Band-aid solutions won't work

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Band-aid solutions won't work

The cost of supplying fertilisers has increased due to a hike in cost of feedstock/raw materials, rupee depreciation, capital cost, transport and so on

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 fertiliser subsidy in the year 2016-17. It also approved that, in future, Department of Fertilisers (DoF) would avail the SBA with concurrence of Department of Expenditure (DoE).

Faced with fertiliser subsidy arrears of around Rs 35,000 crore by end of financial year 2016-17, Union Minister for Chemicals and Fertilisers,  Ananth Kumar had in January, 2017 sought from the Finance Ministry SBA for Rs  20,000 crore. Against this, DoF was allowed to raise a loan for Rs 10,000 crore. 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) for Rs 14,000 crore to meet subsidy claims for 2013-14  with condition to bear interest liability for an interest rate of 8 per cent (maximum G-Sec rate). 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 7,000 crore under SBA to pay for fertiliser subsidy arrears for 2014-15. During 2017-18 also, a substantial amount will have to be raised 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, Union Government directs manufacturers/importers to sell fertilizers (urea — primary source of nitrogen (N) — and 22 complex fertilisers which offer N, phosphate (P)  and potash (K) under different ratios) at low price unrelated to cost of production/import and distribution which is higher. The excess of cost over the price is reimbursed to them as subsidy. The payments are made from its regular budget.

The cost of supplying fertilisers has increased due to increase in cost of feedstock/raw materials, rupee depreciation, capital cost, transport, handling and distribution besides cascading effect of taxes and duties. On the other hand, their selling price has either remained more or less unchanged (urea) or increased at a much slower pace (complex fertilisers). Together with increase in production and import, this has led to ever increasing subsidy payments.

At the same time, budget allocation has invariably remained inadequate leading to arrears year-after-year. The problem is over three decades old. Whereas in the 90s, the arrears used to be in hundreds of crores, in the 2000s, it is in thousands of crores. According to FAI, the industry has to bear about Rs 4,000 crore annually as interest costs. The provision for SBA is not of much help. This is because the loan is made available only after a time lag from the date subsidy becomes due (for instance, Rs 10,000 crores loan to pay arrears for 2016-17 was given towards the end of the year). For that period, manufacturers have to fund on their own and bear interest cost entirely. Even from the date SBA loan is available till it is paid off, they suffer loss due to disallowance of interest in excess of rate on G-securities.

The arrangements such as SBA (or ‘fertiliser bonds' issued in 2008-09 when subsidy had peaked to over Rs 100,000 crores) are like band-aid for a problem that is generic. This has to do fundamentally with grossly inadequate provision in the budget vis-à-vis the requirements. It can be addressed either by taking steps to rein in subsidy or making sufficient provision. 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 fertilisers subsidy has borne the brunt due to inadequate provision in the budget.

(The writer is a freelance journalist)

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