Fertiliser subsidy demands may upset Centre's fiscal maths

While the government struggles to curtail its fiscal deficit within the target of 5.3% of GDP, the demand for fertiliser subsidy in the current fiscal might swell by 62% over the Budget estimates of Rs 60,974 crore.

Meanwhile, the fertiliser industry complained that there has been delay in payment of subsidies to companies which is creating pressure on the domestic industry.

The Fertiliser Association of India said, "On account payment for subsidy on imported Phospatic and Pottasic (P and K) fertilisers has been made only up to June, 2012 and for domestic P & K fertilisers, it has been paid till July 2012. The subsidy for domestic urea has been paid up to August 2012."

The association further claimed that the budget allocation of Rs 60,974  crore for fertiliser subsidy has already been exhausted and an estimated amount of Rs. 19,000 crore subsidy payment is outstanding for the period
till October, 2012 and an equal amount would be required for the rest of the fiscal.

Senior officials in the department of fertilisers confirmed the delay in payment of subsidy as well as the fact that the subsidy has already surpassed budgeted estimates.

“There is delay in payments, but the industry will surely get it soon. Rest of the decision lies with the ministry of finance,” an official said.

The finance minsitry is struggling hard to rein in fiscal deficit. The Budget had pegged it at 5.1% of GDP. Realizing that this projection is difficult to meet, Finance Minister P Chidambaram revised the target to
5.3% of GDP.

The Centre’s fiscal deficit in the first eight months of the financial year stood at Rs 4.13 lakh crore, constituting
80.4% of the budgeted target for the full financial year. Assuming nominal GDP grows by 14% in 2012-13, as projected in the Budget, the fiscal deficit would turn out to be 77% of the target, revised
by the Finance Minister.

However, it should be noted that the size of GDP might not grow at a rate as high as projected in the Budget, since real GDP growth could come down to 5.7-5.9% and inflation could also not average eight% in
the current financial year. The lower the GDP, the higher would be fiscal deficit as percentage of GDP.

The Government pays the difference between the cost of production or import of fertilisers and the farmgate prices, which is known as subsidy. At present, about 60% of the total cost of production and import is
met through subsidy, industry players said.

“It is becoming increasingly difficult for the fertiliser companies to make payment for the feedstock  for want of working capital. Some of the units are on the verge of closure because of their inability to pay for the raw
materials required for continuing production,” the association said.

Unless immediate measures are taken to correct the situation, a significant portion of existing domestic production may become unviable, necessitating further imports at exorbitant international prices.

While the average subsidy on domestic urea is close to Rs 8,000, the average subsidy on imported urea is close to Rs 16,000 crore.

“There is urgent need for arrangement for additional funds of about Rs 38,00 crore to save the fertiliser industry from the current financial crisis and enable it to continue operations and supply fertilisers to the farmers. Large outstanding bills increase the working capital requirements of the industry and cost there of,” the association said.