Pending fertiliser subsidy hits ₹45,000 crore

Despite moving a good portion of its spending outside the Budget and funding it through Internal and Extra budgetary Resources (IEBR), the Centre has not been able to settle its key payments. Under IEBR, public sector enterprises borrow on their books to fund Central schemes.

Numbers seen by BusinessLine show that the pending fertiliser subsidy as on January 1, 2020, stood at a massive ₹45,000 crore — a level never seen before.

For 2019-20, the total amount allocated to fertiliser subsidy (urea plus other nutrients) was ₹79,996 crore. But this seems to have been exhausted by the Centre early in the year. Since the third week of August 2019, no payments have been made to urea manufacturers (domestic). The manufacturers of P&K (phosphatic and potassic) fertilisers have not received subsidy payment after November.

Satish Chander, Director General, Fertiliser Association of India, said the outstanding payment to fertiliser firms may increase to ₹60,000 crore by March.

The Centre will have to make a provision to pay this outstanding amount and also provide for fresh subsidy in the Budget for FY21. But given its empty coffers, it looks like the government faces a tough challenge.

Why the crunch?

When the Centre provisioned close to ₹80,000 crore for fertiliser subsidy for this entire fiscal, how did all of it get used up in less than six months? Speaking to fertiliser majors, BusinessLine found that every year, the Centre uses a part of the available funds to pay the pending subsidies carried forward from the previous years. Over the years, the pending dues have grown to a gargantuan figure, using up significant portions of the budgetary allocation over successive years.

“If all pending subsidy is settled, then, ₹70,000-75,000 crore of subsidy for fertiliser should be enough for a year,” said a private fertiliser manufacturer who did not wish to be named.

The ballooning amount is also due to higher consumption of urea and the increase in its cost of production.

While urea consumption is growing 3-4 per cent a year, its costs have been spiralling due to the higher cost of natural gas — the feedstock for making urea — which accounts for 80 per cent of the production cost, per a CARE report. The government revises the price of natural gas every six months; with higher crude prices, the price of natural gas has also been rising over the past two years. Also, the prices of other inputs — phosphoric acid, rock phosphates, ammonia and sulphur — have been increasing as well.

For urea, while the MRP that the fertiliser companies can charge is fixed, there is no cap on the cost of production that is charged to the government. Thus, many inefficient public sector fertiliser units pass on all their costs to the government, which again increases the size of the fertiliser subsidy, say experts.

DBT turns unfavourable

While on one side, the government doesn’t have the funds to pay for the subsidy it promised, on the other, the switch to DBT (direct benefit transfer), which has altered the payment schedule, is hurting fertiliser companies. Earlier, the companies used to be paid the subsidy when the fertiliser was dispatched from the factory site. But, under DBT, it is paid only at the time it is sold to the farmer.

Payments thus happen only during the kharif and rabi seasons, when farmers buy fertilisers. So, from 45 days earlier, the working capital cycle now is six-eight months, said a large private fertiliser manufacturer.

With DBT, the Centre had assured payment of the subsidy due in a week to the fertiliser companies. But this year, with empty coffers, the payments have not been made since August.

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