Uttar Pradesh, a leading producer of sugar cane and sugar before independence, lost its pre-eminent position to Maharashtra in the 1960s, when the western state developed a formidable sugar industry in the cooperative sector. However, a recent resurgence has been noticed in UP, similar to the 1930s boom. This paper tracks different phases of the evolution of UP's sugar industry and examines the regional patterns within the state: how the industry that had originally developed roots in the eastern parts of the state, particularly the Gorakhpur-Basti belt, is now mainly concentrated in the western and central districts.

Sugar Industry in Uttar Pradesh: Rise, Decline and Revival

Uttar Pradesh, a leading producer of sugar cane and sugar before independence, lost its pre-eminent position to Maharashtra in the 1960s, when the western state developed a formidable sugar industry in the cooperative sector. However, a recent resurgence has been noticed in UP, similar to the 1930s boom. This paper tracks different phases of the evolution of UP’s sugar industry and examines the regional patterns within the state: how the industry that had originally developed roots in the eastern parts of the state, particularly the Gorakhpur-Basti belt, is now mainly concentrated in the western and central districts.

HARISH DAMODARAN, HARVIR SINGH

rior to independence, Uttar Pradesh (UP) was India’s leading producer of both sugar cane as well as sugar. From the 1960s onwards and up to the early 1990s, the state lost its pre-eminent position to Maharashtra, which developed a formidable sugar industry in the cooperative sector through strong grassroot leadership, combined with gratuitous state support and political patronage. During this period, the industry in UP went into long-term decline, with hardly any new private mills coming up and neither cooperatives nor stateowned factories successfully ﬁlling the vacuum. As a result, right till the 1990s, production of indigenous sugars – ‘gur’ and ‘khandsari’ – by small crushers and ‘kolhus’ in UP exceeded the out-turn of white sugar from mills. This contrasted with Maharashtra, where virtually the entire cane grown by its farmers was utilised for crushing in cooperative factories. The present decade, however, has apparently heralded a new phase: one of revival and a private sector-led investment boom in UP’s sugar sector reminiscent of the 1930s. UP, it would appear, is not only back in the reckoning, but is set to reclaim its “rightful” place in the country’s sugar map, even as it is Maharashtra’s mills that are now feeling the heat.

This article tracks the above three phases of the evolution of UP’s sugar industry: the pre-1947 rise, the decline from the 1960s to the 1990s, and the noticeable revival since the start of this century. The ﬁrst two phases are dealt with in the opening section, which also examines regional patterns within UP: how the industry that originally developed roots in the eastern parts of the state (particularly the Gorakhpur-Basti belt) is now mainly concentrated in the western (Meerut-Muzaffarnagar-Saharanpur) and central (Bijnor-Lakhimpur Kheri) districts. The second part looks at the ongoing resurgence, while drawing parallels with the 1930s boom and, at the same time, highlighting features and circumstances suggestive of divergence.

I Evolution

Pre-1947

The sugar industry’s origin in UP goes back to 1874, when Begg Sutherland and Company, an English managing agency, set up what was actually a factory-scale ‘gur’ (jaggery) reﬁnery at Kanpur. This factory melted and reﬁned round lumps of gur (also called ‘bhelis’) procured from the eastern districts of Gorakhpur and Basti. It was the eastern region that also gave rise to the ﬁrst full-ﬂedged sugar mills, beginning with the Purtabpore Company’s Mairwa unit at Pratappur founded in 1903-04 and managed by Begg Sutherland. By 1930, UP had 15 mills (which directly processed cane rather than gur bhelis), of which Gorakhpur district alone accounted for nine.

There are reasons why the early development of the industry took place in eastern UP and not in the canal-irrigated western districts of Meerut, Muzaffarnagar and Saharanpur, which today constitute the state’s premier sugar belt. In western UP, the growers, apart from cultivating cane, also produced and sold gur of high, edible-grade quality. This gur, light in colour and granular in texture, did not require any reﬁning and commanded an independent market within and beyond UP, and was largely disposed of by the peasants themselves in the bazaar sans involvement of moneylenders or other usurious intermediaries.

It was otherwise so in eastern UP, where the gur produced by farmers had high water and sucrose content, was soft in texture and not suited for direct consumption. Instead, the bhelis had to be further reﬁned and were used as raw material by ‘khandsari’ (cottage sugar) manufacturers. The eastern UP cane grower, unlike his independent gur-producing and marketing western counterpart, was also bound to the khandsari reﬁner through an exploitative chain of village moneylenders, transporters, middlemen and brokers. The raw gur produced at Gorakhpur and Basti was consumed not only by the local khandsari units, but also by the factory-style reﬁneries at Kanpur that were commissioned from the late 19th century and precursors to the modern sugar mills. The latter directly crushed and reﬁned cane and it was natural for them to have come up ﬁrst in the Gorakhpur-Basti region, close to where the crop was grown. Till the mid-1930s, these mills even had gur reﬁneries attached to them to produce sugar through the traditional, low-recovery open-pan process (against the more efﬁcient vacuum-pan technology of factories) in the off-season when cane supplies had dried up. The modern mills initially relied on the same landlord-moneylender-middleman institutional nexus to procure cane from the eastern UP peasantry. Such an option was not available in western UP, whose more prosperous and independent gur-processing growers had to be paid much higher if they were to supply cane to sugar factories. It was

