Can Sugarcane and sugarcane-based industries change the industrial landscape of Bihar?

Almost all the districts of Bihar are sugarcane producing districts. As per the data provided by the Bihar Sugarcane Industry Department, sugarcane is grown on an area of 2.55 lakh hectare (2011-12)  (LH) [one lakh is hundred thousand) and is produced to the tune of 177 lakh metric ton (LMT), with a productivity being a mere 69.7 metric ton per hectare (MTPH). Out of the production of 150 lakh MT in 2010-11, only 34.50 lakh MT is crushed within the state and only 3.45 lakh MT of sugar is produced, with a recovery percentage of a mere 9.45%, which is quite low. 

While the sugarcane productivity in Bihar has increased in the recent times, from 50 MTPH  in 2009-10 to close to 70 MTPH in 2011-12, and is now close to the national average, which is a positive sign given the favorable agro-climatic conditions that obtain in Bihar, particularly in the North. One thing is clear from above that most of sugarcane from Bihar is  going to other States in India, and hence, the benefits of sugarcane based Industry such as sugar production, molasses production, ethanol production etc. are not being reaped by the State. The key to developing the sugarcane based Industry is to diversify its uses and encourage the value addition within the State. 

In order to promote sugar, ethanol production and power generation in the State, The Bihar Government has rightly placed the following incentive packages in place :

A. For New Sugar Mills

i. Reimbursement of Central Excise Duty on Sugar.

ii. Exemption of Purchase Tax on Sugarcane.

iii. Exemption of Stamp Duty and Registration Fees on purchase of Land.

iv. Grant of 10% Subsidy on Capital Investment (Plant and Machinery) to a maximum of Rs. 10.00 Crores, which ever is less.

B. For Distillery Units/ Ethanol Units

i. Exemption of Administrative Charge on Molasses.

ii.Reimbursement of Sales Tax (VAT) on Molasses.

iii.Exemption of Stamp Duty and Registration Fees on purchase of Land.

iv. Grant of 10% Subsidy on Capital Investment (Plant and Machinery).

C. Setting up co-generating power units

i. Exemption of Electricity Duty on Co-generated Power.

ii. Exemption of Stamp Duty and Registration Fees on purchase of Land.

iii. Grant of 10 % Subsidy on Capital Investment (Plant and Machinery).

iv. Laying of Transmission Line from Factory to the Grid Station by Electricity Board

However, the question remains: Are the above incentives enough? I do not think so. These are  just some ad-hoc measures, but will not pay us good in the long term. In order to make the sugar and ethanol industry in the state a viable option, the government has to plan for a longer term. 

Bihar can learn from the experience of Brazil, which started a program called "Proalcool" in 1970's to increase sugarcane alcohol production to be used as a substitute for gasoline. The impact of the program was such that it had replaced the vehicles fleet based on oil by those based on sugarcane-based ethanol and completely eliminated the balance of payments pressures. Today, this program has brought Brazil to such a point that the ethanol production and its commercial use as a substitute for petrol is being done totally on commercial basis. The support in the form of incentives for increasing the number of annexed distilleries, guaranteeing the distribution of this fuel to all the gas stations across the country, and increasing the demand for alcohol is no longer needed.  The adaptation in the vehicle for the use of flex-fuel engines ultimately paid off and subsidies are no longer needed. Moreover, this has reduced the environment degradation. The self-sufficiency in energy in Brazil was mainly successful because the government of the day was visionary and they created a mechanism in which the initial incentives were provided to create a market. Once that done, the market  took care of itself. Brazil now is not only the leader in ethanol production, but also is the most efficient producer of ethanol (USA, which produces ethanol from corn, is quite inefficient). 

It is to be noted that the agro-climatic conditions that exist in Bihar and Center -South of Brazil are similar. The Government in Bihar can think about studying the region so that they can adopt the same practices. In my view, if this industry could be given the initial push for the next 10-15 years, I am sure that the industry could not only be a major employment generator in Bihar, but  will also encourage various ancillary industries. The longer term benefits outweigh the initial cost of push.

