The focus of the policy package announced last week was phosphatic and potassic fertiliser, both of which were officially decontrolled years ago, but kept de facto under government pricing control. And so the government has now announced a new concession (read subsidy) scheme for phosphatic and potassic fertiliser, a nutrient-based subsidy for complex and mixed fertilisers to bring down their cost, and rationalisation of the freight subsidy to facilitate fertiliser supply to remote areas. Besides, the government has done well to bring under the subsidy scheme triple super phosphate and ammonium sulphate, which had illogically been kept out of the subsidy regime. The decision to create a buffer stock of 350,000 tonnes of di-ammonium phosphate (DAP) and 100,000 tonnes of muriate of potash (MOP) is also a move in the right direction, as this reduces the risk of shortage at sowing time.
The new subsidy scheme for phosphatic and potassic fertiliser, stipulating compensation to domestic manufacturers on the basis of the import parity price, ends the uncertainty that has prevailed on this issue after the last pricing policy lapsed in March. Though the price parity move, aimed at promoting competition, may not go down well with indigenous DAP producers who want a comparative advantage, it does rationalise the concession pay-out and fulfil a World Trade Organisation (WTO) requirement. The new scheme also introduces an "outlier" concept under which importers contracting phosphatic and potassic fertiliser at prices lower than the industry's collectively bargained average import prices, will be entitled to retain 65 per cent of the price difference, the balance 35 per cent going to the government. However, whether individual buyers can succeed in securing supplies at lower than the collectively negotiated price in a rapidly rising global market is in doubt. In any case, the rally in fertiliser stock prices suggests that the policy package has been received well.
While all this is fine as far as it goes, the net saving on the subsidy bill for phosphatic and potassic fertiliser will be only Rs 1,163 crore, which pales when compared with the outstanding dues of around Rs 30,000 crore, including about Rs 20,000 crore that has accrued in the first quarter of the current financial year. What is also disquieting is that the budgetary provision for the fertiliser subsidy is grossly inadequate, so arrears on subsidy payments will continue to rise as long as farm-gate prices remain unchanged. What this means is that up to 85 per cent of the production and import cost will be borne by the government. It should be obvious that this is not sustainable. But the government's position seems to be that it cannot raise fertiliser prices and upset farmers, and it does not want to show a larger fiscal deficit by recognising the full amount of subsidy that should be paid out this year. In short, this is not a policy package that will end the investment drought that has prevented any new fertiliser capacity coming up for the last decade and more.