viz., Tamil Nadu, Karnataka and Andhra Pradesh. It has tremendous transformational
opportunities to meet food, fuel and power needs of the country. Cyclic changes in sugar
production in India, considerably have an impact on the world trade, in sugar. The sugar
industry is politically sensitive, and so, the Government keeps up the control over its input
and output prices13
.
The table below shows the production of sugar of the world, in India and in Tamil
Nadu, for the period from 2000-2001 to 2008-2009.
TABLE 1.5
SHARE OF SUGAR PRODUCTION FOR THE PAST NINE YEARS
S. No. Period Production in 000’ M.Ts.
World India Tamil Nadu
1. 2000-2001 130557 18511 1781
2. 2001-2002 141949 18528 1839
3. 2002-2003 148362 20145 1644
4. 2003-2004 147266 13546 921
5. 2004-2005 141364 12691 1108
6. 2005-2006 152175 19267 2142
7. 2006-2007 166347 28364 2539
8. 2007-2008 162497 26357 2141
9. 2008-2009 161712 14539 1697
Source: www.dailyfutures.com and Sugar India Year Book and NFCSF Book.
12 Jagjit Puri, “Challenges Before Indian Sugar Industry in New Millennium”- Cooperative Sugar, Dec.2000 Vol.32. No.4. 13 www.sismatn.org/Indian Sugar Industry.
Page / 10
The overall growth of sugar industry during the period from 2000-2001 to 2008-
2009, can be seen, with the help of the following table.
TABLE 1.6
GROWTH OF SUGAR INDUSTRY IN INDIA
S.No. Period Area under
sugarcane in
Hectares
(000)
Production
of
sugarcane
in lakh
tonnes
Yield per
Hectare in
tonnes
No. of
Sugar
Mills in
operation
Average
Recovery
1. 2000-2001 4316 2960 68.6 436 10.48
2. 2001-2002 4411 2972 67.4 434 10.27
3. 2002-2003 4520 2816 63.6 453 10.36
4. 2003-2004 3938 2339 59.4 422 10.22
5. 2004-2005 3662 2371 64.8 400 10.17
6. 2005-2006 4201 2812 66.9 455 10.21
7. 2006-2007 5151 3555 69.0 504 10.16
8. 2007-2008 5055 3482 68.9 516 10.55
9. 2008-2009 4396 2739 62.3 488 10.03
Source: Sugar India Year Book and NFCSF Book.
1.7 STATUS OF COOPERATIVE SECTOR
The cooperative sector of the sugar industry in India, has played a major role, in the
growth of the Indian Sugar Industry, and has been solely responsible for transforming India,
from a deficit sugar producing country to a surplus sugar country. After Independence, the
Government of India decided to industrialize the country, by building up a large and
growing cooperative sector, and accordingly, the principle of cooperation was assigned. It
plays an important role in the development of the industries, based on agricultural produce,
such as sugarcane, which paves the way for the country‟s economic development. The
Government of India gave preference to the cooperative sector in licensing of new factories.
This policy continued till de-licensing of sugar industry, in August, 1998.
The impressive growth in the number of sugar mills and sugar production could be
attributed, to the growth of cooperative sector in sugar industry. The sector had hardly any
presence as late 1955-1956, when cooperative sector comprised of three sugar mills and
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could produce only 0.02 million tonnes sugar, out of 1.83 million tonne sugar produced in
India.
It was hardly 1.2 per cent of the total India‟s sugar production. Now, the scenario
was entirely different. During 2000-2001, where 250 cooperative sugar factories have
produced 10.49 million tonnes, which was nearly 57 per cent of the total India‟s production.
India produces around 45 per cent of the Asian sugar and 15 per cent of the world sugar14
.
As a result of the preferential policy given to the cooperatives, the sugar industry
progressed by leaps and bounds, and, the Indian sugar industry achieved the distinction of
being the World‟s largest sugar producers, during 1988 to 1993, and again during 1995-
1996. However, with the liberalization of economy in June 1991, the cooperative sector of
sugar industry could not expand at the same pace as before, because of the financial
institutions‟ reluctance to grant funds, and slowly their growth has come to a grinding halt15
.
TABLE 1.7
STATUS OF THE COOPERATIVE
SUGAR MILLS IN INDIA
S. No. Period No. of
Cooperatives
1. 2000-2001 259
2. 2001-2002 250
3. 2002-2003 269
4. 2003-2004 235
5. 2004-2005 203
6. 2005-2006 239
7. 2006-2007 252
8. 2007-2008 249
9. 2008-2009 218
Source: NFCSF
Cooperatives function on the principle of service motive, but they must consider
themselves, as a commercially viable entity. Cooperatives still do not escape from the
perpetual tendency to look for help, protection or any kind of charity, as they do not explore
their full strength and relative position in a competitive environment. Their decision making
14 Desai M.R. Regional Sugar Policies and its impact on Sugar Industry in Asian Countries, Cooperative Sugar, Sep.2003, Vol.32, No.1. pp.29-31. 15 Nigam, Dr.G.A. Indian Sugar Industry (2006) Shree Publishers and Distributors, New Delhi.
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capacity is not faster in comparison to competitive sector. Cooperatives are also facing the
problem of shortage of professional staff. Cooperatives were expected to play a vital role in
bringing about socio-economic transformation, in a country like India. Unfortunately, even
after more than five decades of independence they have not been able to play this role,
effectively.
The economic viability of a sugar factory depends, to a large extent, on the sugar
recovery per cent. Although India‟s average sugar recovery per cent is much lower than
many developed cane producer countries, the cooperative sugar factories in India have been
achieving higher recovery, compared to their counterparts in the country. During 2007-
2008, the cooperative sugar factories of Maharashtra achieved the top three ranks.
Sadashivrao Mandlik Sahakari Sakhar Karkhana Limited, Hamidwada in Maharashtra
achieved sugar recovery of 13.68 per cent from sugarcane, thus breaking its own previous
old record of 13.56 per cent achieved in 2005-2006.
Cooperative sugar factories are primarily owned by sugarcane growers, who
constitute the bulk membership. As on March 31, 2008 there were 5.4 million cane grower
members as against 5.2 million on March 31, 2007. The total share capital comprising
producer members, non-producer members, cooperative societies, State Government and
others for the year ending March 31, 2008 was around `3590.0 crores.
1.8 SUGAR INDUSTRY IN TAMIL NADU
Tamil Nadu sugar industry shares for about 10 per cent of the total sugar production
in India. Majority of the sugar units in Tamil Nadu lies with the cooperative sector, with
some private players are also gathering momentum. At present, the sugar industry in Tamil
Nadu stands in a total mess, similar to that of the other rural industries. The sugar industry
had faced a boom in the 1980‟s, but the crisis era started from 1990, all, after the economic
liberalization. With the surge in the procurement price of sugarcane, surplus production and
reduction in the open market sugar price directed the industry, and the sugar factories,
thereafter, to have a glut of stocks.
