Sources in the ministry indicated that the interim arrangement will help cash-strapped fertiliser firms to stay afloat by borrowing funds from public sector banks at lower rates. Under the plan, the fertiliser firms are going to raise loans guaranteed by the government against the subsidy receivables. The finance ministry is expected to share about 8-9% of the interest burden on loans and the remaining will be borne by fertiliser firms, a ministry official said, requesting anonymity.
This arrangement would also help the finance ministry keep the fiscal deficit under check in 2012-13, as the loan repayment is likely to spill over to the next fiscal. The government is already hard-pressed to stick to its upwardly revised fiscal deficit target of 5.3% by the end of March 2013, as higher-than-expected expenses and lower-than-expected revenues derail its fiscal maths.
IFFCO managing director US Awasthi said: It is very difficult for the finance ministry to provide subsidies to the companies for the next six months. The interim proposal will certainly help the companies since the borrowing cost will get reduced by the part interest shared by the ministry. Most fertiliser companies are affected adversely by late subsidy payments and have reported losses, said Fertiliser Association of India secretary general Satish Chander.
The stressed companies are finding it difficult to sustain operations. Subsidies offset a large chunk of the total cost of production/import of fertilisers: 50% in the case of gas-based domestic urea, 80% for imported urea, 39% for DAP or diammonium phosphate and 47% for MOP or muriate of potash.
However, due to inadequate budgetary allocations, the funds generally get exhausted by the middle of the year. There is an urgent need for the government to provide extra subsidy. The banking arrangement would certainly help companies to reduce their cost of borrowings and increase the efficiency, Chander said. A similar arrangement was made in 2008-09, when fertiliser firms raised Rs 22,000 crore in bank credit from State Bank of India and State Bank of Patiala in lieu of subsidy payments.
Sources said the fresh proposal would see companies raising loans from state-owned banks this year, too. As per the 2012-13 Budget subsidy allocation, the government had provided Rs 13,398 crore for imported urea, Rs 19,000 crore for indigenous (urea) fertilisers, and Rs 28,576 crore for the sale of decontrolled fertilisers (DAP, MOP and complexes) at a subsidised rate to farmers. The subsidy shortage is especially acute for phosphatic and potassic fertilisers.