Column : Price controls and fiscal cliffs

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SummaryLikely FY14 subsidy allocations won’t last more than 2-3 months. Dismantling the subsidy regime is critical.

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 Parliament’s 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 government’s 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). Let’s 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

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