The unabated food and fertiliser worries

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Updated: December 3, 2015 1:30:53 AM

With reforms in fertilisers and food stuck in a groove, it is but natural that the government is shirking from paying subsidy arrears

Hamstrung by its inability to achieve target for divestment proceeds from public sector undertakings (PSUs) and lower-than-expected collection from direct tax revenues, the government has resorted to hard posturing with regard to release of subsidy payments under major heads—fertilisers and food.

As far as fertilisers are concerned, against a budget allocation of R73,000 crore for the current year, the requirement is expected to be around R80,000 crore. Even as the ministry of finance is likely to provide for additional R7,000 crore, it is in no mood to release arrears of about R30,000 crore from previous year.

The finance ministry has also rejected a request from the Department of Fertilisers for a Special Banking Arrangement for short-term loan of R25,000 crore to enable payments to the industry. Its logic is that the government will be forced to release the amount next year and that will squeeze the available fiscal space.

Likewise, as far as food is concerned, the finance ministry is unwilling to release arrears of R60,000 crore to the Food Corporation of India (FCI). It has also rejected FCI’s request for letting it issue bonds to the Life Insurance Corporation of India, saying it won’t act as a guarantor to the bonds.

One gets a sense that arrears will continue to be rolled over perpetually. A bigger worry is that the government does not have a roadmap to bring down these subsidies, except to say that “it intends to launch direct benefit transfer (DBT) for food next year.” For fertilisers, it does not even talk of DBT.

A steep fall in international prices of crude oil and corresponding decline in the price of imported liquefied natural gas (LNG) had offered a golden opportunity to (1) garner substantial saving in fertiliser subsidy for clearing a sizeable portion of arrears, if not all; and (2) implement long-pending reforms in fertiliser policy.

As regards garnering substantial saving in fertiliser subsidy, about 40% gas-based urea production, or 7.2 million tonnes, is met from LNG. A price reduction of $7 per mmBtu over last year would yield savings of around $1,200 million, or R7,800 crore. In addition, there would be a saving of over R1,500 crore due to cut in price of domestic gas ($0.43 per mmBtu from April 1 and further $0.94 per mmBtu from October 1). This adds up to R9,300 crore against a budget provision of R38,200 crore for indigenous urea. But this is nowhere to be seen.

This, in fact, is because urea manufacturers continue to pay a high price of over $13 per mmBtu to GAIL, which picks up gas from Petronet LNG (a consortium of four PSUs—ONGC, IOCL, BPCL and GAIL) under the take-or-pay agreement at this price. Petronet LNG is locked in a 25-year contract for the purchase of 7.5 million tonnes annually (30 mmscmd) from RasGas of Qatar, under which it is bound by a ‘flawed’ formula—linked to average price of Japanese crude in immediately preceding 60 months without any floor or cap—leading to a high price.

Even as cheaper domestic gas remains in short supply—courtesy dithering interest among E&P companies due to unattractive price under extant guidelines notified in October, 2014—manufacturers will continue to depend on imported LNG and perforce source supplies from GAIL/Petronet. It is, therefore, imperative that the government prevails upon Qatar to change the pricing formula. Reportedly, the latter has agreed ‘in principle’ to link price to immediately preceding 3-month average of Brent crude. With this, we can look for savings hopefully from next year.

However, with regard to implementing long-pending reforms in fertiliser policy, the government has made no credible efforts. By freezing urea MRP at existing level for four years, it has foreclosed option of garnering savings (10% hike can yield R1,600 crore annually). In May, it had brought out a “comprehensive new urea policy”, its stated objective being to make a dent on subsidy. However, it would get a meagre saving of R1,000 crore annually.

As regards DBT, after initial exhortations, the government has now gone into a silence mode. That there will be no DBT for four years is a fait accompli, after the Cabinet decided to continue with extant unit-wise new pricing scheme (NPS) under which subsidy payments are made to manufacturers.

On the food front, the galloping subsidy is due to ‘unlimited’ procurement at ever increasing prices, stocks much in excess of requirements, heavily subsidised food to millions of non-poor households too, large-scale pilferage, high local taxes, and reimbursement of expenses to state agencies towards handling and storage on ‘actual’ basis devoid of norms with regard to cost and efficiency.

In January, the Shanta Kumar committee had recommended reduction in coverage under the Food Security Act to 40%, making non-poor households pay 50% of MSP, restricting procurement to the extent of PDS needs, permitting private sector in handling and storage, and implementation of DBT in phases to cover cities with a population of 1 million to begin with, food surplus states in the next phase and food deficit states in the third.

The reduction in coverage alone would have yielded around R50,000 crore per annum. Additional savings would accrue due to elimination of leakages and efficiency improvements in the supply chain. Yet the committee’s recommendations have been put in cold storage. Even with regard to DBT, the government has merely announced its intent to run a pilot scheme in Puducherry.

With reforms in fertilisers and food stuck in a groove, it is but natural that the government is shirking from paying subsidy arrears. But what it forgets is that the current dues—almost touching R1 lakh crore—will only swell and continue to haunt the budget if Prime Minister Narendra Modi decides not to take the reform highway.

The author is a policy analyst
www.uttamgupta.com

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