At present, the Tamil Nadu sugar industry comprises of 36 sugar mills, with 15 of
them in the cooperative sector, two sugar mills in the public sector, and 19 sugar mills in the
Page / 13
private sector, which are in operation. The sugar industry in Tamil Nadu has come out as a
tool for economic translation16
.
TABLE 1.8
POSITION OF SUGAR INDUSTRY IN TAMIL NADU
S.No. Period
Area under
sugarcane in
Hectares
(000)
Yield per
Hectare in
tonnes
No. of
Sugar
Mills in
operation
Average
Recovery
1. 2000-2001 315 105.3 37 9.64
2. 2001-2002 321 101.6 36 9.61
3. 2002-2003 261 106.8 35 9.88
4. 2003-2004 192 91.9 34 9.92
5. 2004-2005 232 100.8 34 9.64
6. 2005-2006 336 104.7 35 9.24
7. 2006-2007 391 105.1 37 9.25
8. 2007-2008 354 107.5 37 9.32
9. 2008-2009 314 102.6 36 9.62
Source: Sugar India Year Book, SISMA and NFCSF Book.
The Department of Sugar was formed, in order to show special attention, to the
development of sugarcane, and for the establishment of sugar mills, in the cooperative
sector. ‘Commissioner of Sugar’ is the Head of the Department, for coordinating various
functions, relating to the sugar mills, in the state. This department has no direct contact with
the public, as the main functions of this department are limited to, supervision and
coordination of the working of the cooperative sugar mills of the State.
The table 1.9 shows the production of molasses, alcohol utilization by the alcohol-
based chemical industry, potable sector and the surplus at the end of each year. It is
therefore evident, that along with sugarcane production, phenomenal growth is also taking
place in the production of molasses, the basic raw material for the production of ethanol
from sugarcane. Of course, there are also other agro routes available to produce ethanol.
According to MPNG, 5 per cent ethanol blends on an all-India basis would require 500
million liters. The current availability of molasses and alcohol would be adequate to meet
16 www.business.mapsofindia.com/sugar-industry/tamilnadu.html.
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this requirement, after fully meeting the requirement of the chemical industry and potable
sectors.
TABLE 1.9
SALE OF NON LEVY SUGAR, MOLASSES AND ALCOHOL PRODUCTS FOR
THE PAST TEN YEARS (RS. IN CRORES)
Year Sugar Molasses Alcohol
2000-2001 591 12.65 13.18
2001-2002 585 20.37 14.23
2002-2003 448 16.79 12.04
2003-2004 485 16.02 21.07
2004-2005 645 26.86 22.51
2005-2006 599 18.16 16.63
2006-2007 967 13.63 43.03
2007-2008 581 27.21 35.00
2008-2009 1365 66.63 38.72
2009-2010 1364 53.99 52.64
Source: Annual Reports of TNCSF.
1.9 COOPERATIVE SUGAR MILLS IN TAMIL NADU
The cooperative sugar mills in Tamil Nadu play an important role, in the economic
upliftment of the rural people, in the state. As it is an agro based industry, it has the direct
impact, on the lives of the agriculturists in the rural areas, and provides them many
economic benefits, including, direct employment in the sugar mills, and indirect
employment through sugarcane cultivation, cane harvesting and transportation. The ‘Cane
Growers Association‟ and the labour unions of the respective mills, play an important role,
in effectively redressing the grievances.
1.10 TAMIL NADU COOPERATIVE SUGAR FEDERATION – AN
ORGANIZATION
Tamil Nadu Cooperative Sugar Federation Ltd., started functioning from 30.05.1962
as an Apex Organization of the cooperative factories. It has a membership of 17
cooperative and three public sector sugar Mills. The Additional Registrar of Cooperative
Societies / Special Officer is the Chief Executive of the Tamil Nadu Cooperative Sugar
Page / 15
Federation Ltd. and is appointed by the Government of Tamil Nadu. The Tamil Nadu
Cooperative Sugar Federation Ltd., is functioning under the control of the Commissioner of
Sugar.
1.10.1 Objects of the Federation
Co-ordinate and facilitate the working of the affiliated factories.
Provide technical advice and other assistance to the factories
Centralize purchase of major items and sale of sugar and byproducts.
Represent the factories at National Federation and other organizations.
Arrange for holding periodical conference, technical meets and seminars with a view
to improve working efficiency of the factories through interaction among
technocrats.
1.10.2 Activities of Federation
The Federation arranges for finalization of rate contract for purchase of A-twill
gunnies, Fertilizers & Pesticides, Heavy Chemicals, Lubricants, Burnt Stone Lime, High
Value Plant and Machineries required for the entire member Cooperative & Public Sector
Sugar Mills. The sale of open market sugar of all these mills is undertaken by the
Federation, through tender system. With the help of Technical cell, mills‟ efficiency has
been improved through better extraction and recovery, reduction in cost of maintenance,
which may occur at the plant level. The Federation conducts Advanced Sugarcane
Technology Seminar every year at Chennai with the Sugarcane Technologists at All India
level to improve the sugar recovery.
1.10.3 Finance Division
The Finance Division was formed in August 1992, to look after various financial
activities, headed by a Chief Accounts Officer as given below:
1. It conducts negotiations with Tamil Nadu State Apex Cooperative Bank and
NABARD.
2. Offers guidance and assistance to the member cooperative sugar mills, in
the timely preparation of cash credit application well ahead of the season, and get
the working capital finance with the Bankers, through the Commissioner of Sugar.
Page / 16
3. Convenes joint meeting of all mills, to identify the general problems and specific
unit level problems, level of cash credit accommodations both at the stage of
sanction of limits and drawal, of funds against the pledge / hypothecation credit.
4. Liaises with the bankers i.e. Central Cooperative Banks, Tamil Nadu
State Apex Coop. Bank and NABARD for early authorization and sanction of
working capital limits, and remove the bottlenecks in getting the credit by Central
Coop. Banks operating under refinance facilities.
1.10.4 Functions of Department of Sugar
The Department of Sugar involves in -
i) Exploring the feasibility of setting up of new Sugar Mills in the
Cooperative / Public / Private Sectors.
ii) Evaluating the need for expansion of the existing crushing capacity of the sugar
mills, with reference to the cane availability.
iii) As the functional Registrar for the cooperative sugar mills, monitoring the
activities of the cooperative sugar mills, with reference to the Tamil Nadu
Cooperative Societies Act & Rules.
iv) Formation of new roads, link roads and maintenance of the existing roads, from
the Cane Cess Fund.
v) In the capacity of Cane Commissioner, allotment of cane areas to the sugar mills
in the state and recommending reasonable cane price for the cane farmers.
vi) Ensuring industrial peace in the cooperative sugar mills, by sorting out the
labour demands, on a coordinated basis.
1.11 PRIVATE SUGAR MILLS IN TAMIL NADU
The private sector sugar mills as the cooperative sugar mills, provide employment
opportunities, to a good number of people, and the growth of it, brings an all round
development, in the economy. The private sugar mills could not capture the market, as de-
control is not there, as in foreign countries.
