Sugar cooperatives in India are the perfect example of a sweet dream turned sour. They have been the backbone of India's sugar sector. Once upon a time they were raking in money like a Shylock-managed company. But, thanks to mismanagement and corruption, the cooperatives are on its death bed now.

Take the case of Maharashtra, the land of sugar cooperatives. They contribute 95 per cent of the total sugar produced in the state, making private sector's presence almost insignificant in the state. The first sugar cooperative in Maharashtra was formed by Vithalrao Vikhe Patil in 1950 to resist the uncouth exploitation of farmers by money-lenders and private mill owners. Patil brought together sugarcane farmers of 44 villages in Ahmednagar district in western Maharashtra and formed Asia's first cooperative sugar factory.

At that time, extracting sugar from cane was so expensive that most of the farmers preferred to convert it to jaggery, which resulted in a glut of jaggery in the market. The cooperative changed this situation by assuring the farmers of off-take of their produce at a reasonable price. The unique aspect of the cooperative movement was that a farmer with a small landholding is also given the same status of a shareholder.

Situation has changed down the years. What is ailing the sugar cooperatives now? Ask Prakash Naiknavare, managing director, Maharashtra State Co-operative Sugar Factories Federation Ltd. He said: "A major problem being faced by the cooperative sugar sector is unprofessional management, lack of foresightedness and absence of decision-making process.

The decision-making is delayed because of the high number of people involved in the process. Another issue is that of vagaries of nature. Sugar industry is grossly governed by natural vagaries and the infamous sugar cycle of two years surplus followed by one year of shortage."

Biggest problem the sugar industry facing today is surplus production -- from 10 lakh tonnes in 1950 to over 200 lakh tonnes at present. While consumption of sugar is increasing at a steady pace of 4 to 5 per cent per annum, it does not match the increase in production. As a result, prices of sugar have been steadily sliding this year. In three months' time -- from January to March this year -- sugar prices crashed from Rs 1,800 to Rs 1,300 per quintal.

"We are facing the problem of plenty. It is unprecedented. Today, the price of cane is more than the price of sugar and this has never happened before," says S L Jain, director-general of Indian Sugar Mills Association. The impact of the price crash will ultimately be felt by sugarcane farmers. As mills run into losses, payment to farmers will be delayed. Then, cane planting will go down and crop patterns will change. As a result, farmers will be forced to shift to other crops, causing shortage of sugar.

In a bid to rescue the sugar sector, the government recently lifted the ban on exports and decided to create a buffer stock. But, lifting the ban on exports came at a time when global prices had crashed. So, despite export subsidy, sugar mills were not able to ship the commodity to other countries at a competitive price.

While sugar production has increased in the last decade, domestic sugar consumption has grown at a sluggish pace. This has led to accumulation of stocks with sugar mills which affected prices. This is one of the main reasons why the margins are under pressure. This is also true to the global sugar scenario and thus to prevent imports at low global prices, the government has a high tariff protection in place.

This situation can be rectified if the government encourages exports. While India is the third largest sugar producing nation in the world, it is only the seventh largest exporter of the commodity for 2005-06 fiscal. India produces around 20 million tonnes of sugar and exports just one million tonnes. The per capita consumption stands at 18 kg, much lower than 59 of Brazil, which is the largest producer and exporter of sugar.

"The main reason why we are not able to exploit the export potential is that we mainly produce plantation white sugar, which is not in much demand in the global market. There is virtually no demand for our sugar. Many countries have started to export raw sugar and then set up their own refineries to process it. Thus, we are unable to capture the export market," says Jain.

This year, Maharashtra government announced an export subsidy of Rs 1,000 per tonne, which is over and above the export subsidy of Rs 1,350 a quintal announced by the Central government. The subsidy is for exports up to 10 lakh tonnes.

However, the subsidy came at a time when global markets had crashed, causing losses to sugar mills and farmers. In India, sugar is under the purview of Essential Commodities Act, 1955, which means that the government controls sugar capacity additions through industrial licensing and determines the price of sugarcane and the quantity that can be sold in the open market.

Sugar export is governed by Sugar Export Promotion Act, 1958, which stipulates that the government can use 20 per cent of the country's total production for sale abroad. Import of sugar or export is mainly resorted to when there is a mismatch in domestic sugar production.

While Brazil also records a high sugar production, the Latin American country is not facing the problem of carry-over stocks since it is producing biofuel ethanol from sugarcane. Brazil is currently the largest producer of ethanol (around 45 per cent available in the market).

If you want to learn a lesson from Brazil, biofuel is a growth opportunity for the sugar industry in the country. Thanks to 'votebank' politics, sugar decontrol has been put on hold for a long time now.

Recently, the Union Cabinet decided to constitute an expert group to look into ways and means to free the sugar sector. However, sugar sector is already in partial decontrol mode. The government had announced complete decontrol of the commodity by March 2003, but the decision was deferred to October 2005. Still, restrictions on the commodity continue.

One of the major hurdles faced by sugar mills today is levy system, which basically means that mills are expected to surrender 10 per cent of their production to the government at prices below the market rate. This sugar is used by the public distribution system.

Second restriction is 'free-sale quota'. After surrendering 10 per cent of output as levy, the remaining 90 per cent is sold by mills in a restricted marketing environment. The government releases what is called monthly free-sale quota to mills to be sold within stipulated time-frame.

Levy system and free sale quota system are believed to be restricting the growth of sugar industry. The decontrolled environment is likely to help sugar industry record a more robust growth. "We have to explore new markets for exports. The Union government has to encourage production of ethanol and other energy-related byproducts of sugar," says Jain.