Delicensing of the sugar industry, an issue much talked about for over two decades, has finally been set in motion by the BJP-led government. Without doubt this is a big step towards liberalisation of the industry. There is, however, still a long way to go before market forces determine the commodity's price.

The delicensing only means that new capacities will be allowed to set up. But here lies a problem. Already excess letter of intents have been issued under the "free licensing" scheme. Over 700 such letters have so far been issued and less than 460 units have been set up.

The letters have been issued for a total capacity of 280 lakh tonnes of sugar, whereas the industry's present capacity is about 140 lakh tonnes.

One reason for additional capacities not being set up was that banks and institutions were not willing to extend loans as most of these proposed units were unviable, considering their size. There is nothing in the present announcement that will provoke the lenders to extend loans.

An important announcement, however, was allowing new units to be set up within 15 km, were sugarcane availability is not a problem. This should take care of the problem of farmers burning their sugar stocks. Allowing new units to sell their entire production in the free-sale quota is something that is already in practise and there is nothing new in the move. What was urgently needed by the industry, however, was some positive announcement on the pricing front. Unless factories keep selling 40 per cent of their production to the centre as part of levy sugar, domestic prices will continue to remain high, because manufacturers will try to recover their cost from the open market.

Subsidy on DAP

The centre's announcement to increase the subsidy on di-ammonium phosphate (DAP) from October has fallen short of industry expectations. The phosphatic-fertiliser industry, which has been awaiting the revision since April, had expected the price support to increase from Rs 2,000 per tonne to Rs 3,500 per tonne on imported DAP and from Rs 3,500 per tonne to Rs 5,500 per tonne on indigenous DAP. The government has, however, fixed the subsidy at Rs 2,500 per tonne on imported DAP and Rs 4,000 per tonne on indigenous DAP. The ceiling on DAP's retail price, which is at present fixed at Rs 8,300 per tonne, has also been done away with till March 2000.

The rupee depreciation has led to an increase in input costs as the main raw material -- rock phosphate -- is almost entirely imported and as there is a ceiling on retail prices, most domestic DAP producers have been witnessing negative contributions.

As a result, several producers have either cut production or restricted supplies into the market and, therefore, the fertiliser is in short-supply. While the announcements will help increase the availability, DAP prices will rise by at least Rs 1,000 per tonne. DAP prices are already at high levels compared to urea, and this has contributed to a progressive decline in its consumption.

While total consumption in 1991-92 was 4.5 lakh tonnes, consumption in the previous year was about 3.6 lakh tonnes, a decline of 20 per cent. In the same period, urea consumption had gone up progressively from 14 lakh tonnes to around 19 lakh tonnes, an increase of 35.71 per cent. As a result, the NPK ratio has been worsening and this should be a cause for concern. The policy should, therefore, be directed towards encouraging the use of phosphatic fertilisers like DAP. The recent announcements, however, appear to be directed at the opposite end.

Not increasing the price support in line with industry expectations and removing the price ceiling will lead to a lower subsidy bill. But the higher DAP prices, that will result from these announcements, will discourage its use, thereby further worsening the NPK ratio and will lead to poor soil conditions in the long run.

Finolex Cables

Finolex Cables has sought shareholders' approval to either hive off in full or in part or lease up to 31 per cent of its jelly-filled telephone cables capacity to a wholly-owned subsidiary -- Finolex Telecommunications -- a private company.

The reason given is improvement in capacity utilisation. A close look at the department of telecommunication's tendering process reveals a yet more important reason -- one that has not been revealed by the company itself.

As the 20 lowest bidders (highest quantity to the lowest quote) are given the order, bidding by two companies instead of one would result in a greater share of orders. What the shareholders would probably want to know is whether this move will improve the holding company's cash flow? Probably not.

Though the payment is through a letter of credit, it is on deferred credit (spread over five years in quarterly installments) resulting in a strain on working-capital finance. The subsidiary will have to be funded to a great extent by the parent. As the subsidiary is fully owned, selling of assets to it will be meaningless. Leasing of the capacity to the arm also makes little sense as Finolex Cables has very little unabsorbed depreciation. It has been paying 31 per cent tax for the last two years and it will receive taxable lease rentals. Dividends from the subsidiary will also be negligible. For the last two years, the telephone-cable division has operated at barely 50 per cent capacity and the proposed move is a desperate attempt to present a better performance but this too may not work.

(With contributions from Shishir Asthana, Sarad Saraf and Urmik Chhaya)