Page / 17
TABLE 1.10
NUMBER OF MILLS IN OPERATION IN THE
COOPERATIVE AND IN THE PRIVATE SECTOR IN TAMIL NADU
S.No. Year
No. of Mills in
the Cooperative
Sector
No. of Mills
in the Private
Sector
Total
1. 2000-2001 16 18 34
2. 2001-2002 15 18 33
3. 2002-2003 14 19 33
4. 2003-2004 14 18 32
5. 2004-2005 14 18 32
6. 2005-2006 15 18 33
7. 2006-2007 15 20 35
8. 2007-2008 15 20 35
9. 2008-2009 15 19 34
Source: NFCSF
1.12 COOPERATIVE AND PRIVATE SUGAR MILLS – A
COMPARATIVE VIEW
In Tamil Nadu, the public sector sugar mills account for around five per cent of the
total mills in operation, while the private sector sugar mills account for, approximately 53
per cent, and the cooperative mills account for, approximately 42 per cent. In the recent
past, the number of operational private sector sugar mills has been increasing by a marginal
per cent of the total number of mills. Also, the share of sugar production by the private
sector sugar mills has been increasing.
At present, the sugar production from the private sector sugar mills, accounts for
more than 54 per cent of the total production, while the share of production from the
cooperative sugar mills, has come down to 43 per cent from 57 per cent, in 2001. This is
due to the fact, that the number of operational private sector sugar mills, has been steadily
functioning, since 2001, while the number of cooperative sugar mills, has remained
constant. Also, the states of Maharashtra, Karnataka and Tamil Nadu, which have a high
Page / 18
concentration of cooperative sugar mills, were affected by woolly aphid pest attacks, in
2003-2004, apart from the drought, that affected almost all cane producing states17
.
The Honorable Minister for Food and Agriculture Mr.Sharad Pawar18
said, that
most of the cooperative sugar factories have not been retaining profit for future investment,
and, as a result, they are not keeping pace with the private sugar mills, as net worth of some
of the cooperative sugar factories has become negative. He also added that due to lack of
funds, the cooperative sugar mills have not been able to upgrade their technology, or
enhance production, capacity and quality. The Minister appealed to the cooperative sugar
factories, to focus on expanding their portfolio, and asked them, to set up bagasse based co-
generation of power and ethanol manufacturing facilities, to become economically viable.
He also said that the number of sugar mills under the cooperative sector, and their share in
the total production are coming down, gradually. Even the attitude of the farming
community is changing, and they prefer private sector sugar mills. He also said that the
government cannot help those cooperatives who have incurred losses due to their wrong
financial decision. Speaking at the occasion, Minister for New and Renewable Energy
Mr.Farooq Abdullah said that the government should protect the interest of the small
cooperative mills.
Consequent to the liberalization of economy in 1991, followed by de-licensing of the
sugar industry in 1998, the cooperative sector of the sugar industry has been facing severe
competition from private sector. The competition has not been fair to the cooperative sector,
first, because the cooperative sugar factories in most of the states were not functioning
democratically, as they were under government control and secondly, because the
cooperative act still continues to have many restrictive clauses, which prevents them from
raising funds from outside. Without funds, it has not been possible for the cooperative sugar
factories comprising small and marginal farmers to expand, modernize and grow in
strength.
Added to this, the promotional sugar policy, announced in some states, which
favoured the big industrialists, made it difficult for the cooperative sugar factories to face
the onslaught of the private factories. Aware of the predicament of the cooperatives in
17 ISMA, KPMG (Klynveld Peat Marwick Goerdeler) Analysis. 18 www.in.news.yahoo.com
Page / 19
general, the Government of India constituted a high powered committee under the
Chairmanship of Mr.Shivajirao G.Patil on May 10, 2005,
i. review the achievements of the cooperative movement during the last 100 years, and
prepare a road map, recommending steps to be taken.
ii. address the challenges being faced by the movement in changing the social and the
economic environment and
iii. suggest appropriate policy and legislative framework and changes required in the
cooperative legislation in the country, with a view to ensure democratic, autonomous
and professional functioning of cooperatives and amendments to the Multi-State
Cooperative Societies Act, 2002. The committee has submitted its interim report and
the constitution (One hundred sixth amendments) Bill 2006 has been introduced in
Lok Sabha addressing the key issues for empowerment of the cooperatives, through
their voluntary formation, autonomous functioning, democratic control and
professional management.
In order to avoid unhealthy competition among sugar factories to procure sugarcane,
a minimum distance of 15 km would continue to be observed between an existing sugar mill
and a new mill, by exercise of power under the Sugar (Control) Order, 1966. The total
installed capacity of annual sugar production as on March 31, 2007 was 206.9497 lakh
tonnes. Out of this, the cooperatives installed capacity was 107.3720 lakh tonnes as against
87.5828 lakh tonnes of the private sector and 11.9949 lakh tonnes of the public / state
owned sector. The cooperatives share of the installed capacity has declined to 51.89 from
54.77 on March 31, 2006, mainly because of the tremendous increase in the installed
capacity of the private sector in Uttar Pradesh, under their special sugar promotion policy.
Cooperatives in India came into being as a result of the Government taking
cognizance of the agricultural conditions that prevailed during the latter part of the
nineteenth century and the absence of institutional arrangements for finance to
agriculturists, which had resulted in mounting distress and discontent. Unless cooperatives
are commercially viable, they will always face the humiliation of begging for help from
Government or other agencies. The business environment in India has gone through many
rapid changes, in the recent few years. So, it is necessary to make adjustments in Indian
Page / 20
cooperatives, as per the changes occurring in Indian business environment. The
cooperatives have to make few drastic changes in their working for their survival. If they
are not willing to change, many of them may find it difficult, to exist in this competitive
environment. The cooperative organizations and the personnels‟ together must learn to
accept the changes and adjust accordingly.
Some of the problems and challenges that cooperatives face today are:
Inability to ensure active membership, speedy exit of non-user members, lack of
member communication and awareness of building measures.
Serious inadequacy in governance including that related to Boards‟ roles and
responsibilities.
A general lack of recognition of cooperatives as economic institutions both
amongst the policy makers and public at large.
Inability to attract and retain competent professionals.
Lack of efforts for capital formation, particularly, that concerns enhancing
member equity and thus member stake.
Lack of cost competitiveness arising out of issues such as overstaffing, a general
top-down approach in forming cooperatives, including the tiered structures.
Politicization and excessive role of the Government, chiefly arising out of the
loop holes and restrictive provisions in the Cooperative Acts.
In addition to the above, there is also a serious problem of a large number of
cooperatives that are sick / non-viable.
1.13 GENERAL NOTE ON SUGAR MILLS IN TAMIL NADU
TABLE 1.11
SUGAR MILLS IN TAMIL NADU AS ON 31.03.2010
S.No. Sector Total Number of
mills
Mills in operation
1. Cooperative 16 15
2. Public 3 2
3. Private 23 20
Total 42 37
Source: Annual Reports of TNCSF.
