With fertiliser subsidies rising sharply due to lower releases by the Centre, thereby hitting the working capital requirements of companies, the finance ministry on Thursday allocated an additional Rs 65,000 crore for the sector in 2020-21.
This is over and above the budgeted Rs 71,309 crore for the year.
This will mean the fertiliser subsidy allocated for 2020-21 will be around Rs 1.36 trillion while the requirement for this year is about Rs 1.28 trillion, which includes Rs 48,000 crore as pending arrears from the last year.
The enhanced allocation was announced by Union Finance Minister Nirmala Sitharaman as part of the latest tranche of Covid-19 relief for stressed sectors.
Sources said if the finance ministry released the promised amount by March next year, India will perhaps, after a long time, start 2021-22 with “very little” subsidy arrears on the books of fertiliser companies.
Clearing fertiliser arrears could also pave the way for more reforms in the sector and include cash transfers of subsidies into the bank accounts of farmers.
The fertiliser subsidy incurred in 2020-21 is estimated to be a little over Rs 80,000 crore. This, when added to the pending arrears of Rs 48,000 crore from previous years, comes to Rs 1.28 trillion.
Of the Rs 1.36 trillion of new subsidy allocated for 2020-21, sources said around Rs 10,000 crore was in the form of bank loans that have to be repaid, leaving the balance at Rs 1.26 trillion, which is sufficient enough to wipe off all the dues and meet the requirements.
K Ravichandran, senior vice-president and group head of ICRA, said the subsidy backlog had resulted in elevated working capital borrowing and a significant interest outgo for the industry, weakening the credit profile and profitability of the industry.
He said according to calculations, the subsidy backlog would have reached Rs 57,000-60,000 crore by the end of FY21. This would have significantly weakened the liquidity position of the industry.
The Rs 71,309-crore subsidy budget allocated for 2020-21 was about Rs 8,689 crore (around 11 per cent) lower than the allocation for 2019-20 at Rs 79,998 crore.
If this was not enough, in 2020-21, the Department of Fertilisers was clubbed under the ‘B’ category of ministries, according to the new expenditure management regime being implemented in the aftermath of Covid-19.
The ‘B’ category ministries are those that will be entitled to spend just 80 per cent of their allocated budget for 2020-21.
This meant of the truncated budget of Rs 71,309 crore, an even lower amount would have been released in 2020-21.
Urea is the top fertiliser sold in India, and almost 75 per cent of its cost of sales comes from subsidies from the government.
Fertiliser demand grew exceptionally high during April-August this year over the same period last year due to a good monsoon and record increase in kharif acreage.
Sales of urea, at 15.52 million tonnes during April to August, were 24.7 per cent higher than in the same period last year, while the consumption of DAP in April to August 2020 was estimated at 4.63 million tonnes, which was 57.6 per cent more than in the same period last year.
The consumption of NPK was at 5.10 million tonnes, which was 53.7 per cent more than in the same period of 2019.