India mulls deep cuts in fertilizer subsidy

Published: December 7, 2008 - 22:54

Noor Muhammad Hardnews

It seems that the days of unlimited fertilizer subsidy in India are numbered as the government weighs different options to rein in the rising fiscal deficit. If the indications from Fertilizer Secretary, Atul Chaturvedi, are anything to go by, the government is ready to bite the bullet on fertilizer subsidy. And it may show its resolve when it presents its income-expenditure statements for the coming financial year 2009-10. The government’s fertilizer subsidy bill is projected to jump to Rs. 1, 00,000 crore in the current financial year 2008-09 from Rs. 47,979 crore in the preceding fiscal, thanks to the sharp rise in the cost of production due to the spike in the global crude oil prices in the early part of the year. Hardnews learns that the softening of oil prices have eased the pressure substantially, but overhang of the enormous fertilizer subsidy is pulling down the economy.

Unable to take so much fertilizer subsidy on the Union Budget, the government has resorted to issuance of special bonds to domestic fertilizer manufacturers towards payment of its subsidy bills.

However, these special bonds are not accepted by banks as collateral for lending due to lack of SLR status. And the fertilizer manufacturers cannot hold these bonds for their life-period of 26 years or so. So they have no options but to dispose of these special bonds at fire-sale prices in the open market for raising cash to meet their investment expenditure. According to The Fertilizer Association of India (FAI) Chairman K.S. Raju, fertilizer manufacturers have sold these special bonds at a 15-20 percent to banks in recent months. The slowdown of the economy and the reluctance of the banks to lend is exacerbating their problems.

Despite sharp increase in the international prices of fertilizers in recent years, the government has kept domestic farmers insulated from its effects by increasing subsidy allocations. According to statistics available with the fertilizer minister, during the period 2002-07, 88 percent of the reported increase in subsidy was due to the sharp rise in international prices of fertilizers inputs and finished fertilizers, while only 12 per cent stemmed from the enhanced consumption of fertilizers.

While delivering his inaugural address to a recent FAI seminar in New Delhi, Chaturvedi said that it was not sustainable for the government to spend such huge money on fertilizer subsidy. He categorically said that the era of open-ended subsidy was over and that the government could slash fertilizer subsidy budget by two-thirds in the next fiscal. 'We cannot sustain so many subsidies and that the fertilizer subsidy for 2009-10 might well be kept at 33% of the current subsidy budget,' Chaturvedi said.

While referring to the FAI's demand for payment of fertilizer subsidy bill to fertilizer manufacturers in cash instead of through fertilizer bonds, Chaturvedi said the government would soon come out with policy measures that could dramatically increase the significance of bonds vis-à-vis cash. And then, fertilizer manufacturers might well start insisting on reimbursement of subsidy through fertilizer bonds rather than in cash, he said in a lighter vein.

India has emerged as the world’s biggest fertilizer consumer in recent years. To meet the surging fertilizer demand from farmers, the government had to resort to fertilizer imports on a massive scale despite the high international prices. Combined imports of DAP and MAP fertilizers by India in 2007-08 was pegged at 3 million tones while the figure for MOP was 4.4 million tones.

Even in urea where the domestic production capacity was enough to meet demand until 2001, imports reached near 7 million tones in 2007-08.
India’s fertilizer imports between 2000-01 and 2007-08 (Million Tones)

Year Urea DAP MAP MoP
2000-01 Nil 0.861 0.078 2.646
2001-02 0.22 0.933 0.125 2.81
2002-03 0.119 0.383 0.100 2.603
2003-04 0.143 0.734 0.065 2.579
2004-05 0.641 0.644 0.022 3.310
2005-06 2.057 2.438 0.045 4.578
2006-07 4.719 2.875 0.097 3.448
2007-08 6.928 2.724 0.266 4.421