Economic and Political Weekly September 29, 2007

estimated in 1913 that cane could be bought 36 per cent cheaper in Gorakhpur and north Bihar than from the high-grade gur- producing tracts like Meerut.1

The spread of sugar mills in western and central UP had to wait till 1932, when the colonial government clamped a 185 per cent ad valorem duty on sugar from Java, the main origin for imports into the country. This protective measure had a dramatic impact. Between 1930-31 and 1936-37, the number of sugar factories in India rose from 29 to 137, with those in UP registering a ﬁvefold jump from 15 to 75. As net imports of sugar declined from 8.08 lakh tonnes (lt) to a mere 22,000 tonnes during this period, domestic production correspondingly went up from 3.50 lt to

12.54 lt.2 In UP, which was the centre of the boom, factories were established across the state. Out of its 84 mills (including two gur reﬁneries) at the end of the 1938-39 season, there were 15 in the Meerut-Muzaffarnagar-Saharanpur belt. But the lion’s share still belonged to eastern UP, with Gorakhpur alone having 24 factories and Basti and Gonda districts ﬁve each. At an all-India level, eastern UP (40), Bihar (37) and Bengal (10) together housed almost 50 per cent of India’s 179 sugar mills (including nine reﬁneries), while Madras (15), Bombay (11) and Punjab (nine) were the other key sugar producers. The biggest plant in the country, with a capacity to crush 2,000 tonnes cane daily (tcd), was the Majithia family’s Saraya Sugar Factory at Sardarnagar in Gorakhpur. Besides, there were a few 1,800-tcd units at Gonda (Nawabganj Sugar Mills of the Narang group), Sitapur (the Birlas’ Oudh Sugar Mills in Hargaon), Kheri (the Bajaj group’s Golagokarannath factory) and the Dalmia-Jain groupcontrolled Rohtas Industries’ plant at Shahabad in Bihar.3

Post-Independence till Early 1990s

The 1930s’ boom resulted in the creation of excess capacities and pressure on prices. That, in turn, stimulated the creation of the Indian Sugar Syndicate (a cartel formed in July 1937 to stabilise sugar prices by allocating sale quotas to individual mills) and the enactment of the UP and Bihar Sugar Factories Control Legislations of 1938. The latter put in place a licensing system to regulate the setting up of new factories, apart from including provisions relating to ﬁxing of “fair” prices for sugar cane and reserving cane areas for individual mills to prevent poaching or unhealthy competition for raw material.4 These provided the under pinnings and background for the more comprehensive inter ventionist policy that took shape in the post-independence era. The basic components of the regime included (1) licensing of both new factories as well as expansion of existing capacities, (2) cane zoning and maintenance of a minimum radial distance between two mills, (3) a mechanism of monthly free sale quotas regulating the quantum and timing of ofﬂoading sugar (“release”) in the market by mills, (4) ﬁxation of a statutory minimum price for sugar cane, and (5) sequestering of a certain percentage of the sugar produced by mills as “levy” for the public distribution system.

The over-investments of the 1930s, leading to the ﬁrst concerted attempts at regulation of the industry, ensured that the subsequent decade witnessed very little action or commissioning of fresh capacities. In 1950-51 and right up to the 1960s, UP remained the country’s leading sugar cane and as sugar producer. This position, however, changed by the 1970s, as Maharashtra (formed from the old Bombay state) dislodged UP to become the number one sugar manufacturer, even while the latter retained its premier position vis-à-vis sugar cane. From Table 1, it can be seen that between 1960-61 and 1980-81, the quantity of cane crushed by sugar mills in UP even fell in absolute terms.

Simultaneously, the state’s sugar production also declined. On the other hand, not only did the number of mills in Maharashtra go up ﬁve times, but they were also crushing more cane and producing more sugar than UP. An even better indicator of the relative performance of the industry in the two states was that in 1990-91, the total cane crushed by the factories in Maharashtra was almost equal to the cane grown by its farmers. By contrast, in UP, less than a third of its crop was being utilised by its mills and the rest mainly going towards manufacture of indigenous sweeteners, viz, gur and khandsari.

The factors responsible for this divergence are well known and do not require elaboration.5 Sufﬁce it to say here that the government of India’s policy after independence favoured the establishment of sugar mills under the cooperative sector. Not only were cooperatives given preference in the grant of licences, but they even received gratuitous state support. Up to 70 per cent of their project costs were met through the Industrial Finance Corporation of India (IFCI) and other public ﬁnancial institutions, with the Maharashtra government, from its side, providing guarantees for their repayment. Even for the balance 30 per cent equity portion, the latter undertook to subscribe up to two-thirds of the share capital, which mills could gradually redeem at par. The Maharashtra mills – the bulk of them cooperatives and producing 95 per cent or more of the state’s sugar – took full advantage of these provisions. Not that there were no cooperatives in UP or other states; but these, unlike in Maharashtra, were devoid of genuine grassroot leadership and were run more like the extension arms of the government with all the attendant inefﬁciencies and problems.6

