Under-budgeting for the annual outgo on the fertiliser subsidy seems to have become a convention, so frequently has it been practised in recent years. The Interim Budget for 2009-10 is no exception. It sets apart less than Rs 50,000 crore for the fertiliser subsidy pay-out in the next financial year, against the revised estimate of over Rs 75,847 crore for the current year. The first point is that the revised estimates do not account for the total bill, since they refer to only the cash subsidy payments made. What is excluded is the pay-out of about Rs 20,000 crore to the industry in the form of bonds—because, technically, the latter is treated as an off-budget transaction and mentioned only as a footnote in the Budget papers. Over and above this, considering that the total fertiliser subsidy payable this year is likely to be in excess of Rs 102,000 crore, it is clear that some part of the subsidy will be carried forward to the next fiscal year as arrears that have to be paid. If any more payments are due to be made to the industry in the remaining six weeks of the year, the danger is that even more bonds may be issued—which would amount to short-changing the industry as the bonds are traded in the market at a discount.
The sharply reduced provision for the fertiliser subsidy payable next year is of course a result of the dramatic decline in international fertiliser prices, from their peaks in September 2008. But even after taking this into account, the provision of Rs 50,000 crore may not be enough to pay next year's subsidy dues and at the same time to clear the arrears carried forward from this year. That is because a part of the anticipated gains due to the drop in global fertiliser prices is likely to be offset by the depreciation of the rupee against the US dollar, and the likely rise in fertiliser imports because of the expected growth in consumption and near stagnation in domestic production.
None of this is conducive to the financial health of the beleaguered fertiliser industry, which has been hit by an acute liquidity crunch owing to the constant delays in subsidy payments in recent years. The broader issue that the government has not addressed is that, if the subsidy is meant for farmers and not for the fertiliser industry, it should be given directly to them instead of being routed through the industry. The former finance minister, P. Chidambaram, had sought to address this issue by indicating in the 2008 Budget speech the government's intention to switch over to a nutrient-based subsidy, and to explore alternative methods of delivering it to farmers. While the nutrient-based subsidy regime has been introduced recently (and this has led to a 19 per cent reduction in the retail prices of complex fertilisers, and a consequential increase in the subsidy), no headway has been made in finding any alternative method of delivering the subsidy directly to farmers. The industry has suggested fixing the subsidy per tonne of nutrient, without any control on farm-gate prices. But this will not be acceptable to the government, considering that there has been no increase in retail fertiliser prices since 2002. Still, that is no reason to give up the search for alternative solutions, and to free the fertiliser industry of the burden of disbursing subsidies while also reducing the size of the subsidy. After all, global fertiliser prices may not remain low in view of the sustained demand surge.