Page / 21
Lay off Mills:
1. Madurantakam Cooperative Sugar
Mills Limited
08.06.2002
(2001-2002 Crushing Season)
2. Madura Sugars
(Public Sector)
29.11.2002
(2002-2003 Crushing Season)
3. Arunachalam Sugar Mills
(Private Sector) (2003-2004 Crushing Season)
4. S.V.Sugars (Private Sector) Suspended the crushing season since
2009-2010 crushing season
5. Sakthi Sugars – Modakurichi (Private
Sector)
Suspended the crushing season since
2008-2009 crushing season
Source: Annual Reports of TNCSF.
TABLE 1.12
CANE CRUSHING CAPACITY AS ON 31.03.2010
S.No. Name of the
Sugar Mills
No. of
running
mills
Tonnes per
day
Lakh Tonnes
per annum
1 Cooperative 15 34900 60
2 Public 2 5500 9
3 Private 20 82400 142
Total 37 122800 211
Source: Annual Reports of TNCSF.
TABLE 1.13
CANE AREA REGISTERED (IN LAKH ACRES)
Year / Sector 2003-
2004
2004-
2005
2005-
2006
2006-
2007
2007-
2008
2008-
2009
2009-2010
Up to
31.03.2010
Coop. and
Public Sector
1.44 2.09 2.43 2.20 1.95 1.63 1.27
Private 2.07 4.31 4.99 4.61 3.70 3.36 1.77
Total 3.51 6.40 7.42 6.81 5.65 4.99 3.04
Source: Annual Reports of TNCSF.
Page / 22
TABLE 1.14
CANE CRUSHED (IN LAKH MT)
Year /
Sector
2003-
2004
2004-
2005
2005-
2006
2006-
2007
2007-
2008
2008-
2009
2009-
2010
Up to
31.03.10
2009-2010
Estimated
Coop. &
Public
Sector
28.05 31.65 62.68 87.88 64.82 49.86 34.69 36.92
Private 64.75 83.27 168.78 186.61 164.86 115.86 55.41 93.09
Total 92.80 114.92 231.46 274.49 229.68 165.72 90.10 130.01
Source: Annual Reports of TNCSF.
TABLE 1.15
SUGAR PRODUCED (IN LAKH MT)
Year /
Sector
2003-
2004
2004-
2005
2005-
2006
2006-
2007
2007-
2008
2008-
2009
2009-2010
Up to
31.03.10
2009-2010
Estimated
Coop. &
Public
Sector
2.78 3.12 5.87 8.09 6.02 4.94 3.16 3.39
Private 6.42 7.97 15.51 17.30 15.39 11.01 5.09 8.53
Total 9.20 11.09 21.38 25.39 21.41 15.95 8.25 11.92
Source: Annual Reports of TNCSF.
TABLE 1.16
RECOVERY (PERCENTAGE)
Year / Sector 2003-
2004
2004-
2005
2005-
2006
2006-
2007
2007-
2008
2008-
2009
2009-2010
Up to
31.03.10
2009-2010
Estimated
Coop. & Public
Sector
9.91 9.86 9.37 9.20 9.28 9.91 9.11 9.18
Private 9.92 9.57 9.19 9.27 9.34 9.50 9.19 9.16
Total 9.92 9.65 9.24 9.25 9.32 9.63 9.16 9.17
Source: Annual Reports of TNCSF.
Page / 23
TABLE 1.17
CAPACITY UTILIZATION (PERCENTAGE)
Year /
Sector
2003-
2004
2004-
2005
2005-
2006
2006-
2007
2007-
2008
2008-
2009
2009-2010
Up to
31.03.10
2009-2010
Estimated
Coop. &
Public
Sector
43 49 91 126 94 72 50 53
Private 62 83 146 154 126 73 39 66
Total 55 70 125 144 115 73 43 62
Source: Annual Reports of TNCSF.
TABLE 1.18
DISTILLERY DETAILS AS ON 31.03.2010
S.No.
Name of the Sector No. of units Capacity in
KL per day
Capacity in KL
per annum
1 Cooperative 2 110 33000
2 Private 15 810 243000
Total 17 920 276000
Source: Annual Reports of TNCSF.
TABLE 1.19
CO-GENERATION PLANTS AS ON 31.03.2010
S.No.
Name of the sector No. of
Units
Installed capacity
(in MW)
1 Cooperative 3 20.00
2 Private 18 396.10
Total 21 416.10
Source: Annual Reports of TNCSF.
1.14 OPERATIONAL EFFICIENCY – CONCEPTUAL ASPECTS
Operational efficiency is percentage measure of a management‟s ability to generate
sales revenue and to control costs19
. Operational efficiency deals with minimization of
waste and maximization of resource capabilities, in order to deliver quality products and
19
www.businessdictionary.com
Page / 24
services to customers. Operational efficiency is concerned with identifying wasteful
processes and resources, which drain the organization's profits. Operational efficiency is
also concerned with designing new work processes, which improve quality and
productivity. Improving operational efficiency has a direct impact on the company‟s profit
margin.
Operational Efficiency is - what occurs, when the right combination of people,
process, and technology comes together to enhance the productivity and value of any
business operation, while driving down the cost of routine operations, to a desired level. The
end result is, that resources previously needed to manage operational tasks, can be
redirected to new, high value initiatives that bring additional capabilities to the organization
efficiency.
Present competitive environment in business requires companies to introduce quality
products at lower prices in order to capture market share. Globally, business has become
more integrated with supply chains crossing multiple nations. Inefficiency in this chain and
internal drain of resources due to outdated processes, affect the ability of a company, to be
profitable. Operational efficiency is, therefore, a critical system wide initiative, that can
translate to the company, being in business or closing down.
Operational efficiency is also concerned with designing new work processes, which
improve quality and productivity. For example the "Just-in-time” (JIT) process emerged as
a result of the focus on improving operational efficiency by reducing inventory to the bare
minimum. The supply of inventory in JIT process is delivered just, when it is needed for a
process, thus eliminating holding costs of inventory.
1.14.1 Significance
Improving operational efficiency has a direct impact on the company's profit
margins. Assuming the overall quality is standard, in order for businesses to profit, they
have to either raise the price of their product or service, sell more of their products or lower
the costs involved in making the product. Raising the selling price and increasing the market
share are both inhibited by increased global competitive market. However, lowering costs is
a viable option, because internal wastage contributes to increased cost.
Page / 25
1.15 STATEMENT OF THE PROBLEM
A bird‟s eye-view of the annual reports of the sugar mills in Tamil Nadu, do show
losses, mostly in the cooperative sector, and this increases year by year; whereas, the private
sector mills earn lesser profit, when compared with other industries‟ profitability. India is
known as the second highest in the world, in sugar production. But, its share in the
international market is very negligible. The reasons are, the Indian sugar industry is not cost
effective, as compared to the leading sugar-producing countries, in the world. Though the
country has an advantage of the lowest field cost, in the world, and when the factory cost is
included in the total cost of sugar production, it shows, that the Indian sugar industry is
placed at the third highest, in the increasing order, in the world. Normally, it is the
responsibility of the sugar industry, to provide the sugar for home consumption, at a cheaper
rate. This can be achieved, only when all-round efforts are taken for minimizing its cost of
production. Globalization has created obvious challenges for sugar producers, relating to
cost. International sugar market is available, only to those, whose cost of production is cost
effective.
