The fertiliser industry is not cheering the higher subsidy bill estimated for 2008-09 at a whopping Rs 95,000 crore? more than double of last year?s amount. Industry experts believe the government will prefer to issue special bonds to pay for the subsidy, so as not to risk a jump in the fiscal deficit. Perturbed over the development, the representative body of the industry Fertiliser Association of India (FAI) has written a letter to Prime Minister Man Mohan Singh to intervene.
The fertiliser majors fear that the government will either have to step up its borrowing programme to support this or issue larger portions of the dues in the form of fertiliser bonds?a form of compensation the industry doesn?t like.
After all, the long-term fertiliser bonds are an inefficient form of assistance for the industry?s working capital needs as they are typically discounted at low rates. FAI has argued that the issuance of bonds won?t eradicate the cash-flow problem, as suppliers of major material and feedstock are not ready to extend further credit to industry. Similarly, banks and financial institutions are not coming forward to extend their working capital limit, the letter said.
The industry leaders say even if fertiliser companies pledge the bonds to FIs as security for arranging finances, the units are likely to suffer a loss of about 4% due to a difference in the rate of interest on the working capital arranged by them and the rate of interest receivable on the bonds issued by the government.
The rate of interest on special bonds issued to fertiliser units is equivalent to the government securities while the rate of interest on the working capital is pegged between 12 to 13%.
?Because of the liquidity crunch, there have been unprecedented borrowings. During 2007-08 at this time, we had only Rs 2,000 crore borrowings. This year, it is already Rs 6,800 crore,? Iffco managing director US Awasthi said.
The fertiliser units will suffer a loss of 4 to 5% interest on working capital. Since the bonds will tradable, it will not help the industry. The bonds will have to be sold at discounted rates which will further upset the bottomlines of the industry. The discounts will not be less than 3-4% which will badly affect the margins of fertiliser units and threaten operations and supply of nutrients.
During 2007-08, of the total subsidy dues of Rs 48, 000 crore, Rs 43,000 crore were disbursed in cash and Rs 7,500 crore in bonds in two tranches (maturing in 15 and 18 years) with coupon rates of 8.3 and 7.95%.