While UP ceding ground to Maharashtra was a notable feature of the post-independence period, a coterminous development that has perhaps not received as much attention is the signiﬁcantly changed regional proﬁle of the industry within UP. Prior to independence, sugar mills, were overwhelmingly concentrated in the eastern part. But by 1990-91, out of the top 10 factories in UP, there was only one located in an eastern district: Balrampur Chini at Gonda. All the others were either in the western (Ghaziabad, Meerut, Muzaffarnagar, Saharanpur) or central (Bijnor, Kheri) region. The biggest mill of pre-independent India

– Saraya in Gorakhpur – suffered a drop in its rank to 13th (in

Table 1: Sugar Industry: Uttar Pradesh versus Maharashtra

1950-51	1960-61	1970-71	1980-81	1990-91
Cane output
Uttar Pradesh	281.53	545.19	546.72	642.05	1035.62
Maharashtra	53.02	120.89	147.70	235.91	384.16
All-India	548.23	1105.44	1293.68	1542.48	2410.45
Cane crushed
Uttar Pradesh	61.35	149.73	141.82	129.21	327.56
Maharashtra	10.62	44.90	93.53	188.83	382.84
All-India	111.46	311.09	382.04	515.84	1223.19
No of mills
Uttar Pradesh	67	70	71	90	105
Maharashtra	15	27	41	77	97
All-India	138	174	216	314	385
Sugar output
Uttar Pradesh	6.02	14.27	12.45	12.24	29.75
Maharashtra	1.23	5.23	10.55	20.85	41.19
All-India	11.18	30.28	37.40	51.48	120.47

Note: Output and crushing ﬁgures are in lakh tonnes. Source: Indian Sugar, various issues, Indian Sugar Mills Association, New Delhi.

terms of sugar output) within UP. But it was not just the Majithias of Saraya who experienced marginalisation. Even bigger casualties were the other distinguished sugar barons with mills in the Gorakhpur-Basti belt: the house of Gokulchand Narang (Ghughli, Basti, Walterganj and Barhni, besides Nawabganj in Gonda) and the erstwhile British managing agency of Begg Sutherland (Padrauna, Kathkuiyan and Gauribazar).7 The bulk of these mills saw hardly any enhancement in production capacities; they eventually shut down or were nationalised upon turning sick.8 In 1990-91, eastern UP still had more mills (42) than in central (40) or western (23) UP. But the eastern mills produced only 25.9 per cent of the state’s sugar, against the 39.5 per cent of central and 34.6 per cent of western UP. Among individual districts, the top by ranking were Meerut (western), Bijnor (central), Muzaffarnagar (western), Kheri (central), Padrauna (eastern) and Saharanpur (western). Padrauna’s ﬁfth position was contributed by as many as nine mills, whereas there were just four in Saharanpur, ﬁve each in Bijnor and Kheri, six in Muzaffarnagar and seven in Meerut.9

The diminished importance of eastern UP – particularly the Gorakhpur-Basti belt – is partly attributable to the fact that the drawal rates of cane by factories were already high even prior to independence and that, by itself, imposed limits on the industry’s expansion. By the late-1930s, sugar mills in trans-Ghaghra UP (comprising Gorakhpur, Basti, Gonda and Bahraich) were utilising some 52 per cent of the total cane cultivated, whereas this proportion did not exceed 16 per cent in any other tract (in western UP, it was as low as 3 per cent!). In Gorakhpur, almost threefourths of the marketable surplus of cane was earmarked for the factories. What is more, cane in the region was raised with minimal irrigation facilities, involving, at most, tapping of groundwater through cheap ‘katcha’ wells.10 Simply put, the sugar industry in eastern UP had reached a frontier, beyond which where additional cane could be sourced only from increasingly unproductive and marginal lands. On the other hand, there were large swathes of cane growing area in western and central UP, where not only were yields higher due to assured canal irrigation, but considerable scope existed to entice growers to supply their crop to the mills, away from gur or khandsari manufacturing.11 One can perhaps also venture an additional hypothesis here about the socio-economic and institutional arrangements governing cane supplies in eastern UP, which, as mentioned earlier, were loaded heavily against the grower. The landlord-middleman-moneylender nexus, which guaranteed assured and cheap supplies of cane to the factories in eastern UP, is likely to have been undermined, if not weakened, in the post-independence era through progressive legislations such as land reforms (abolition of zamindari tenures) and measures to augment institutional farm credit. That would, in turn, have further reinforced the natural comparative advantage that western UP particularly enjoyed in terms of cane yields and irrigation coverage, making it more conducive for mills to expand capacities there.12

II 1990s and After

The Revival

In the previous part, we saw how UP’s pre-eminent position in the country’s sugar industry prior to independence was usurped by Maharashtra’s cooperatives towards the 1970s. Alongside, a reconﬁguration of the industry happened within UP, as the power balance shifted from the eastern region to the western and central districts.

