The Cabinet Committee on Economic Affairs (CCEA) has accorded the ex-post facto approval for special banking arrangement [SBA] for Rs 10,000 crore for payment of outstanding claims on account of fertilizer subsidy in the year 2016-17. It also approved that, in future, Department of Fertilizers [DoF] would avail the SBA with concurrence of Department of Expenditure [DoE].
Faced with fertilizer subsidy arrears of around Rs 35,000 crore by end of financial year 2016-17, the union minister for chemicals and fertilizers Ananth Kumar had in January, 2017 written to the finance minister asking for SBA for Rs 20,000 crore to provide loan to cash starved fertilizer companies at reasonable rates. Against this, Department of Fertilizers [DoF] was allowed to raise a loan for Rs 10,000 crores. The mentioned approval is against that loan. This is not a one-off arrangement.
In November 2014, in reply to a question in the parliament, the government had informed about making SBA with a consortium of public sector banks [PSBs] to raise short term loans against the fertilizer subsidy receivables with condition to bear interest liability for an interest rate of 8% [maximum G-Sec rate]. An amount of about of Rs. 14,000 crore was raised to meet outstanding subsidy claims for the year 2013-14. The interest over and above the G-Sec rate was borne by the fertilizer companies.
Likewise, in 2015-16, the DoF had raised loan of Rs 7000 crores under SBA to pay for fertilizer subsidy arrears from 2014-15. During 2017-18 also, a substantial amount will have to be raised [some time towards the end] as the budget allocation of Rs 70,000 crores is short of the requirement by about Rs 35,000 crores [according to Fertilizer Association of India].
Keeping subsidy payments pending for long is not a healthy practice. It squeezes liquidity of manufacturers thereby impairing their ability to maintain production besides interest cost on working capital needed to fund subsidy receivables. It encroaches on limited funds of banks which could be better used elsewhere. What is the genesis of problem? Can it be prevented? What is the way forward?
Under subsisting arrangements, the union government directs manufacturers/importers to sell fertilizers [urea – primary source of nitrogen (N) – and 22 complex fertilizers which offer N, phosphate (P) and potash (K) under different proportions] at low price unrelated to cost of production/import and distribution. The excess of latter over the former is reimbursed as subsidy to manufacturers/importers. The payments are made from its regular budget.
Over the years, the cost of supplying fertilizers has increased due to increase in cost of feedstock/raw materials used in making fertilizers, rupee depreciation, capital cost, transportation, handling and distribution etc. On the other hand, their selling price has either remained more or less unchanged [urea] or increased at much slower pace [as in complex fertilizers]. Together with increase in consumption, this has led to ever increasing subsidy payments.
At the same time, budget allocation has always remained inadequate leading to arrears year-after-year. The problem is over 3 decades old. Whereas, in the 90s, the arrears used to be in hundreds of crores, in the 2000s, the magnitude is in thousands crores leading to serious liquidity problems and associated interest cost. The industry has to bear about Rs 4,000 crore annually as interest costs.
The provision under SBA for the government picking the tab for interest cost is not of much help. First, the loan under this arrangement is made available only after a time lag from the date subsidy becomes due. During that period, the interest cost of financing subsidy receivable remains uncovered. Even from the date loan is available till it is paid off, the manufacturer suffers loss due to dis-allowance of interest in excess of the rate on G-securities.
The arrangements such as SBA are like band-aid for a problem that is generic in nature. This has to do fundamentally with grossly inadequate provision in the budget for fertilizer subsidy vis-à-vis the requirements. It can be addressed either by taking steps to rein in subsidy or making sufficient provision in the budget. Unfortunately, successive political dispensations have addressed neither.
On the requirement side, neither they made efforts to reduce the cost nor to bring up selling price [this has a lot to do with vote-bank politics that has played out full throttle especially with respect to the price of urea] to a level anywhere near the cost. At the same time, the compulsions to keep fiscal deficit within the set target have led governments to put artificial cap on expenditure and fertilizers subsidy has borne the brunt due to inadequate provision in the budget.
That Modi – government has no intent of addressing the causes behind galloping subsidy is also corroborated by its decision in 2015 under the so called “Comprehensive New Urea Policy” [CNUP] to continue with the extant new pricing scheme [NPS] and freeze maximum retail price [MRP] of urea at existing level for 4 years – both having the effect of unsustainable increase in fertilizer subsidy.
Unable to address the root cause, the political establishments including NDA led by Vajpayee [1998-2004] have continued with band-aid. Modi too has continued with this short-sighted approach. The status quo will continue as is evident from the decision of CCEA to authorize DoF to avail of loan under SBA with the concurrence of DoE thereby obviating the need to come to the Cabinet again and again.
Meanwhile, Ananth Kumar has talked of rolling out direct benefit transfer [DBT] of fertilizer subsidy from 2018-19 after the trial runs – currently under way in 16 districts are done. This is inconsistent with the decisions under CNUP mentioned above. Those decisions mean that the government will continue to give subsidy through manufacturers till March 31, 2019, whereas DBT requires direct transfer to the account of farmers. You can’t have both at the same time.
After DBT is put in place, while there is a less chance of reining in subsidy, government will have no escape from having to make adequate provision in the budget and timely payments or else, it will run the risk of inviting the wrath of farmers [unlike existing dispensation under which the industry has no other option but to live with the pain of delayed and even short payments].
Given this fear and fiscal consolidation road-map from which the government cannot digress come what may, no wonder, it may not be interested at all in latching on to DBT [notwithstanding pronouncements to this effect ad infinitum by Modi, Jaitely and Ananth Kumar] at least till the next general elections.