Apart from the incentives already in place in Bihar (above-mentioned ones, which are basically production oriented), I would like to suggest the following:
1. The diversification of sugarcane based Industry in Bihar could be linked to that in Uttar Pradesh. The combined strength of both Bihar and UP in sugarcane production can create enough incentives for private sector to step in. This partnership is  needed in the beginning for the regulation regarding the obligatory use of ethanol as a substitute to petrol (more than 10% to start with). Both Bihar and UP can initiate the action on their own.
2. Cooperation from the UP Government could be sought in creating "green fleet" vehicles using ethanol in the government departments, by replacing all the existing vehicles with the new flex-fuel vehicles. This will create the initial captive market for car companies to produce or retrofit that many cars at least.
3. To attract other consumers, the Bihar Government may think of declaring the price of ethanol as a fixed percentage of petrol price so that the fuel bill for the ethanol-based cars/vehicles could be less than that for petrol-based cars/vehicles for similar uses.
4. The Bihar Government may provide incentive for new distribution companies so that the ethanol is made available to all the petrol stations in the State. 
5. Instead of dissipating the efforts on sugar mills spread all across the state, the Bihar Government may think of creating an agro-industrial zone in the State, where setting up a sugar mill, annexed distillery for ethanol production and captive power plants could be given not only the incentives, but also the required infrastructure (roads to link the farm to the zone and markets, initial power to start the production, training facility for the prospective workers suited for this industry etc). A cluster approach will be more efficient and hence, productive.
6. More efforts should be made to make the sugarcane plantation more efficient and also make them more compatible for both sugar and ethanol production by reducing the water content.
7. Sugar Mills should be encouraged to adopt the best practices in both sugar and ethanol production so that productivity is comparable to that in Brazil.
8. The Bihar Government may like to merge various Departments dealing with sugarcane, sugar, ethanol etc. into the one with the objective of fast tracking the development of sugarcane plantation, sugar and ethanol production, distribution, price fixation etc. Cutting the red tape would be the key to success of this program in Bihar.
9. The program must start with the vision of at least 15 years, if not more. All the incentive mechanisms should be designed in such a manner that after 15 years or so, the industry becomes self sustaining and generates enough profit for private players so that no Government support is required thereafter.

Bihar must decide now to be more ambitious on this, and not wait for direction from either  the Center or other major sugarcane and sugar producing States. Bihar must think now in creating a viable industry option, based on the resources available locally. And sugarcane-based industries could just provide that if we go in the right manner on this. 

Thanks.

The Ultimate Place

No matter how far I go,
Your love pulls me,
Always back.
No matter what I do,
You will be there,
Always in my heart.
It beats for you,
Always.
When you suffer,
It cries for you,
When you smile,
It gloats infinitely,
You are where,
I belong,
I am where you are,
You define me.
I exist from you.
The invisible cord,
That binds us,
Floats me here and there,
Gives me the chance,
To admire your beauty,
From far and wide,
And to revel,
at where I return.
In the end,
You are where,
I rest.
In your bosom.


- Rajeev

Why Bihar must support FDI in Retail?

It is very unfortunate that the Nitish Kumar government is against FDI in retail sector. Let me first reproduce what Mr. Kumar has said in his recent interview on this: "If FDI comes in infrastructure, it's okay, but not in agriculture. They want our markets. Shiny markets won't help farmers. We won't allow this in Bihar. FDI will make the farmer a slave in the end."

On the contrary, in a state like Bihar, which is mainly dependent on agriculture, if the FDI in retail is opened up, it will bring the much needed capital (not only foreign, but also the private Indian capital), technology, efficient management practices and tight supply chain. They will also entail efficiency in the movement of farm produce from farm to market and thus reduce wastage en route. In fact, Bihar at the moment should not look at it only from the consumer market point of view since average per capita disposable income in Bihar is still low (only Rs. 16, 500) and may not attract many except in big cities like Patna, Muzaffarpur etc.. There is no denying the fact that the FDI in retail is much more attractive in states like Maharashtra, Gujarat etc. as far as the consumer market is concerned  as they already have the necessary infrastructure  and the consumers there already have enough disposable income for packaged items. Once the brands like Walmart, Ikea etc. go to these states, they will definitely try to develop backward supply chains in India, in order to have a constant supply of products on their selves. Bihar, being a predominantly agricultural  state and with enough labour supply (a.k.a. Lewis model), will be the ideal choice for these big Brands to develop their supply chain in Bihar and could be one of the major sourcing hubs in India. [The only problem that I see here is power. I am sure once these Brands realize these huge benefits in Bihar, of course positively supported by the state government, they will try first to develop an effective power system themselves, either through the existing grids in the state or through their own captive plants there and then to link these non-farm activities closer to farms to the selves in Maharashtra,  Gujarat etc. by developing an effective logistics and other necessary back-end infrastructure.]  