Asia‟s share in the world production is around 29 per cent, whereas, its consumption
is 37 per cent. It shows that consumption exceeds production, by almost eight per cent, in
this continent. The Indian sugar industry has an advantage to export maximum sugar in the
Asian market. But, this is possible, only, when the sugar industry is cost effective, as
compared to its competitors. Therefore, it is the need of the time, to take a complete review
of the cost structure of the sugar industry, so as to see, which cost component is more
responsible, for the higher cost of sugar production, and to see that, how it can be
controlled, so as to keep it, as minimum as possible. The major cost center in the sugar
industry is, as follows:
Cost of sugarcane i.e. raw material cost
Employee cost
Manufacturing / Conversion cost and
Depreciation on Plant and Machinery.
The comparative study of these cost components will certainly help, to know, which
factors are adversely affecting, for the higher cost of sugar production. Therefore, the study
aims at, in the absence of cost data, to find out the cost trends of sugar production, with the
Page / 26
help of the prevailing financial accounting system, as well as, to identify the most casual
factors, which are responsible for unsatisfactory results, in the sugar industry. In addition to
this, the study intends to know the impact of under utilization of plant capacity, to the total
cost of sugar production. While judging the profitability of sugar mills, it also shows, that
the incidence of administrative overheads and the interest and bank charges are too heavy,
which led the mills in higher cost of sugar production. Therefore, it is equally important, to
analyze the magnitude of each overhead carefully, and how it has affected to the cost of
sugar production, between the private and the cooperative sugar mills, over a period of time.
1.16 IMPORTANCE OF THE STUDY
Sugar industry, being an agro based industry, boosters the rural development, by
providing employment opportunities, directly and indirectly. Millions of people get
benefitted, by this industry. The facilities, such as road, water, power, transport, education,
hospitals and much infrastructural facilities are made, if there exists a sugar mill. The
country‟s economic development is possible, only if the mills run profitably. India, with
huge population, has the largest consumers of sugar, in the world. Only a little amount is
left for export. Though, it is the second largest producer of sugar, it is all there, only to meet
the domestic market. Unlike India, Brazil gives equal importance to ethanol production and
sugar production. Hence, it earns huge income, and it is the cost reducer.
In India, when prices are fixed, sometimes it cannot meet even the cost of
production. Out of the 100 bags, each weighing 100 Kgs., 20 bags should be given to the
government, for levy price. Only 80 bags will be sold of their own. Hence, taking all these
factors into consideration, the mills should take up the earnest steps, to come out with profit
and development. The first and foremost factor to be considered is the ‘cost’. Each and
every cost in sugar production should be analyzed, and the necessary steps are to be taken,
to reduce the cost. There should be a keen watching, whether each and every rupee spent
gives the maximum utilization. The technical factors, all the cost items, capacity utilized,
interest paid, crushing days, recovery per cent, overhead cost; all have to be analyzed, and
to verify, which is the pulling factor, that brings down the profit of the mill. The most
important factor to be analyzed is, how, with the same raw material, it is possible for the
private sector sugar mills to run successfully than the cooperative sugar mill.
Page / 27
1.17 REVIEW OF LITERATURE
It is mandatory to review the literature available with respect to the area of the
research study. Measuring the performance of the sugar industry has always been an area of
controversies from the point of view of the government, shareholders, prospective investors,
creditors, employees and any other stake holder. Several studies have been undertaken to
assess the operational efficiency in the sugar industry, and in the other industries under
various parameters. This module presents some of the excerpts of various studies conducted
by the financial analysts, in the past.
Madhurima Sen and S.L.Kumbhare20
had stated that, to achieve operational
efficiency, availability of sugarcane is required throughout the season as well as proper
management of raw material. It is, however, difficult to ensure a steady flow of sugarcane,
because farmers harvest more than the quantity ordered to clear their fields, or they divert
the cane to gur / khandasari units.
Jai Ghorpade21
conducted the study of relative organizational effectiveness using
two measures of efficiency as the criteria of success:
As criteria of effectiveness, these two indices are designed to measure the overall
operating efficiency of the enterprises signified in their ability, to minimize the costs
incurred in transforming a resource (sugarcane) into a usable output (sugar). It may be
mentioned, that both of these indices are commonly used by sugar factory officials in India,
for assessing the general efficiency of sugar factories.
Chun-Chu Lin22
has stated that in recent years, as competition among major ports
has become increasingly intense, there has not been a port that has not hoped to increase its
20 “Sugarcane Systems in Uttar Pradesh, Karnataka and Haryana” – Commodity Vision, Vol.3. Issue 1. Jul-Aug.2009. 21 “Organizational Ownership Pattern and Efficiency – A Case study of Private and Cooperative Sugar Factories in South India” – Academy of Management Journal, Vol.16, No.1 Mar.1973.
Page / 28
own operational efficiency, and hence, its ability to compete internationally. By evaluating
efficiency, it is possible for a port to understand its strengths and weaknesses, and to
recognize the crises and opportunities likely to exist within the competitive environment, so
that it may adopt appropriate response measures. It is for this reason that a set of impartial
and objective tools to evaluate efficiency is deemed necessary.
Hussein A. Hassan Al-Tamimi and Ahmad M. Lootah23
describes that weak
management, size, liquidity, and diseconomies of scale with respect to personnel were
identified as the main sources of inefficiency. Oral and Yolalan measured the operating
efficiencies of a set of 20 bank branches of a major Turkish commercial bank. They
concluded that the younger the age of the branches, the smaller the number of personnel, the
higher the number of „ active ‟ accounts, the bigger the size of administrative expenses, and
the proximity of branches to newly urbanized sections of the cities, the most efficient the
branch.
George Philip24
has stated that exploitation strategies are concerned with improving
operational efficiency, whereas exploration strategies are meant to provide
competitive/strategic advantage for the business. In the past 10 years or so, attention has
also focused on investigating the success factors of many of the strategic planning efforts.
Success depends on a wide range of issues; these include: organizational issues (Lederer &
Sethi, 1991), resource issues (Tukana & Weber, 1996), effectiveness of the planning
methods used and the actual relevance of the plan, and more importantly, problems
associated with implementing the plans themselves (Tukana & Weber, 1996).
Jaana Auramo, Kari Tanskanen and Johanna Smaros25
illustrated how new
service concepts, where product suppliers are integrated and more involved in customers‟
operations, enable suppliers to organize their own supply chains more efficiently, while
simultaneously providing better service to customers. A case study of a process equipment
22 “Evaluating the Operational Efficiency of major ports in the Asia-Pacific region using data envelopment analysis” – Applied Economics, 2008, 40, 1737-1743. 23 “Evaluating the Operational and Profitability Efficiency of a UAE-based Commercial Bank” – Journal of Financial Services Marketing – Vol.11, pp.333-348. 24 “IS Strategic Planning for Operational Efficiency” – Information Systems Management, Taylor
and Francis Group, LLC. .24:-247-264, 2007. 25 “Increasing Operational Efficiency Through Improved Customer Service: Process Maintenance Case” – International Journal of Logistics: Research and Applications, Vol.7. No.3. September, 2004.
