Quick clearance Of Backlog And Adequate Allocation Of Regular Subsidy To Play Key Role For Fertilizer Industry
Indian fertilizer industry is going through a challenging phase. On one hand, subsidies are hitting an all-time high. Clearance of backlog has also become a challenging task for the government. Credit rating agency ICRA released its expectation from the budget 2018 for fertilizer sector.
The Indian fertilizer industry is highly subsidised and the subsidy budget has consistently increased from around 4,500 crore in Financial Year 1990-91 to 70,000 crore for 2017-18. At present, the fertilizer subsidy is the second largest, after food, provided by the Government of India which is fraught with leakages and delays in the release of subsidy to the fertilizer companies, resulting in increased borrowings for the fertilizer players. This has necessitated streamlining of the subsidy pay-out under the Direct Benefit Transfer (DBT) programme.
The 2017 annual conference of Fertilizer Association of India has emphasised more upon direct benefit transfer scheme of government. On the other hand, it seems that domestic players are not willing to compete with foreign players. Developments like a pilot project of the central government for direct benefit transfer in states of Telangana and Maharashtra had been criticised by industry players, though many have refrained from making direct objections.
There has been a feeling for the emergence of new dimensions with the entry of a Norwegian fertilizer group buying urea unit in Uttar Pradesh for a better presence in north Indian markets. It has been noticed as first FDI in a controlled fertilizer trade of India. Gas is an important input which decides the manufacturing cost of fertilizer and industry keeps a vigilant eye upon allotment of gas to players by the government as well as the price of gas in international market.
In the mean-time, ICRA had released their expectations for 2018 for the fertilizer industry,
It says, "The Indian fertiliser sector is highly regulated with controls on several aspects pertaining to the businesses." The urea sector works on normative cost-plus-return framework, with controls on farm-gate price, distribution and gas allocation. Sharing its opinion about how the subsidy is handled in fertilizer sector it says, "the difference between retention price and farm-gate price net of dealer margin is paid as subsidy to the industry, which is variable in nature, depending on the energy price trends."
The NPK segment works on fixed subsidy and variable farm-gate pricing principle. Because of the regulated nature, timely payment of subsidy is the key to the eventual returns achieved by the industry, with urea players impacted more than the NPK segment as more than 65 per cent of the realisation comes by way of subsidy against around 30 per cent for the NPK segment. They have also raised alleged gaps in provision of subsidy, it says, "In recent years, subsidy allocation to the industry has fallen short of requirements, resulting in a recurring backlog of subsidy. As a result, subsidy gets exhausted within 7-8 months of the fiscal year, forcing the industry to resort to short-term borrowings, the interest costs of which are not borne by the government of India (GOI)."
With Direct Benefit Transfer (DBT) scheme ready to be rolled out on a pan-India basis, under which the GOI has committed to pay subsidy within seven days of confirmation of sales to the farmers, onetime clearance of backlog and adequate allocation of regular subsidy will be the key factors to the financial health of the industry. The urea industry also awaits the payment of revised fixed costs, which is long overdue. Many players in the segment have booked this as an income for the last three years. Any reversal of policy in this regard will lead to write down of earnings and put significant pressure on profitability. Notwithstanding these concerns, the agency expects the Budget 2018-19 to have several policy measures to give a stimulus to the agricultural sector such as on irrigation, crop insurance, e-NAM and agricultural credit, which will help the fertiliser players.
