Column : Price controls and fiscal cliffs

Written by Uttam Gupta | Updated: Feb 7 2013, 06:09am hrs
The department of fertilisers (DoF) is working on an arrangement with a consortium of PSBs for a loan amounting to R25,000 crore to pay outstanding fertiliser subsidy dues to the manufacturers.

Urea manufacturers receive subsidy under the new pricing scheme (NPS) to cover the differential between the cost of production and distribution, and maximum retail price controlled at a low level.

DAP and complex fertiliser manufacturers receive subsidies under the nutrient-based scheme (NBS)a fixed amount linked to nutrient content, viz nitrogen, phosphate and potash.

The budget for 2012-13 provided for an allocation of around R60,000 crore towards fertiliser subsidies. These funds were exhausted in the first 4 months of the current fiscal. DoF needs an additional Rs 40,000 crore to fully discharge its liability in the current year. However, it was unable to secure Parliaments approval even for a meagre R3,000 crore!

The finance ministry is in no mood to compromise on its commitment to rein in the fiscal deficit at 5.3% of GDP. Therefore, DoF faces a funds crunch that is getting transmitted to manufacturers.

Manufacturers of DAP and complex fertilisers have not received subsidy payments since July 2012. Payments to urea manufacturers were suspended in August 2012.

Cash flows of the fertiliser industry are squeezed to a point of affecting its ability to sustain operations (FAI has already warned of several plants having to shut down for want of money to pay for raw materials and other inputs). Payments to companies cannot be withheld any longer. Hence the recourse to banks!

DoF believes that loans would be paid off during 2013-14, when fresh allocations are made in the forthcoming budget. This is tantamount to postponing the problem!

Given the governments commitment to lower subsidies (food, fertilisers and oil) to 1.75% over 3 years, it is unlikely that DoF would in 2013-14 get an amount more than in the current year (it may even be less). Lets take R60,000 crore.

After netting carry forward from current year, funds available for meeting subsidy obligations during 2013-14 would be just R20,000 crore. And, that would get exhausted in just about 2.5 months. So, next year, the fertiliser industry should be prepared for suspension of payments from mid-June 2013. No wonder, DoF will have to go for another round of loan from banks on a much larger scale. The vicious cycle will continue.

The phenomenon is not new. During the last 2 decades or so, we have seen a consistent trend whereby the budget allocation for fertiliser subsidy was substantially lower than actual requirements. This mismatch resulted in delayed payments. As against a norm of 2 months (fixed by FICC that administers the subsidy scheme), the government wont release payments for several months extending even to more than a year.

The situation assumed crisis proportions whenever the scale of payments zoomed. For instance, during 2008-09, the actual subsidy crossed R1,00,000 crore, nearly double the budget allocation. Then, DoF issued bonds to companies. Manufacturers pledged bonds to get loans from banks. The resultant huge interest outgo dented their margins as the government did not compensate them for interest on delayed payments. This time, however, the government is reportedly thinking of sharing the interest burden with the manufacturers. Thus, it will bear a cost up to 8.5% and would expect the companies to absorb the balance.

Logically, the government should pay interest in full on delayed payment. That is because manufacturers sell fertiliser cheap on its asking and are forced to borrow as they are not paid in time.

Caught between the fiscal cliff and price control, the tussle between the government and industry is unlikely to go away too soon. Indeed, this will stay ad infinitum as long as the existing dispensation of fertiliser pricing and subsidy continues.

Despite umpteen committees recommending a roadmap for phased deregulation and removal of subsidy (HPC under Dr CH Hanumantha Rao, 1998; Expenditure Reforms Commission 2000 et al), we are yet to see any concrete policy framework, much less a roadmap. All that we see are policy changes in bits and pieces. Thus, for DAP/complex fertilisers and MOP, NBS was put in place in April 2010. For urea, in early 2012, the Group of Ministers (GoM) mooted NBS; however, this is still in the work (or may even have been shelved).

Recently, the government announced an investment policy for new urea plantsgreenfield projects and brownfield (expansion). However, this is only for the purpose of determining cost reimbursements to these plants. These plants will have to operate under the contours of extant policy dispensation. Like existing urea manufacturers, they will also be afflicted by mismatch between allocated funds and requirements.

The manufacturers of DAP/complex fertilisers, though technically decontrolled, continue to depend on subsidy payments for their viability. The suspension of payments since July 2012 has played havoc with their fortunes. The government has excluded fertilisers from the much publicised direct benefit transfer (DBT).

However, it has started a pilot project in 10 districts that aims to track fertiliser movement from the dealer to the farmer. It says this will be a precursor to the launch of DBT. Where is the connection between the 2 schemes

The raison dtre of DBT is that it would be possible to get rid of control on fertiliser pricing, distribution, movement, etc. Prices will be set competitively. The farmer will be empoweredwith money in his accountto buy the fertiliser of his choice (based on soil/crop analysis) and from a shop of his choice.

Since all manufacturers/dealers will be selling at the market-determined price and the farmers buying at that price, all questions with regard to receipt, stock, sale of fertilisers and their tracking are redundant. The government need not waste time in running pilot projects.

It should rather proceed with the dismantling of the extant pricing and subsidy regime without further delay. The more it lingers, the more damage it will inflict to our fiscal health, soil health and industry health.

Our policymakers need to change gears before it is too late.

The author is executive director, CropLife India, New Delhi. Views are personal