India may start FY22 with almost 'nil' fertiliser subsidy arrears

With fertiliser subsidy dues rising sharply due to lower release by the Centre and hitting the working capital requirement of the companies, the finance ministry on Thursday allocated an additional Rs 65,000 crore for the sector in 2020-21, which is over and above the budgeted Rs 71,309 crore for the year.

This will mean that the total fertiliser subsidy allocated for 2020-21 will be to the tune of around Rs 136,309 crore while the actual requirement for this year is around Rs 128,000 crore, which includes Rs 48,000 crore as pending arrears from the last year.

The enhanced allocation was announced by Finance Minister Nirmala Sitharaman as part of the latest tranche of Covid-19 relief for stressed sectors.

Sources said if the entire promised amount is released by the finance ministry by March 2021, India will perhaps, after a long time, start the 2021-22 financial year with almost nil subsidy arrears in the books of fertiliser companies.

Clearing of fertiliser arrears could also pave the way for more reforms in the sector and could include cash transfer of subsidy directly into the bank account of farmers instead of routing it through the companies.

The total fertiliser subsidy incurred in 2020-21 is estimated to be a little over Rs 80,000 crore, which when added to the pending arrears of Rs 48,000 crore from previous year comes to Rs 128,000 crore.

Of the Rs 136,309 crore of new subsidy allocated for 2020-21, sources said around Rs 10,000 crore is in the form of bank loans which has to repaid and which leaves the balance to Rs 126,309 crore, sufficient enough to wipe off all the dues and meet the current requirement.

K Ravichandran, senior vice president and group head of ICRA, said that the subsidy backlog had resulted in elevated working capital borrowings and significant interest outgo for the industry, weakening the credit profile and profitability of the industry.

He said that according to calculation, the subsidy backlog would have reached around Rs 57,000 crore to Rs 60,000 crore by the end of FY2021 which would have significantly weakened the liquidity position of the industry.

The Rs 71,309 crore subsidy budget allocated for 2020-21 was already about Rs 8,689 crore (around 11%) lower than the allocation for 2019-20 at Rs 79,998 crore.

If this was not enough, in 2020-21, the department of fertilisers was clubbed under the ‘B’category of ministries according to the new expenditure management regime being implemented in the aftermath of Covid-19.

The ‘B’ category ministries are those that will be entitled to spend just 80 per cent of their allocated budget for 2020-21.

This meant that of the already truncated budget of Rs 71,309 crore an even lesser amount of about Rs 57,047 crore would have been released in 2020-21.

Of this, around Rs 10,000 crore has already been spent on repaying bank loans in the first quarter of this fiscal.

In the absence of fresh infusion, only Rs 47,047 crore would have been left for this year’s subsidy, which was not even enough to clear the last year’s outstanding dues.

Urea is the top fertiliser sold in India, and almost 75 per cent of its cost of sales comes from subsidy receivable from the government.

Fertiliser demand grew exceptionally high during April to August 2020 over April to August 2019 due to a good monsoon and record increase in kharif acreage.

Sale of urea at 15.52 million million tonnes during during April to August 2020 was 24.7 per cent higher than in the same period last year, while consumption of DAP in April to August 2020 was estimated at 4.63 million tonnes, which was 57.6 per cent more than the consumption the same period last year. The consumption of NPK was at 5.10 million tonnes, which was 53.7 per cent more than the same period last year.