The post-1990s, however, witnessed a revival of UP’s mills, as they steadily narrowed their production gap vis-à-vis Maharashtra. In the last few seasons, UP has, in fact, even overtaken Maharashtra. The table below shows that Maharashtra’s sugar output has tended to ﬂuctuate much more than that of UP. There have been seasons when production in the state has fallen by as much as 20-30 lakh tonnes over the preceding year, whereas there was only one year (2003-04) in UP, when a decline of nine lakh tonnes took place. Maharashtra’s vulnerability to drought has been especially exposed in recent times, with production dropping to nearly a third between 2002-03 and 2004-05. Since 2005-06, there has been a recovery and in the current 2006-07 season (October-September), Maharashtra’s mills are expected to produce an all-time-high of 70 lakh tonnes. But on the other hand, UP’s sugar output is slated to be even higher at 73 lakh tonnes. Once the newly commissioned mills, which have come up since the announcement of the UP Sugar Industry Promotion Policy 2004 (see following section), begin to crush to their nearfull capacity, the state may end up producing over 80 lakh tonnes by the 2007-08 season. That would decisively re-establish UP as India’s number one producer of both cane and sugar – a slot it had occupied prior to independence before vacating it to Maharashtra till well into the 1990s.

In UP, the trend in recent times has been towards greater expansion of capacities and consolidation of ownership. In the long run, this could, by way of conferring economies of scale and scope, place its industry in an advantageous position over the widely dispersed mills of Maharashtra. In 2005-06, just ﬁve groups – Bajaj Hindusthan, Balrampur Chini Mills, K K Birla, Triveni Engineering and Industries and Dhampur Sugar Mills – controlling 26 out of UP’s 114 mills produced 46 per cent of its total sugar. If one takes the top 10 (36 factories), their combined contribution to the state’s production comes to 61 per cent. This is a marked contrast to Maharashtra, where mills are spread over and no cooperative (barring the Warana SSK in Kolhapur and the Rajarambapu Patil SSK in Sangli) currently controls or operates more than one unit. Moreover, the factories are scattered all over the state, many of them located in districts with low rainfall and

Table 2: State-wise Production of Sugar in Lakh Tonnes

UP**	Maha-	Tamil	Karnataka Andhra	Gujarat	All-India
	rashtra	Nadu*	Pradesh
1990-91	29.75	41.19	12.31	9.42	7.01	8.32	120.47
1995-96	43.79	53.94	16.71	12.63	8.59	11.30	164.53
1996-97	40.84	34.45	10.83	8.71	7.72	9.67	129.05
1997-98	39.22	38.47	12.66	9.59	7.82	8.89	128.52
1998-99	37.29	53.37	17.74	13.72	11.13	10.25	155.39
1999-2000 45.56	65.03	17.68	15.77	11.82	11.41	182.00
2000-01	43.94	67.05	18.19	16.13	10.22	10.73	185.19
2001-02	52.60	56.13	18.78	15.50	10.48	10.56	185.27
2002-03	56.51	62.15	16.78	18.68	12.10	12.51	201.40
2003-04	45.51	31.75	9.41	11.16	8.86	10.66	135.46
2004-05	50.37	22.17	11.26	10.40	9.82	7.97	126.91
2005-06	57.84	51.97	21.70	19.43	12.36	11.68	192.67

Notes: Only states producing more than 10 lakh tonnes are taken; * includes Pondicherry; ** Excludes Uttaranchal from 2000-01 (3.61), 2001-02 (4.44), 2002-03 (4.98), 2003-04 (3.88), 2004-05 (3.81) and 2005-06 (4.26).

Source: Indian Sugar Mills Association.

Economic and Political Weekly September 29, 2007

inadequate irrigation coverage, making them not particularly conducive for cane cultivation. The one lakh tonnes-plus sugarproducing mills are all either from the south (Kolhapur, Sangli, Satara) or west-central (Pune, Ahmednagar, Solapur, Nasik) zones. These two zones housed 59 per cent (81 out of 137) of the state’s operational factories, but produced 78 per cent of its sugar in 2000-01. The 56 mills of Khandesh, Marathwada and Vidarbha accounted for only 22 per cent production and, in the coming years, we are likely to see many of them being weeded out (having come up for basically political reasons, in the ﬁrst place). On the whole, as things stand, there are no signs of consolidation taking place in Maharashtra, unlike in UP, where the process is already at a fairly advanced stage.

Thirties Revisited?

The beginning of 1990s marked a slow but steady revival of the sugar industry in UP. This coincided with the advent of economic reforms and the gradual loosening of licensing and other controls. Although the sector was formally de-licensed only in August 1998, a more liberal environment vis-à-vis granting of licences had by then already been created. To start with, the requirement for a new mill to maintain a minimum radial distance of 40 km from an existing factory was relaxed, ﬁrst to 25 km in May 1989, and then to 15 km in November 1991 (“in special cases where cane availability so justiﬁes”). The November 1991 guidelines explicitly stipulated that “the basic criterion for grant of licences for new sugar units would be their viability, mainly from the point of view of cane availability and potential for development of sugar cane”. Further, only new factories with minimum 2,500 tcd individual capacities were to be given licences, in order to ensure fundamental viability. While preferential licensing accorded to cooperatives and the public sector over the private sector was to continue, this was, nevertheless, conditional upon “other things being equal”. In August 1998, the industry was fully de-licensed, with entrepreneurs having to merely conform to the 15 km minimum radial distance criterion.13 The other major reform measure was the phased whittling down of the levy sugar obligation from 45 per cent of production at the start of the 1990s to 10 per cent by March 2002. Correspondingly, the proportion of “free sale” sugar that mills could dispose of at open market rates went up from 55 per cent to 90 per cent.

