Fertiliser Association of India (FAI) has filed a petition in Delhi High Court (DHC) seeking compensation for losses incurred on ‘fertilizer bonds’ that were given to fertilizer manufacturers in lieu of subsidy during 2007-08 & 2008-09.
These bonds were valued at Rs 27,500 crores accounting for 20% of subsidy payments during those 2 years. According to FAI, loss is estimated at Rs 3500 crores. About 50% of loss was on sale of bonds worth Rs 11,795 crores to RBI.
Why were these bonds issued? What is their nexus with subsidy? What prompted companies to sell these? To unravel these questions, we need to look at ‘genesis’ of subsidy.
Government of India (GOI) controls MRP of urea at a low level un-related to cost of supply (domestic production and import) which is higher. The excess is reimbursed to manufacturers as subsidy under NPS (new pricing scheme).
GOI also gives subsidy to manufacturers of ‘decontrolled fertilizers’ viz., DAP, other complex fertilizers, MOP and SSP (single super phosphate) under NBS (nutrient based scheme) to enable them reduce sale price to farmers.
Under these schemes, Government has an inherent commitment to compensate manufacturers ‘in full’ the loss that they incur due to former’s directive for selling at target price. This is an arrangement ‘unique’ to fertilizers.
These essential features were embedded in erstwhile ‘unit-wise’ RPS (retention price scheme) 3.5 decades back for urea in 1977 and DAP/complex fertilizers in 1979. These were driven by overriding need to reconcile conflicting interest of farmers and producers.
Government wanted to give fertilizers to farmers at prices they could ‘afford’ so that their use increased leading to higher food production. Yet, it wanted that producers got a price to fully cover cost and earn reasonable return.
Based on a ‘minority’ view in recommendation of Marathe Committee (1976), the unit-specific RPS was designed to encourage production from all plants each differing from other in regard to feedstock, location, vintage, size, technology etc.
It was intended to be a ‘pooling’ mechanism whereby plants whose retention prices (RP) was lower than realization from sale at controlled price would contribute to pool. And, units whose RP was higher would receive money.
This was not just theoretical. During initial years, RP of some plants viz., GSFC, Baroda; IFFCO, Kalol; HFC, Namrup were lower than MRP. The money collected from them was used to cross-subsidize others with higher RP.
But, an inflationary environment (mentioned plants faced a gas price hike of 400% in 1987) and MRP almost frozen in the 80s,this ‘self-funding’ character of the scheme could not sustain.
Fertilizer subsidy increased from Rs 266 crores in 1977-78 to Rs 4389 crores in 1990-91. By this time, all plants had their RPs higher than realization from selling and thus, received subsidy from GOI.
When, economic reforms were initiated in 1991, Government took on to itself the task of ‘fiscal stabilization’. A major plank of this was to cut subsidy on fertilizers. A commitment was given to IMF to eliminate in 3 years.
Increase in MRP by 30% (July 1991), decontrol of P & K fertilizers (Aug,1992) & removal of subsidy, elimination of customs duty (CD) and import of fertilizer raw material/intermediates at lower official rate under then dual exchange regime, rationalization of railway freight, etc were some steps taken based on JPC recommendations.
But, momentum was short lived. Subsidy on P & K was resurrected under a new incarnation viz., ‘concession’ (Sept, 1992); full convertibility of Re (1993); CD revived (1999) even as administered prices of feedstock/fuel and rail freight were raised brazenly and consistently. Concurrently, MRPs were kept low.
Successive political dispensations at the helm neglected the prime factors contributing to increase in subsidy. By 1998-99, it had crossed Rs 10,000 crore and by 2008-09, it had almost hit Rs 100,000 crores. During 2012-13, this is projected to be Rs 1,02,207 crores (as per MoS for Fertilizer statement in Parliament).
Yet, subsidy reduction ‘per se’ syndrome refused to go away. During last 2 decades or so, mandarins in Finance Ministry have taken recourse to financial engineering that involved inter alia under-provision in Budget & postponing payments.
Whereas, in 90s, under-provision used to be in Rs 500–2000 crores range, in first decade of 21st century and now in to second, these run in to several thousand crores!
In 2008-09, actual requirement at Rs 96,603 crores was almost ‘double’ budget allocation. In 2011-12, against provision of Rs 49,998 crores, revised estimate (RE) was Rs 67,199 crores. In 2012-13, requirement was Rs 41,233 crores more than allocation.
Under-provision leads to suspension of payments, liquidity crunch and pushes plants to brink of closure. In 90s, manufacturers faced suspension in last quarter of a fiscal. Now, this happens much earlier e.g., start of second quarter in 2012-13!
To stave off pressure, Government gave bonds. A bond is a certificate to repay borrowed money after specified period (15-18 years in instant case). This tantamount to postponing subsidy payment ‘indefinitely’.
Caught between deep sea and devil, companies sold bonds at huge discount to generate cash badly needed to run business. Whether or not industry will be able to recuperate this loss? That is for court to decide.
But, bigger problem is under-provision in budget that has become endemic. This will not go away unless ‘CAUSES’ of increase in subsidy are addressed upfront.
Eventually, Government intends to switch over to direct cash transfer (DCT) though for now it is not on radar. However, it would be naive to think that under DCT dispensation, subsidy will ‘automatically’ come down.
Subsidy depends on cost of production & distribution on one hand and selling price on the other. If, Government sticks to current urea MRP and gas price is doubled, there is no way subsidy can be reined.
If you don’t wake up now, substantial under-provision in budget will persist and consequential suspension of payments to farmers under DCT would lead to greater chaos!!