Poor bond-age

The government's decision to issue bonds worth Rs 6,000 crore to fertiliser manufacturers, to partly offset their massive outstanding subsidy dues, reflects a continuation of the ill-conceived policy (if it can be called such) of taking ad hoc measures rather than resolving issues for good. This latest measure, along with the proposed cash disbursement of Rs 9,000 crore and the Budget provision of Rs 22,450 crore for the fertiliser subsidy this year, falls far short of the requirement of nearly Rs 48,000 crore for getting rid of all the unpaid arrears. The bonds are in any case an accounting fudge, in the same manner as the oil bonds. They do not show up in the Budget, and therefore will not increase the annual deficit, but such deferment of the disbursement burden to a future date can hardly be deemed sound fiscal practice. In under-stating the true size of the deficit, this stratagem will lead people to believe that more fiscal correction is taking place than is actually the case. For the industry, of course, the bonds are better than no payment at all, as they carry an interest component which has so far been denied on other dues that are settled in cash after considerable delay. The bonds also do not help the industry deal with its liquidity crunch owing to a shortage of old-fashioned cash.

The real issue that needs to be tackled "" and which the government chooses to overlook "" is the mounting fertiliser subsidy and the flawed manner of its delivery. The farm gate prices of fertilisers have been kept unchanged for over a decade, though the cost of fertiliser production has mounted multifold during this period. Inevitably, the annual subsidy bill has been mounting, and reached the clearly unsustainable level of over Rs 22,450 crore in 2006-07; this year, the figure will swell if selling prices are kept unchanged.

The refusal to set right the conditions in which the industry operates has had other consequences. For instance, there has been no capacity addition in the fertiliser industry for over a decade, while demand has been rising fast. If the agriculture sector regains its momentum, and the signs of this are discernible, the growth in fertiliser demand will gain tempo. As it is, the gap between the requirement and the domestic availability of fertilisers is projected to widen to a whopping 16 million tonnes by the end of the 11th Plan, in 2012. Such a huge gap may be difficult to bridge through imports, as the global fertiliser capacity is not expanding at the desired pace. Also, besides India, China is a major buyer of plant nutrients in the international bazaar. All this is doubly unfortunate because most cash-rich fertiliser manufacturers, in India and abroad, are opting for non-fertiliser businesses. Unless the financial health of the fertiliser industry is restored, new players are unlikely to enter this field and there will be no fresh investment in an area vital to the growth of Indian agriculture.

There is also the need to reform the fertiliser subsidy delivery system, which uses the industry as a conduit. Perhaps as a consequence, the benefit of the subsidy goes chiefly to large farmers growing selected cash crops. Direct subsidy payment to farmers makes better sense, and an announcement on this was made in the last Budget speech "" but there has been no follow-up action.