The burdensome return of fertiliser subisidy spurt
The government has to foot a bill of Rs 28,200 crore this fiscal from fertiliser companies through which it routes the fertiliser subsidy for farmers, a major increase from the Rs 17,200 crore estimated last Budget.
By KG Narendranath, TNN |
NEW DELHI: The government has to foot a bill of Rs 28,200 crore this fiscal from fertiliser companies through which it routes the fertiliser subsidy for farmers, a major increase from the Rs 17,200 crore estimated last Budget.
For the government bound by the fiscal prudence policy, this is rather disconcerting, given that in recent years, especially 2002-03 and ���03-04, the growth in the subsidy bill had been slowing down. The finance ministry has already released Rs 22,400 crore as fertiliser subsidy this fiscal with supplementary budgeting of Rs 5,200 crore.
The department of fertilisers has, however, estimated a subsidy requirement of around Rs 34,000 crore for the whole fiscal, including arrears of Rs 6,000 crore. The explanation for the additional amounts the government has to expend is lucid ���high input prices which jacked up the production cost of fertiliser producers. With crude prices remaining high for most part of the year, feed-stocks like naphtha, gas and fuel oil turned dearer.
Since around 65% of urea produced in the country is gas-based, the limited availability of this feedstock under the administered pricing mechanism forced the fertiliser units to buy largely from the open market at much higher prices. Rock sulphate and phosphoric acid, inputs for phosphatic fertilisers, which are largely imported, have also been more expensive this year.
Outside the restrictive confines of politics, the government has taken a few steps to contain the subsidy expenditure in recent years, a move which resulted in a deceleration in trend growth of aggregate absolute subsidy amount, which showed up as a marginal decline in subsidy to GDP ratio.
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Unable to curb the growth in the explicit food subsidy, the strategy has been to quietly weed out subventions hidden in the provision of social and economic services and curb the growth in two explicit subsidies ��� fertiliser and petroleum ��� through calibrated price increases. Therefore, total Central subsidies, which as a proportion of GDP amounted to 4.25% in 2002-03, declined in that relation to 4.18% in ���03-04. Explicit subsidies, which form about 40% of this, too showed signs of growth deceleration from 1.8% of GDP during ���02-03 to 1.7% in ���03-04.It may be noted that fertiliser subsidy had grown steadily from Rs 4,389 crore in 1990-91 to a high of Rs 13,800 crore in ���00-01 since when it declined to Rs 12,595 crore in ���01-02 and further to Rs 11,797 crore in ���03-04. Fertiliser subsidies form roughly a quarter of the explicit subsidies provided by the Central government.
Unless the new acceleration is promptly reversed, the efforts to control subsidy expenditure could go haywire. This is more so, given the fact that it is even harder to pare food subsidies. It was believed that the decline in the trend growth of fertiliser subsidy noted since 2000-01 would somewhat neutralise the increasing trend in food subsidies.
The government has no legal or moral right to deny the disbursements to fertiliser companies. The companies have no obligation to suffer losses or bear the burden of selling fertilisers at below their cost prices because the government wants to subsidise the farmers. The delay in disbursing the money to the fertiliser companies is also untenable, as the government does not in any way pay for the interest costs on capital.
Many fertiliser producers are facing a liquidity crunch, which could restrict their ability to produce the fertilisers. It may be noted that comprising the ���reasonable margin��� (which the government determines) for the producers and the trade, the cost of urea to the consumer should be about Rs 9,500-10,000 a tonne. As against this, the fertiliser is made available to the farmer at a price of Rs 4,830. That is, market realisation is less than 50% and the balance is subsidy.
What are the options before the government to address the issue of disconnect between the average farmer���s purchasing power and the right of the fertiliser manufacturers to run their operations according to the market forces? One option could be that government gives the subsidy directly to the farmers.
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That a pilot scheme for this, run in select districts, has not been a resounding success is not reason enough to dismiss this option. The scheme could be streamlined, improved and adopted across the country. A senior functionary of a fertiliser major told ET that they would rather have key inputs at low prices than haggle with the government for release of subsidies.
���If we get gas at $3.5, we don���t need any subsidy,��� he said. For sure, operating and running costs of India���s fertiliser companies are globally competitive and it is the high input costs that hit them. With the prospects of increased availability of gas domestically (thanks to the gas finds of Reliance, ONGC and GSPC), a solution might not be difficult to find.
Fertiliser companies are planning alliances to set up units abroad in an effort to cut input costs. Co-operative major Iffco has explored the option of owning raw material bases in foreign countries. It has acquired rock phosphate mines in Egypt. These trends could be buttressed in the coming months. The government���s joint venture urea unit in Oman has helped it to source urea at lower cost, but since the buying rights rest with the government, fertiliser industry is hardly a beneficiary.
Rationalisation of urea price subsidy will have a salutary impact on balanced application of NPS fertilisers. Subsidies are, of course, the converse of indirect taxes and have defined ends. Unless they are targeted and contained, it would be a slur on fiscal rectitude.
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