The loosening of controls led to a spurt in private investment in UP. During the 1980s and the decade before, a total of 34 mills were commissioned, of which as many as 27 were cooperatives and six state-owned. There was just a sole unit in the private sector – Palia Kalan of Bajaj Hindusthan – that commenced crushing in 1971-72. In the 1990s, it went quite the other way round: 22 private, one cooperative and not a single public sector factory came up.14 The impact of liberalisation was, thus, beginning to show in UP, even while things remained more or less the same in Maharashtra, where cooperatives have till date managed to hold their ground.15

But the real story of UP’s resurgence is far more recent, starting from 2004-05. From Table 3, it emerges that between the 2004-05 and 2006-07 seasons, 29 new mills with an aggregate crushing capacity of over 2,00,000 tcd would have been commissioned on the ground. If one also includes the brown-ﬁeld expansions of about 1,05,000 tcd in existing units, the total capacity addition during the course of these three years would be well over 3,00,000 tcd. That will take the total crushing capacity of mills in UP from below 4,00,000 tcd as on 2003-04 to 7,00,000 tcd-plus by 2006-07. In other words, a 75 per cent jump in a matter of three years. At an average Rs 150 crore per factory, it involves an investment of Rs 4,200 crore or so in green-ﬁeld projects alone; if one factors in brown-ﬁeld expansions, the outlay will certainly cross Rs 6,000 crore. Simply put, it is the 1930s investment boom being revisited; and again, it is UP that has been at the thick of action.

The 1930s boom, we saw, was the outcome of protection for domestic manufacturers through imposition of a 185 per cent customs duty on Javanese sugar by the then colonial administration. The present boom, by contrast, has had not one, but at least three triggers. One of them has to do with the country going through two consecutive bad seasons (2002-03 and 2003-04), leading to a roughly 35 per cent drop in sugar output over the 2002-03 peak. The resultant domestic shortage further coincided with two developments on the international front: skyrocketing oil prices and the forced phase-out of subsidies on sugar exports by the European Union (EU). High world crude prices meant that the world’s biggest producer-cum-exporter, Brazil, started diverting more and more of its cane away from sugar to manufacture ethanol, which could then be used for blending with gasoline (petrol). The EU’s farm subsidy rationalisation measures, in compliance with its World Trade Organisation (WTO) commitments, reduced the quantum of below-cost sugar “dumped” by it in the global market from some six million tonnes (mt) to 1.3 mt annually.16 The combined effect of all the three was to push up both domestic and global sugar prices, thereby boosting sentiments – fundamental and speculative – in the commodity.

Table 3: Greenﬁeld Sugar Units in Uttar Pradesh from 2004-05 to 2006-07

Group Unit/Starting Year District Capacity

Bajaj Kinauni (2004-05) Meerut 12,000 Hindusthan Thana Bhawan (2005-06) Muzaffarnagar 9,000 Budhana (2005-06) Muzaffarnagar 9,000 Bilai (2005-06) Bijnor 9,000 Khambharkheda (2006-07) Kheri 12,000 Barkhera (2006-07) Pilibhit 7,500 Gangnauli (2006-07) Saharanpur 9,000 Triveni Sabitgarh (2005-06) Bulandshahr 7,000 Engineering Chandanpur (2006-07) JP Nagar (Amroha) 6,000 Raninagal (2006-07) Moradabad 5,500 Milak Narayanpur (2006-07) Rampur 6,000 Uttam Sugar Barkatpur (2005-06) Bijnor 7,000 Shermau/Nakud (2006-07) Saharanpur 7,500 Khaikheri (2006-07) Muzaffarnagar 4,500 DSCL Hariyawan (2006-07) Hardoi 8,000 Loni (2006-07) Hardoi 8,000 Balrampur Chini Mijhaura (2005-06) Ambedkar Nagar 7,000 Datauli Mankapur (2006-07) Gonda 8,000 Dalmia Cement Jawaharpur (2006-07) Sitapur 7,500 Kuiyan Nigohi (2006-07) Shahjahanpur 7,500 Rana Sugars Belwara (2006-07) Moradabad 5,000 Karimganj (2006-07) Rampur 5,000 Amirkhan Ka Mazra (2006-07) Rampur 3,500 Dhampur Sugar Rajpura/Gunnaur (2006-07) Badaun 7,500 Dwarikesh Sugar Bahadarpur (2005-06) Bijnor 7,500 Mawana Sugars Nanglamal (2005-06) Meerut 6,000 Simbhaoli Sugars Brijnathpur (2006-07) Ghaziabad 4,000 Parle Biscuit Parsendi (2005-06) Bahraich 3,200 Anand Agrochem Gopi (2004-05) Aligarh 2,500

Note: Capacity is in tcd. Source: UP Cane Commissioner’s Ofﬁce, Lucknow.