According to one conservative estimate, more than one-third of farm produce in India goes waste because of lack of cold chains and other bad management practices. I am sure the wastage in Bihar is much larger, given the state of electricity supply, back-end infrastructure and prevalent practice of consumption directly from farms in the state. Moreover, as per a government of Bihar report, the agricultural productivity in the state, which was much higher than that in other states in 50's, is now much low. The same report also mentions that the average yield of rice (1.45 t/ha), wheat (2.19 t/ha) and maize (2.3 t/ha) is much below the potential of 5 t/ha. It is ironical that a state, rich in soil and water resources, has such a low productivity. Moreover, agriculture is the backbone of the Bihar economy. Not only it generates 42% of the state's GDP, but also employs close to 81% of its workforce. I am sure if the state welcomes the FDI in retail, the unrealized productive forces in agriculture will be unleashed and crops such as paddy, wheat, pulses, maize, potato, sugarcane, oil seeds, jute, horticulture and floriculture will get the necessary boost. The back-end infrastructure in agriculture too, such as in local level water management, may also get support from this capital. 

As far as the investment proposals in the state approved by State Investment Promotion Board is concerned, it appears that most of the investment proposals in the state are coming into educational institutions ( establishment of engineering, medical  or dental colleges), hospital and sugarcane. Good as they are, they are not touching agriculture except in sugarcane and sugarcane-based ethanol. All other crops are untouched by investment proposals. The question is how to get the other crops reach their potential in productivity. The policies since independence have definitely not worked so far. Now is the time to try newer things in these areas. The experience of foreign capital worldwide has shown that establishing an efficient supply chain that links farmers and small manufacturers directly with retailers will maximize value for farmers and minimize wastage of foods and vegetables, encourage best practices in crop management and improve food safety and hygiene. So this may lead to much needed productivity growth in Bihar's agriculture. 

In my view, Kirana stores will continue to exist and may develop different business models for feeding into these big brands. Moreover, the worldwide experience has also shown that  the modern retailers are tax-compliant and are large tax payers while Kirana stores avoid taxes. In state like Bihar where there is a need to generate more tax revenues since the state of state finances is not very good at the moment. In Bihar, the commercial tax collection is merely Rs. 6700 crores (1 crore is equivalent to 10 million), while the total expenditure by state is a huge Rs. 78, 700 crores. Despite meeting the requirements through other state tax measures  (including excise), non-tax revenue, share of state in central taxes and central grants, there is still a need of borrowing for the state to the tune of Rs. 10000 crores per anum. The government must think how to increase the tax net from the state, by including those activities which have been avoiding taxation so that deficit is manged well and debts are kept under control. One way is to make the retail in state more organized. FDI in retail could be that way.  

From the arguments above, I see the following happening in Bihar if we adopt FDI in retail sector:

1. Agriculture will get a boost; productivity across crops will rise;
2. Adoption of best farm practices in the state;

3. Non-farm sector in rural areas will develop; food processing industries will mushroom;

4. Efficiency in movement of farm produce from farms to markets;

5.Farmers' disposable income will increase; More income will mean more investment in agriculture;

6. Electricity supply in state may get an alternative source (private sector initiative);

7. State revenue will see a quantum jump;

8.Back-end infrastructure for both agriculture (better water management) and retail (cold chains) will improve;

9. The rural-urban migration will be discouraged and cities like Patna and Muzaffarpur will have some respite;
10. Logistics such as multi-modal transport system, roads (roads are already getting better in Bihar) will improve; 
11. Un-employment and underemployment will reduce; and
12. The consumers will get more choices in and better quality skin care, hair care, apparel and other consumer items at their doorsteps.

I hope this blog encourages the like-minded people in my state to convince the state government to at least look at the benefits that the foreign capital may bring to a state like Bihar. We may have more to gain than lose from this initiative. So, let us build the consensus!

Any comments (positive or negative) from the readers will be appreciated.

Thanks for reading this!