Budget: Mixed bag for fertiliser companies

The Budget has been a mixed bag for the fertiliser makers. The Union government has outlined three key initiatives which should spell some relief for players in the tightly-regulated fertiliser industry.

First, the long wait for direct subsidy transfer to the farmer seems to be over. After testing the Direct Benefit Transfer (DBT) model for LPG subsidy, the government has now proposed to do a DBT pilot for fertiliser subsidy. The pilot will be done in a few districts across the country. This, once implemented commercially, will not only improve the quality of service delivery to farmers, but will also benefit fertiliser companies by way of cutting out the role of the government and improving their working capital cycle.

Second, an allocation of ₹368 crore has been made in the budget for National Project on Soil Health and Fertility. This scheme will enable farmers obtain information about soil nutrient level. The government targets to cover all 14 crore farm holdings across the country by March 2017. The Government has also approved a policy for converting city waste into compost under Swachh Bharat Abhiyan and fertiliser companies will co-market the compost.

Third, excise duty on micronutrients which are used in addition to chemical fertilisers has been reduced from 12.5 per cent to 6 per cent. Likewise, physical mixture of fertilisers which are made using chemical fertilisers will no longer attract excise duty.

While the above measures are positive for the sector, come April 2017, the investment-linked deduction under section 35AD of the Income-Tax Act for companies that are into production of fertilisers will be reduced from150 per cent to 100 per cent.

In India, fertiliser production and sales is regulated by the Essential Commodities Act. Urea is the most widely used fertiliser and its pricing is completely controlled by the Government. Phosphatic fertiliser prices were decontrolled by the government in 2010 through introduction of nutrient based subsidy scheme (NBS). The overall fertiliser consumption has been skewed towards Urea – the cheapest fertiliser – thanks to the massive subsidy provided by the government.

Direct subsidy transfer, once implemented commercially, will benefit urea and phosphatic fertiliser makers such as Chambal Fertilisers, Tata Chemicals, National Fertilisers, GSFC and Coromandel International. The reduction of excise duty on micro nutrients is positive for companies such as Coromandel International that produce and sell micronutrients. The reduction of investment-linked deduction for fertiliser production units may reduce the IRR on new expansion projects.