Page / 29
supplier illustrates how the company‟s new value-added maintenance services, including
planning of the customer‟s maintenance operations and inventory management of the
customer‟s spare parts, could help the supplier to improve its operational efficiency.
However, the proposed benefits of increased planning possibilities, improved planning
accuracy and reduced stock-keeping units are not gained automatically. Moreover, the
operations planning competencies for the customer and the supplier are demanding, if such
benefits are to accrue.
Valinda Rutledge, David Huber, MD. Fache and Jan Mathews26
has told that
strategies used by Caro Mont Health to improve quality, decrease cost, and increase
operational efficiency have ultimately aligned their system to address the present and future
challenges confronting healthcare. Their strategies reinforce the fact, that improved quality
and patient outcomes will ultimately reduce overall healthcare costs.
Stephen A. Magnus, John R.C. Wheeler, and Dean G. Smith27
- had said that
operational efficiency implies lower day-to-day operating costs (such as staffing, supplies,
business travel, and routine promotional expenses), as well as reduced managerial
perquisites.
Haritha Saranga and B.V.Phani28
revealed, that operational efficiencies of a firm
play a crucial role, in determining the survival and growth of a firm, especially, when the
industry is going through a dynamic structural transformation, owing to external changes. In
this paper, they explored the effect of managerial and strategic parameters on the degree of
operational efficiency achieved by a firm in the Indian pharmaceutical industry, using data
envelopment analysis (DEA). They used non-parametric DEA models and parametric
methods, such as regression analysis to determine the factors, which have contributed to the
internal operational efficiencies of these firms. The findings indicate, that domestic firms,
most of which are controlled by family based governance structures, enjoy higher
efficiencies than affiliates of multinational pharmaceutical majors. Operational efficiencies
add to the bottom line thus providing the firm with additional resources to take advantage of
26 “Progression of Strategies used by a Healthcare System preparing for Healthcare Reform : Past and Present” Frontiers of Health Services Management, Fall 2010, 27, 1; Abi/inform/Global 27 ”The Association of Debt Financing with Not-for Profit Hospitals’ Operational and Capital-
Investment Efficiency” – J Health Care Finance 2004, 30(4) 33-45, 2004 Aspen Publishers Inc., 28 “Determinants of Operational Efficiencies in the Indian Pharmaceutical Industry” – International Transactions in Operational Research, Intl.Trans.in Op. Res. 16(2009), 109-130.
Page / 30
any growth opportunities that may arise due to the dynamic nature of the external
environment.
Rajiv D. Banker, Robert J. Kauffman, and Richard C. Morey29
have stated that
operational efficiency measures, such as the ones they have developed provide managers
with the opportunity to implement deployment strategies for new ITs, in order to maximize
value.
Tzong-Ru Lee and Jui-Sheng Kao30
had stated that improving operational
efficiency reduces block percentage to a minimum and automation and computerization
coupled with good management and experienced staff are all essential for the fish market to
operate efficiently.
Bijan Vasigh and Mehdi Haririan31
demonstrated that the empirical results
regarding operational efficiency reflect the statistically different ratios for government
versus privatized airports. Countries that have privatized airports generally impose some
form of price regulation or landing fees. However, private airports‟ monopoly power could
also be a source of increase in revenue and profit. Profitability is the result of the
relationship between the regulatory controls, choice of market to serve, market power, and
productivity.
B.Golany and J.E.Storbeck32
found efficiency differences between branches with
personal investment centers (PICs) and branches without PICs in one of the cities of their
sample. The general premise they investigated was, whether these two groups of branches
differed in productive efficiency. Thus, they wanted to measure the extent of operating-
efficiency differences in these groups and then to identify the source of those differences. In
looking at the average managerial and program efficiency levels for PIC and non-PIC
branches in one city during the second quarter of 1992, they found that the PIC branches
tended to be, on average, much more efficient than the non-PIC branches (72.4 per cent
29 “Measuring Gains in Operational Efficiency from Information Technology : A Study of the Positron Deployment at Hardee’s Inc.,” – Journal of Management Information Systems, Vol.7. No.2 (Fall 1990) pp.29-54. 30 “A Simulation application to improve the operational efficiency of the wholesale fish market in Taiwan” – Agriculture Economics & Management, Vol.3. No.3. 1999. Pp.229-237. 31 “An Empirical Investigation of Financial and Operational Efficiency of Private Versus Public Airports” – Journal of Air Transportation, Vol.8. No.1, 2003. 32 “A Data Envelopment Analysis of the Operational Efficiency of Bank Branches” – Interfaces 29: 3 May-June, 1999, pp.14-26.
Page / 31
versus 44.9 per cent). This difference was due primarily to the program itself. The relatively
similar managerial efficiency averages for the PIC (79.6 per cent) and non-PIC (72.9 per
cent) groups, coupled with the highly desperate program averages, suggest that the primary
source of operating-efficiency advantage for PIC branches was in the adoption of the PIC
program.
Stephen P. Zera and Jeff Madura33
analyzed some interesting points with respect
to the observed operational efficiency of mutual funds. First, a statistically significant
negative relationship exists between expense percentages and both individual fund size and
fund family size. Larger fund size is associated with smaller expense percentages. This
statistically significant relationship holds for each of five categories of fund investment
objective. An implication from the perspective of mutual fund shareholders is that growth in
fund size is desirable. It is possible, that the decrement in expense percentages associated
with increases in fund size should be even greater, than that which we currently observe.
When examining the elasticity of mutual fund expenses with respect to mutual fund size, the
full sample ESE is 0.96, indicating that a one per cent increase in fund size is associated
with a 0.96 per cent increase in fund expenses. That is, the full individual fund sample
exhibits only slight economies of scale.
Healthcare Purchasing News34
has given that due to a well coordinated
implementation combined with strong ongoing support from hospital management, the
outsourcing instrument management services program has been successful. Benefits to the
program have been diverse and include faster room set-up and break-down times due to
strengthened operational efficiency and achievement of targeted cost savings due to the
elimination of mistakes, rework, unnecessary steps, reductions in repair expenses and
reductions in disposable instrument utilization.
Jin-Li-Hu, Wei-Kai Chu, Xiaoling Hu and Chih-Yuan-Lee35
had stated, which the
operational performance of a firm is influenced by its technical efficiency and external
operational environment.
33 “The Empirical Relationship between Mutual Fund Size and Operational Efficiency” – Applied Financial Economics, 2001, 11, 243-251. 34 “Instrument Management Service enhances Operational Efficiencies, Surgeon Satisfaction” – Healthcare Purchasing News, Feb.2008 www.hpnonline.com 35 “Operational Environment – Adjusted nationwide Bank Efficiency in China” – Journal of Management Research, Vol.9. No.3 Dec.2009, pp.142-158
Page / 32
Hsiu-Ling Wu, Chien-Hsun Chen36
had told that the process of economic reform
began in China, the Chinese banking system has grown impressively. The aim of their paper
is to examine the differences in operational efficiency between China's state-owned
commercial banks (SCBs) and shareholding commercial banks using pooled cross-section
and time-series data to observe the period between 1996 and 2002. The results showed that,
on average, shareholding commercial banks have lower operating costs than the SCBs; that
is to say, they display a higher level of "vitality", and greater efficiency. The empirical
results also indicated that there has been a significant improvement in the overall
operational performance of China's commercial banks in the last few years.