That still begs the question: why has all this bullish sentiment stimulated massive capacity additions in UP and not as much in other states? Again, we can probably single out three reasons. The ﬁrst relates to a point made earlier: the existence of a sufﬁcient “gur frontier” in UP. Right through the 1990s, UP’s annual production of gur and khandsari averaged around 60 lt, which was higher than its 40 lt white sugar outturn. Thus, unlike in Maharashtra, where the entire cane was virtually utilised by existing sugar factories, UP provided considerable scope for new mills to come up and exploit the “gur frontier” by weaning growers away from the indigenous crushers and ‘kolhus’. The second factor is company-speciﬁc. Sometime in late-2003, Shishir Bajaj’s Bajaj Hindusthan took a calculated gamble to start as many as four units in western UP. This was a canal-irrigated tract with plenty of water and cane, and with just a few entrenched players around since the 1930s and who had, at most, carried out intermittent capacity expansions to their existing factories. Betting on a recovery in sugar prices from the rock-bottom levels of that time, Bajaj Hindusthan – which was hitherto conﬁned to Lakhimpur Kheri in central UP – decided to enter the territory of Triveni Engineering, Mawana Sugars, DCM Shriram, U K Modi, Simbhaoli Sugars and other big western UP combines. The rivals had no option but to respond. And respond they did.

Here, a third factor came into play: the 2004 Sugar Industry Promotion Policy of the Mulayam Singh Yadav government in UP. The policy offered a host of incentives including (a) 10 per cent capital subsidy on investment, (b) reimbursement of transport cost of sugar from the factory up to a distance of 600 km from the UP border, (c) reimbursement of the additional cost of transporting sugar cane from the out-centres (primary collection point) to the factory-gate, (d) remission of stamp duty and registration charges on land purchase, (e) remission/reimbursement of purchase tax on cane, (f) reimbursement of cane society commission, (f) exemption of entry tax on sugar, and (g) exemption of administrative charges and trade tax on molasses. Importantly, these concessions were to be given for ﬁve years subject to a company investing a minimum of Rs 350 crore, and for 10 years in case of investments of Rs 500 crore and above. Moreover, to be eligible for the claims, the factories had to commence production within three years from the date of the policy’s announcement, i e, by March 31, 2007.17 The policy turned out to be the proverbial icing on the cake for millers in an overall sugarfriendly domestic and international environment. While Bajaj Hindusthan was no doubt the ﬁrst mover, in no time, others too had joined the bandwagon. A state desperately starved of worthwhile industrial investments in recent times was suddenly attracting thousands of crores, that too in a sector with employment and income opportunities reaching out into the rural hinterland.

The issue that naturally arises is: will all these additional capacities end up creating a glut situation as they did in the 1930s? This is something that prima facie cannot be ruled out, though we need to take cognisance of certain moderating inﬂuences. Firstly, the domestic sugar market is now more mature and deeper than what it was in the 1930s, when the bulk of sweetener consumption was accounted for by gur and khandsari. Since the past 2-3 decades, there has been a steady trend of substitution of these alternate sugars with factory-processed white sugar, similar to the switch over that has taken place from vegetable fatsbased washing soaps to the relatively easy-to-handle synthetic detergents in most Indian homes.18 This displacement process, by itself, may impart some underlying stability to sugar demand in the coming years, the occasional gluts notwithstanding. Secondly, the EU’s farm subsidy phase-out programme has opened up new markets, especially in west Asia. True, a large part of this 50 lt-odd EU-vacated market may be ﬁlled by the likes of Brazil, Thailand and Australia. But it still leaves the possibility of India becoming a regular exporter, supplying 20 lt or so every year in the world market. That, of course, calls for some imaginative long-term policymaking on the part of the government and deﬁnitely not knee-jerk reactions, such as the July 2006 decision to suddenly ban all sugar exports in response to a temporary spike in domestic prices. Thirdly, one has to consider the capacity consolidation bound to happen within India. In the unfolding competitive environment, gluts are likely to hit factories in Maharashtra most – and this is mainly in respect of mills in the arid, low-recovery zones of Vidarbha and Marathwada. We can expect, therefore, increased production from UP to be partially offset by the restructuring of Maharashtra’s sugar industry.

