Subsidy pangs

Against an actual requirement of Rs 34,000 crore, Budget 2007-08 has set apart only Rs 24,450 crore for fertiliser subsidy.

For the fourth year in a row, the Central Budget has not provided adequate funds to fully reimburse fertiliser subsidy to the industry. Against the actual requirement of Rs 34,000 crore, Budget 2007-08 has set apart only Rs 24,450 crore for fertiliser subsidy.

The unpaid subsidy arrears have steadily been mounting in the past years. These rose from Rs 3,800 crore at the end of 2004-05 to Rs 6,000 crore in 2005-06, and further to Rs 12,000 crore in 2006-07.

Since Budget 2007-08 too has kept the allocation for fertiliser subsidy at the same level as the previous year's revised estimate, the carried-forward subsidy arrears at the end of the year are set to swell further, fertiliser industry sources feel.

"In the next financial year, the subsidy payments to the industry, which may begin from around late-April or early-May, are likely to end by August on the exhaustion of budgeted funds," according to the Fertiliser Association of India (FAI).

The subsidy due on the fertilisers sold after August may, therefore, be carried forward to the next financial year unless, of course, additional resources are not allocated for this purpose through supplementary grants.

Finance minister P Chidambaram, in a tacit acknowledgement of this problem, said in his Budget speech: "I had budgeted Rs 17,253 crore for fertiliser subsidies in 2006-07. According to revised estimates, this will rise to Rs 22,452 crore, and there is a demand for more money." But despite this admission, the Budget has earmarked only Rs 22,450 crore for fertiliser subsidy in the next financial year.

The financial constraints due to delayed subsidy payment and flawed policy environment have eroded the investment worthiness of the fertiliser industry. As such, no fresh capacity addition has taken place in the urea sector since 1999, barring some marginal addition through revamping of a couple of existing plants.

The foreign direct investment, which is pouring in large measure for various other industrial segments, is not coming to the fertiliser industry. In fact, some foreign investors who had evinced interest in the past have off-loaded their investments, according to the FAI.

As a result, the urea production capacity that is actually operative has declined in the past few years due to idling of a number of plants and the closing down of some other units. The capacity utilisation in the di-ammonium phosphate (DAP) sector, too, has dropped due to prolonged uncertainty over pricing norms.

While fertiliser output is on the slide, consumption has been on the upswing. The combined consumption of all three major plant nutrients (nitrogen, phosphate and potash) grew by 9.5 per cent in 2004-05 and 10.6 per cent in 2005-06.

In the current year, too, consumption is expected to rise further by at least 8 per cent. On the other hand, the domestic production of urea is estimated to have dropped by about 4 per cent between April and September 2006 compared to the same period of the previous year.

Consequently, the import of urea is reckoned to touch a record 5 million tonnes in 2006-07, against a mere 2 million tonnes in 2005-06. The import of phosphatic fertilisers, largely DAP, is also likely to rise to 3 million tonnes from 2.4 million tonnes in the previous year.

Larger imports are also contributing to the spurt in the subsidy bill as the landed cost of imported fertilisers is far higher than the production cost of indigenously produced fertilisers.

The present prices of imported urea, for instance, are around $330 a tonne (C&F), roughly over Rs 14,500 a tonne, against the weighted average cost of locally manufactured urea of around Rs 10,500 a tonne. The industry claims that it can produce urea at the even lower cost of Rs 7,000 a tonne, provided adequate gas is made available to it at reasonable prices.

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SNIPPETS

Right hands

Finance minister P Chidambaram has conceded the demand from a large section of the fertiliser industry to pay the fertiliser subsidy directly to the farmers without using the industry as a conduit to deliver it to them.

While asserting in his Budget speech that fertilisers should be subsidised, he said: "We must find an alternative method of delivering the subsidy directly to the farmer."

He added that the fertiliser industry had agreed to work with the fertilisers department to conduct a study and find a solution. Based on the report, the government intended to implement a pilot programme in at least one district in each state in 2007-08.

This announcement has generally been hailed by the fertiliser industry, as such a move would erase the common impression that the subsidy was being paid to the fertiliser industry because of its inefficiency.

The industry feels that it had only been performing the government's job in reaching the subsidy to the farmers. In the process, the industry is incurring an additional financial burden as it first passes on the subsidy amount to the farmers and then waits to get it reimbursed after a long gap of time. The cost of interest on the borrowed capital is borne by the industry.

Noted agricultural expert M S Swaminathan has suggested that fertiliser subsidy should be provided directly to the farmers through smart cards, so that they can buy the needed macro and micro nutrients depending on the soil health of their fields.

Low consumption

Despite impressive growth in fertiliser use, especially since the green revolution of the late 1960s, the country-wide average per hectare consumption of fertilisers in India (less than 100 kg) is far lower than its neighbouring countries like Bangladesh (157 kg), Sri Lanka (120 kg) and Pakistan (109 kg).

Notably, the bulk of the fertilisers are consumed in just five states and in a fewer number of crops. Over half of the total nutrient consumption is accounted for by Uttar Pradesh, Andhra Pradesh, Maharashtra, Punjab and Karnataka. Among crops, paddy, wheat and sugarcane consume most of the fertilisers with some going to cotton and groundnut.