Carl A.Scheraga37
has stated that the operational efficiency was measured by
means of data envelopment analysis, using the input oriented model specified by Ali and
Seiford, an approach used in related studies. Efficiency measures were related to
strategically focused expenditures on operations, passenger services, and ticketing,
promotion, and sales by means of a bit analysis. The results of the bit analysis suggested
that focused expenditures on operations and passenger services had a negative impact on
operational efficiency. At the same time, focused expenditures on ticketing, sales, and
promotion had a positive impact on operational efficiency.
Global Scenario38
has mentioned, that the Brazilian Government has announced an
accord with the country‟s sugar industry, to provide decent working conditions for
sugarcane cutters, local press reports said. Responding to criticism from European human
rights groups, Brazil‟s Government and industry representatives signed a labour accord that
commits them to improve existing working conditions, in the sugar industry. The document,
which is not binding, represents a commitment on the part of the companies to provide
decent working conditions for sugarcane labourers, as well as technical training. For its part,
the Government has committed to improving its oversight of all cane cutters in the country.
The pact does not directly address minimum wages, nor does it include any mandatory
36 “Operational Performance of Commercial Banks in the Chinese Transitional Economy” – The Journal of Developing Areas, 2010, Vol.44. Iss.1. Pg.383, 14 Pgs. 37 “The Relationship between Operational Efficiency and Customer Service : A Global Study of
Thirty-Eight Large International Airlines” – Airline Efficiency and Customer Service, Transportation Journal, Summer, p.48, 2004. 38 Global Scenario – “Sugar Industry signs up for better labour conditions” - Cooperative Sugar, Vol.40, No.11. Jul-2009.
Page / 33
obligations for companies. So far, 303 out of the 403 firms in the industry have signed the
accord.
Dr.A.P.J.Abdul Kalam39
had a word for the sugar technologists, that they have to
create a partnership between agricultural scientists, extension workers and farmers, so that
there is persistent effort to increase the per hectare are productivity in all the states of the
country taking the experience of high yielding varieties of different states.
B.K.Mali, Pawar P.P., Shete S.M., and Yadav D.B.40
had told that there existed a
gap in yield (demonstration yield minus average farm yield) to the extent of 17-45 per cent
in the production of planted and ratoon sugarcane in Western Maharashtra. One of the
reasons for such yield gap was the imbalanced use of crucial inputs than the recommended
levels. The observed input use gap for the planted and ratoon sugarcane was 60-70 per cent
in manures, 9-27 per cent in Nitrogen, 4-10 per cent in Phosphorus and 4-49 per cent in
Potash. In addition to this, the excess use of Nitrogen (18 per cent), Phosphorus (11-65 per
cent) and Potash (11-44 per cent) has resulted in economic loss. In order to reduce this gap
in yield and to avoid the economic loss, there is a need to educate the farmers, to use the
recommended levels of inputs in the production of sugarcane.
Madhoo Pavaskar and Vaishnavi Naik41
had stated that the current sugar crisis
essentially reflects the failure of government policy on sugar, on all fronts. The obsession of
the government to continue with the bazaar regulations on cane marketing, sugar
production, sugar distribution and import-export trade has perpetual sugar price cycles to
the detriment of not only the sugar economy, but also the producers of cane and consumers
of sugar. It is time for the government to free the sugar economy from all absurd regulations
and controls, so that India can assume its rightful place in the global sugar market.
Petro Evangelista and Alfonso Morvillo42
had said that the objective of their study
is to ascertain, to what extent the use of alliances on the part of shipping companies is
designed, to increase the degree of integration in the supply chain, by providing ever greater
customer-oriented logistics services or improving the efficiency of traditional services. In
39 “The Mission : Vibrant Sugar Industry” – Facts for You, May-2010. 40 “Impact on Input use Gap and Technology Adoption on Productivity of Sugarcane in Western
Maharashtra” – Cooperative Sugar, Vol.38. No.9. May-2007. 41 “Why has Sugar Become Bitter?” – Commodity Vision, Vol.3. Issue 6. May-Jun 2010. 42 “Alliances in Liner Shipping : An Instrument to Gain Operational Efficiency or Supply Chain Integration?” – International Journal of Logistics Research and Applications, Vol.2. No.1. 1999.
Page / 34
order to do this, a database was constructed which logged inter-firm agreements reported by
the specialized press between 1990 and 1998.
William J. Hejna43
has mentioned that the improvements in operating efficiency
should flow from more modern and efficient building systems, streamlined clinical and
business processes, more appropriate departmental adjacencies and enhanced clinical and
information technologies. For targeting improved operational efficiency they have told to
establish a clear and compelling vision and expectation for the facility projects, assess
current operations to identify opportunities for improvement, undertake a structured,
operations driven facility, planning process, foster broad participation and ownership in the
planning process and to maintain a focus on the hospital existing strategic growth and
performance improvements agenda. Gaining operating efficiencies through a hospital
redevelopment project requires a strong and sustained sense of purpose on the part of top
leadership.
An attempt has been made by the researcher to compare the operational efficiency
between the cooperative and the private sector sugar mills by considering the three factors
namely, cost, capacity utilization and profitability.
1.18 SCOPE OF THE STUDY
The sugar mill s in Tamil Nadu are in three sector s , na mely: ( i) Private
Sector, ( ii) Public Sector and (iii) Cooperative sector. The growth of sugar industry in
Tamil Nadu is, in both the cooperative and the private sectors. As the number of factories in
the public sector is very negligible, for the comparative analysis of sugar industry, only the
cooperative and the private sectors have been considered. There are 40 installed sugar mills
in Tamil Nadu. Out of which, 36 mills were in operation, in the year 2008-2009. To draw
logical and meaningful conclusions, eight cooperative sugar mills and eight private sector
sugar mills are included, in the present study.
43 “Five Critical Strategies for Achieving Operational Efficiency” – Journal of Healthcare Management – 49:5. Sep-Oct.2004.
Page / 35
1.19 OBJECTIVES OF THE STUDY
The objectives of the present study are:
To examine the composition of various cost components and their magnitude, in
the total cost of sugar production.
a. Raw material cost and cost of production.
b. Share of employee cost in the total cost of sugar production.
c. Share of manufacturing cost in the total cost of production.
d. Share of depreciation on fixed assets.
e. To ascertain the impact of under utilization of plant capacity due to
various reasons.
f. To judge the gross profit making ability of the sugar mills to net sales.
g. To assess the impact of selling and administrative overheads to net sales.
h. To assess the impact of interest to net sales.
i. To assess the impact of total overheads to net sales.
j. To assess the impact of net profit to net sales.
In the absence of cost data, to find out the cost trend and to identify the most
casual factor, this gives unsatisfactory results.
