After netting the carryover subsidy from FY13, just Rs.30,000 crore is left in FY14 for fertiliser subsidies Finance minister P Chidambaram has achieved a fiscal deficit of 5.2% of GDP for 2012-13, thereby redeeming government’s commitment to contain it within the 5.3% target—though the latter, by itself, is higher than the 5.1% provided for by Pranab Mukherjee in the last Budget.
Further, true to exhortations he made during his road-shows to demonstrate that India is serious about fiscal consolidation, he has budgeted the deficit at 4.8% during 2013-14. He also intends to reduce it to 3% by 2016-17.
The achievement is more fortuitous rather than being a result of credible efforts made on ground zero. A substantial compression in Plan expenditure—helped by ‘unspent’ amount under social welfare schemes—was a major factor.
On the subsidies front, the finance minister has taken recourse to financial engineering in order to ensure that the government does not slip from the set targets. The case of fertiliser subsidy clearly brings this out. The Budget allocation for 2012-13 was R60,974 crore, consisting of R19,000 crore for indigenous urea, R13,398 crore for imported urea and R28,576 crore for decontrolled P&K fertilisers.
In line with a practice consistently followed in the past, the allocation was short of the expected requirement by a whopping R40,000 crore! After discharging carry-forward from the previous year, there was little money left for the current year.
As a consequence, payments were suspended for imported P&K fertilisers from June 2012, and to domestic manufacturers of P&K fertilisers from July 2012.
And the domestic producers of urea have not received payments from August 2012.
Thanks to the finance minister’s proclaimed zero tolerance to any slip in fiscal consolidation mission, the finance ministry even turned down the Department of Fertiliser (DoF) demand for additional funds.
Instead, the government was contemplating to arrange for a loan of around R25,000 crore from a consortia of public sector banks. It intended to pay off the loans when funds are available from the Budget for 2013-14. Industry was not enthused. In fact, a similar recourse to extra-budgetary means in 2008-09 (then also subsidy requirement was R1 lakh crore) through issue of bonds to cover deficit led to huge losses, and a case is pending in a court!
The revised estimate for 2012-13 is R65,974 crore, which includes R20,000 crore for indigenous urea, R15,398 crore for imported urea and R30,576 crore for decontrolled P&K fertilisers.
The revised estimate is a meagre R5,000 crore higher than the allocation and would still leave a gap of R35,000 crore uncovered.
The Budget allocation for 2013-14 is R65,972 crore, which includes R21,000 crore for indigenous urea, R15,545 crore for imported urea and R29,427 crore for decontrolled P&K fertilisers.
After netting carry-forward from the current year, the money available for 2013-14 would be just about R30,000 crore. This would barely cover subsidy liabilities for the first 3-4 months of the ensuing fiscal.
Come July/August 2013, fertiliser manufacturers would witness a repeat of the unprecedented liquidity crisis that they have been going through in the second half of the current year, thus bringing several plants to a brink of closure.
A near-doubling in price of domestic gas by $4 per mmBtu (million British thermal units) based on the recommendations of the Rangarajan Committee is imminent. That would increase fertiliser subsidy by R10,000 crore.
In a credible exercise, the expected increase in spending needs to be captured. But, when the government is prone to under-providing for what is already on plate, it would be far-fetched to expect it to provide a cover for some thing on way.
Therefore, the fertiliser industry better pray for the non-implementation of the Rangarajan recommendations, or at least its postponement, lest this would further aggravate their miseries.
Unlike petroleum products such as diesel and LPG where the government has taken some action on ground (calibrated hike in diesel price, complete removal of subsidy on bulk sales and a cap on LPG subsidy), in fertilisers there is not even a road-map to rein in subsidy.
The finance minister did not deem it fit to increase the urea selling price by a small 10% as recommended by the Committee of Secretaries. Reportedly, this proposal was turned down by the fertilisers minister.
The government could garner a saving of R10,000 crore annually by hiking the urea price by 60%. Indeed, this would be a win-win situation for all stakeholders, including farmers who need to use less of nitrogen for protecting their soil health.
In early 2012, a Group of Ministers had mooted the adoption of nutrient-based scheme (NBS) for urea on the same lines as for decontrolled P&K fertilisers in vogue since April 2010.
Apart from the huge saving in subsidy (under NBS, producer gets a fixed amount per tonne nutrient and price can be varied), this helps in reducing imbalance in fertiliser use, thus enhancing crop yield and improving soil health. But the proposal is more or less shelved.
The direct benefit transfer (DBT) scheme is touted as a big-bang reform of the UPA-2 government. The Economic Survey has pitched strongly for this, and exhorting this would result in better targeting of subsidies and also for plugging leakages.
Ashok Gulati, the chairman of CACP, has pointed towards the possibility of savings of up to R30,000 crore in food and fertiliser subsidy under DBT. Yet the finance minister states that these would be taken up ‘in the last’.
This gives a clear signal that fertiliser and food will not be covered by this revolutionary reform measure, at least not in the near future.
The government’s compulsion to rein in fiscal deficit is well understood. If the finance minister slips on his deficit target, international rating agencies will reduce India to ‘junk’ status with its inevitable consequences. Therefore, slippages have to be avoided.
But, it should chase targets through credible reform measures rather than recourse to under-provisioning and postponing payments, which would harm the prospects of the fertiliser industry in India and even send wrong signal to investors.
Published at http://www.financialexpress.com/news/column-a-fertiliser-plant-closing-near-you/1083656/0