The fourth and last point worth noting is that the sugar industry today is not just about sugar, as it used to be in the 1930s, but also about the various byproducts derived during processing of cane. A typical mill recovers about 10 tonnes of sugar from every 100 tonnes of sugar cane that it crushes. In addition, there is some 30 tonnes of bagasse and 4.5 tonnes of molasses generated as byproducts. Bagasse is normally burnt to produce steam for the captive consumption of mills, so much so that sugar is probably one of the few industries that is completely energy self-sufﬁcient and not dependent on coal or other external fuel sources. Every tonne of bagasse yields roughly 2.1 tonnes of steam. In the 1930s and 1940s, most factories operated on steam engines of low pressure and temperature that did not efﬁciently burn the bagasse. The steam consumption during processing came to about 65 per cent of the cane, meaning that the entire 30 per cent bagasse content was used up to meet the mill’s own requirement. But with the introduction of high-pressure, high-temperature boilers, the process steam consumption in modern sugar plants has come down to 45 per cent of cane, resulting in large bagasse savings. Thus, for every 30 tonnes of bagasse, there is 8-9 tonnes surplus available for mills to sell – especially to paper and particle board makers, who have increasingly been replacing conventional raw materials such as bamboo and wood with bagasse, wheat straw, paddy husk and other ﬁbrous agro byproducts. More recently, mills have started deploying bagasse for co-generation, i e, utilising the whole bagasse to produce steam and electricity, and supplying the surplus power to the state grid. From one tonne of cane (300 kg of bagasse or 600 kg steam), it is possible to generate anywhere from 120 units (kilowatt-hours) to 150 units, depending on the pressure at which the steam is raised in the boiler and taken to the turbine. After adjusting for 25 units of inprocess consumption by the mill and 10 per cent (12-15 units) of auxiliary consumption in the boilers and turbo-generators, bet ween 85 and 110 units of power per tonne of cane can be exported to the grid.19 Likewise, molasses is a substrate for alcohol, with every tonne of molasses producing 220 litres of alcohol. Simply put, while mills could earlier only produce and sell 100 kg sugar from processing every tonne of cane, today they can do additional business through selling 100 units of power and 9.9 litres of alcohol.20 This transition from sugar to an integrated sugar cane processing industry – a barely decade-old

Economic and Political Weekly September 29, 2007

phenomenon in India – presents ample opportunities for de-risking against downswings in the sugar cycle.

Email: harishdamodaran@hotmail.com, harvirpanwar@yahoo.com.

Notes

[Views expressed here are personal.]

1 The above details are mainly from Shahid Amin, Sugar Cane and Sugar in Gorakhpur: An Inquiry into Peasant Production for Capitalist Enterprise in Colonial India, Oxford University Press, New Delhi, 1984, pp 41-130. The ﬁrst sugar mill to have possibly been established in India was by Parry and Company in 1842 at South Arcot, Tamil Nadu. This factory, like the one of Begg Sutherland at Kanpur, essentially reﬁned gur, though derived from palmyra sap and not cane juice.

2 Amin, pp 111-13.

3 Compiled from The Indian Sugar Industry – 1939 Annual (Appendix 1, ‘List of Sugar Mills in India and Burma’), Indian Sugar Mills Association.

4 Amin, pp 215-31, 253-60. Also, see A D Pant and Bimal Kumar, ‘A Study of Socio-Cultural Processes and Inter-relationships within the Sugar Industry of Uttar Pradesh’, Govind Ballabh Pant Social Science Institute, Allahabad, 1989, pp 1-31.

5 The best work on the subject is Donald W Attwood, Raising Cane: The Political Economy of Sugar in Western India, Oxford University Press, New Delhi, 1993. The other useful reading is S M Batra, ‘Dominant Classes and Cooperative Leaders in Western Uttar Pradesh’ in B S Baviskar and Donald W Attwood (eds), Finding the Middle Path: The Political Economy of Cooperation in Rural India, Sage Publications India, New Delhi, 1996, pp 323-41.

6 Batra’s study has vividly described the working of the Baghpat cooperative mill near Meerut – how for its chairman, who happened to be the district magistrate in charge of law and order and general administration of the district, the factory job was “a minor and additional responsibility attached to his position”. Since his ofﬁce was in Meerut city, he used to visit the factory barely twice a year and “a peon or clerk takes the ﬁles to the district headquarters for his signatures”!

7 On the eve of second world war, Gokulchand Narang controlled, in all, eight factories with a combined capacity of 6,900 tcd. That put him ahead of Begg Sutherland (nine mills of 6,251 tcd), the Birlas (ﬁve mills of 5,400 tcd), Dalmia-Jain (two mills of 3,300 tcd) and Octavius Steel (three mills of 2,700 tcd). See Rajat Kanta Ray, Industrialisation in India: Growth and Conﬂict in the Private Corporate Sector 1914-47, Oxford University Press, New Delhi, 1979, pp 143-44.

8 Begg Sutherland’s three units in eastern UP (besides a fourth factory at Marhowrah at Saran in Bihar) were part of Cawnpore Sugar Works (CSWL). In 1960, it was nationalised and became an associate company of the British India Corporation (BIC), which was, by then, a government of India undertaking. By 1992, both CSWL and BIC were declared sick and referred to the Board for Industrial and Financial Reconstruction (BIFR). Most of the other mills in the Gorakhpur-Basti belt were also over time turned over to the UP State Sugar and Cane Development Corporation.

9 Compiled from Uttar Pradesh ke Ganna evam Chini Udyog ki Pramukh

Sankhyiki, Cane Commissioner’s Ofﬁce, Lucknow, 1993.

10 See Amin, pp 116-19.

11 Even in 1990-91, just 29.6 per cent of the cane output in western UP and 29.2 per cent in central UP was being crushed by sugar factories. The corresponding average drawal rate in eastern UP was 43.4 per cent. At the same time, cane yields per hectare in eastern UP (49.7) were lower than in western (63.1) and central UP (53.5).