To study the impact of under utilization of plant capacity, which ultimately
affects the operational efficiency of the sugar mills, and to judge the profitability
of the sugar mills.
1.20 HYPOTHESES
The researcher has framed the following hypotheses and tested in the study.
Gross profit is not significantly affected by net sales.
The effect of selling and administrative expenses on the net sales is not
significant.
The effect of overheads on the net sales is not significant.
The effect of interest paid on the net sales is not significant.
The quantity of sugar produced is not significantly affected by the capacity
utilized.
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1.21 GEOGRAPHICAL AREA
The study is restricted to the state of Tamil Nadu. Since the researcher belongs to a
farming community, interested in the economic development of Tamil Nadu and interested
in making a comparative study of the private sector sugar mills with the cooperative sugar
mills in Tamil Nadu, the researcher has undertaken this study.
1.22 PERIOD OF STUDY
The sugar industry is cyclical in its nature, which is normally of four to five years
i.e. two years of bumper sugarcane crop, followed by two years as shortage of sugarcane -
due to drought or of market position, and one year is a normal. Naturally, this cycle affects
the cost effectiveness and the economy of the sugar mills. Therefore, the researcher has
decided, to cover a period of two cycles i.e. nine years from 2000-2001 to 2008-2009. It has
been considered as an appropriate period, for the analysis of mills, over a period of time,
between, the private and the cooperative sugar mills.
1.23 METHODOLOGY
In this study, the research work is based, mainly on primary, as well as, secondary
sources of information. As a part of primary source, the researcher has visited personally, to
some of the sample sugar mills, in both the sectors. The interviews with the officials and
executives were organized, to understand the financial and technical problems of the sugar
mills. The Researcher had also conducted the interviews with the personnel of research
institutions, federation of the private and the cooperative sugar mills etc.
1.23.1 Secondary Source
In the absence of cost accounting systems in the sugar mills, the researcher had to
rely more on the data, which are available, through financial accounting system. Therefore,
the researcher took rounds to most of the sample sugar mills, Cooperative Sugar Federation
personally, and collected the required data and information on research. For the Cooperative
Sugar Mills, the information required is available through annual reports. These mills have
published their annual reports, and hence, there was no problem, in collecting the necessary
data, from these sugar mills. Whereas, in private sugar mills, there is no such practice of
publishing the annual reports, every year. Hence, the researcher has collected the
information from the records of ‘SISMA’ (South Indian Sugar Mills Association), and cost
Page / 37
data, for private sugar mills from PROWESS Database, of the Centre for Monitoring
Indian Economy (CMIE). This was the procedure adopted, while collecting the data and
information of the nine years, from 2000-2001 to 2008-2009, of all the sugar mills, covered
in this study.
1.23.2 Sample Size
The researcher has selected eight cooperative sugar mills and an equal number of
private sugar mills. The criteria, capacity utilization of the different mills over a span of
seven years, have been used for the selection of the Cooperative mills. The climatic
conditions in these sugar mills, differ from area to area, which affect, not only the sugarcane
yield per hectare, but also the sugar recovery per cent. Ultimately, it affects the cost of sugar
manufacturing and the overall economy of the sugar mills. For selecting the cooperative
sugar mills, the researcher has adopted purposive sampling method. The below given table
shows the percentage of capacity utilization, and their ranks are indicated within the
parentheses, among all the sector sugar mills, in Tamil Nadu.
TABLE 1.20
ACTUAL CAPACITY UTILIZATION BY COOPERATIVE SUGAR MILLS
S.No. Name of the
Sugar Mill
% 2001-
2002
2003-
2004
2004-
2005
2005-
2006
2006-
2007
2007-
2008
2008-
2009 Rank
1. Amaravathi % 102 87 32 92 89 90 89
Rank (9) (19) (34) (19) (24) (21) (18)
2. Chengalrayan % 93 95 94 91 97 97 96
Rank (26) (12) (12) (22) (14) (12) (7)
3. Cheyyar % 101 98 99 98 103 100 96
Rank (10) (5) (4) (9) (6) (9) (8)
4. Dharmapuri % 95 86 92 93 90 91 89
Rank (24) (20) (14) (19) (22) (19) (17)
5. Kallakurichi-I % 101 99 99 95 97 93 95
Rank (11) (3) (3) (15) (13) (17) (10)
6. Kallakurichi-II % 108 94 98 100 99 105 101
Rank (7) (14) (6) (8) (10) (5) (4)
7. Subramania Siva % 99 84 83 97 93 86 95
Rank (14) (21) (17) (11) (21) (28) (11)
8. Salem % 92 79 71 97 100 102 97
Rank (27) (24) (24) (10) (9) (7) (6)
Source: SISMA (for the years 2000-2001and 2002-2003, the data are not available).
Page / 38
In selecting the sample mills for the Private sector, the mills, which have financial
data available for a continuous period of nine years viz., 2000-2001 to 2008-2009, have
been considered for the study. The mills, for which data are not available for one or more
than one year in between the study period of nine years, or in the beginning, or in the end of
the study period, have been deleted. Eight mills, which have satisfied the above said
conditions, have been selected, as samples for the study.
1.23.3 Framework of Analysis
Though this study is based on the primary as well as the secondary data, for
analytical purpose, only the secondary data are considered. Data analysis is made by
employing statistical tools, such as mean, standard deviation, co-efficient of variation,
correlation, simple and multiple linear regressions, AGR, CAGR, t-test and ANOVA. Trend
analysis has also been applied by the researcher, wherever necessary.
1.24 LIMITATIONS OF THE STUDY
This study concentrates only on three important areas:
(a) Cost trends,
(b) Utilization of plant capacity and
(c) Profit making ability of the sugar mills.
The period of study is of nine years from 2000-2001 to 2008-2009, and therefore,
the conclusions drawn are based on the changing economic scenario, at the national and the
international level, and the impact of the government policy on the sugar industry, during
the study period. In some cases, if the details are not available, the researcher framed
appropriate formula to arrive at those particulars. It is very difficult to segregate the data
available with the private sector sugar mills, which are having more than one unit. However,
an equitable method, by simply dividing the total cost by the number of units, has been
followed by the researcher, for data segregation. Therefore, conclusions drawn in this study
are based on the data made available, by these sugar mills.
1.25 ORGANIZATION OF THE STUDY
The thesis is organized into six chapters.
Chapter-I deals with the introduction of he study, statement of the problem,
objectives, methodology adopted, review of relevant studies, scope of the study, importance
of the study, limitations of the study and period of study.
Page / 39
Chapter –II explains a brief profile of the selected sugar mills included in this study.
Chapter-III concentrates on the behaviour of the various cost components, over a
period of nine years, among the individual sector sugar mills and between the two sector
sugar mills.
Chapter-IV tries to ascertain the impact of various factors for under utilization of
plant capacity and their operational efficiency.
Chapter-V denotes to identify the profitability of each sugar mill, over a period of
time and between the two sectors selected.
Chapter-VI gives summary of the research work, suggestions thereon and
conclusion drawn, for the improvement of the sugar industry in Tamil Nadu.