12 The plight of the ordinary sugar cane grower of Avadh is best illustrated in Premchand’s 1936 classic, Godaan. It may be pointed out though that conditions were better for the independent jat farmer of Meerut or Muzaffarnagar, who not only grew cane, but also processed it into gur that he himself sold in the bazaar. It is interesting to note that the promoters of the early sugar mills in Gorakhpur-Basti included substantial landlords like the Majithias (Saraya) and the Raja Bahadur family of Padrauna, who started the Padrauna and Kathkuiyan units before auctioning them to Begg Sutherland.

13 For the relevant notiﬁcations, see Press Notes No 12 of May 11, 1989; No 16 of November 8, 1991; and No 12 of August 31, 1998 issued by the ministry of industry. Incidentally, the ﬁrst relaxation in the minimum distance norm to 25 km came when Ajit Singh, a powerful politician from western UP, became the union industry minister?

14 Of the 22 private mills, central UP accounted for nine, west UP seven and east UP six. The major units to have taken off during this decade included U K Modi’s Malakpur (Meerut); Mawana Sugars/Siel Ltd’s Titawi, Monnet Sugar’s Unn and Tikaula Sugar Mills (all Muzaffarnagar); the Jagran Group’s Shakumbari Sugar (Todarpur, Saharanpur); Dwarikesh Sugar’s Bundki (Bijnor); Dhampur Sugar’s Asmoli and Dewan Sugars’ Agwanpur (both Moradabad); Chadha Sugars’ Dhanaura (Amroha/Jyotiba Phuley Nagar); JK Sugar’s Mirganj (Bareilly); DSCL’s Rupapur (Hardoi) and Ajbapur (Kheri); Dalmia Cement’s Ramgarh and P K Ruia’s Kamlapur (both Sitapur); Dhampur Sugar’s (later Balrampur Chini’s) Rauzagaon (Faizabad); Simbhaoli Sugars’ Chilwaria (Bahraich); and JHV Sugar’s Gadaura (Maharajganj). These details are from Indian Sugar Mills Association, List of Sugar Mills in India, Bangladesh and Pakistan, 2002-03.

15 Although quite a few private mills have come up in Maharashtra during the past 4-5 years, they are still very marginal players compared to the cooperative societies. See Harish Damodaran, ‘Private Sugar Mills Making Inroads into Maharashtra’, The Hindu Business Line, June 6, 2006.

16 On April 28, 2005, the Appellate Body – the WTO’s highest court – ruled that the EU was subsidising sugar exports much in excess of the 12,73,500 tonnes annual ceiling committed by it in the Uruguay Round. In addition to direct shipments of four mt, it was allegedly subsidising the re-export of another 1.6 mt, equivalent to the quantities imported on a preferential basis by it from the African, Caribbean and Paciﬁc (ACP) countries and India. The Appellate Body’s decisive ruling followed two appeals and nearly two years after the case against the EU’s subsidised export regime was originally brought by Brazil, Thailand and Australia.

17 The policy was promulgated through an order dated August 24, 2004 and further amended on December 17 to give it retrospective effect from April 1, 2004. For details, see Chini Udyog Protsahan Niti 2004, cane development and sugar industry department, government of UP, Lucknow.

18 Even in rural UP households, one nowadays notices a marked tendency among people (particularly the younger generation) to use more white sugar in place of khandsari, if not gur.

19 According to information provided to us by a leading south-based miller, at 43 atmosphere pressure, about 124 units of power can be generated per tonne of cane. The generation numbers go up to 132 units, 145 units and 154 units as the pressure levels in the steam cycle are raised to 67, 87 and 110 atmospheres. Power requirement of the mill is taken at 25 units, with auxiliary consumption in the boilers and turbo-generators working out to 11.5, 12.5, 14.5 and 16.5 units at the various pressure levels. The exportable power, thus, ranges from

87.5 to 112.5 units.

20 If one assumes an ex-factory realisation of Rs 15 per kg for sugar, Rs 3 per unit of electricity and Rs 20 per litre for alcohol, the aggregate revenue from crushing one tonne of cane comes to about Rs 2,000. In the old system, the gross income would have been only Rs 1,500 from sugar plus another Rs 200 or so from molasses (at Rs 2-2.50 per kg) and Rs 90-112.50 from bagasse (at Rs 1-1.50 per kg). Apart from electricity and alcohol, there are nowadays also revenue streams from other byproducts (press-mud and spent wash) and earnings from carbon credits. Many mills have registered their co-generations projects under the Clean Development Mechanism (CDM) of the United Nations’ Kyoto Protocol. The CDM validation qualiﬁes the projects for carbon trading, involving sale of Certiﬁed Emission Reductions (CER) to utilities and similar potentially carbon-polluting buyers. Bagasse, unlike traditional fossil fuels, is categorised as a renewable energy source.

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Sugar Industry in Uttar Pradesh: Rise, Decline and Revival

Sugar Industry in Uttar Pradesh: Rise, Decline and Revival

I Evolution

Pre-1947

Post-Independence till Early 1990s

II 1990s and After

The Revival

Thirties Revisited?

Notes

EPW

Term & Policy

Circulation

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