At the beginning of 2019-20, the amount owed by the Government of India [GOI] to fertilizer manufacturers as subsidy arrears was Rs 39,000 crore. According to the Director General, The Fertiliser Association of India [FAI] – an umbrella organization of fertilizer industry- as on November 1, 2019, this was Rs 33,691 crore to [including Rs 20,853 crore under Direct Benefit Transfer (DBT) scheme and balance Rs 12,838 crore other than DBT]. The FAI expects the arrears to touch Rs 60,000 crore by March, 2020.
The persistence of fertilizer subsidy arrears is not an unusual phenomenon. It has been there for decades with the only difference that the amount involved has escalated over the years. During the 80s and early 90s, it used to be in hundred crore; by late 90s, it ran in few thousand crore whereas, in 2000s the arrears escalated to tens of thousand crore. During the last five years of Modi – regime, this was in the Rs 30,000 – 40,000 crore. During the current year, if it touches Rs 60,000 crore, this will be a new peak.
The budget allocation for fertilizer subsidy is Rs 80,000 crore. Taking pending dues from the previous year Rs 39,000 crore, if these were to be cleared first [logically, this is the way forward] then the net funds left to for the current year is just about Rs 41,000 crore against requirement of close to Rs 100,000 crore. If, there is no supplementary authorization, we will end up with arrears of Rs 60,000 crore.
In case, the allocation for next year is kept at the same level as during 2019-20 or Rs 80,000 crore [the finance ministry is quit prone to doing this if past experience is anything to go by] then, 75% of the provision would be used to clear the arrears leaving a measly Rs 20,000 crore for that year. This is an unsustainable scenario.
What has landed us in such a situation? Can the government doing something to avert?What is the way forward?
Considering the crucial role played by fertilizers in increasing food production and the overarching need to make it affordable to farmers, the union government has followed a policy of controlling their maximum retail price [MRP] at a low level unrelated to their cost of production and distribution which is higher. To ensure that production is viable at this price, it gives subsidy to the manufacturer to reimburse the difference between the two. The amount of reimbursement is known as subsidy.
In case of urea, the subsidy varies from unit to unit and is administered under the New Pricing Scheme [NPS] whereas for decontrolled complex fertilizers, a ‘uniform’ subsidy fixed on per nutrient basis is given to all manufacturers under the Nutrient Based Scheme [NBS]. Since, this is subject to submission of cost data by individual units and necessary adjustment in subsidy thereof, de facto even this turns out to be unit-specific.
Prior to Rabi 2017-18 [October 2017 – March 2018], 95% of the subsidy to urea manufacturing units and 85% to complex manufacturers was released on sale of material in the district. The balance 5%/15% for urea/complexes was paid on confirmation of sales to farmers by state government.
Beginning October 2017, the government affected a major change in the mechanism of subsidy payment. Under a new system called direct benefit transfer [DBT], 100 percent of the subsidy is credited into the bank account of the manufacturer based on actual sales made by retailer to the farmer. This is done after the farmer authenticates purchase with Aadhaar card – through a point-of-sale [PoS] device at dealer shop. By March 31, 2018, ePoS devices linked to Aadhaar were installed at fertilizer sale outlets in 31 states/UTs thereby kicking off subsidy payments all over India under DBT from April, 2018.
Since 2013-14, it has also put in place an I-T [information technology] based tracking physical movement of fertilizers under a mobile Fertilizer Monitoring System [m-FMS]. This provides information on stock position, sale and receipt of fertilizers till the last retail point. Together with Aadhaar-based sale, this helps fix accountability on all stakeholders in the supply chain viz. manufacturers, wholesalers and retailers and brings about transparency in operations.
Following switch-over to DBT, secretary, economic affairs exuded confidence that manufacturers will be assured of subsidy payment of within a week of submitting the bill. Forget a week, here manufacturers have to wait for several months to get their dues. Unlike other sectors not subject to control where a manufacturer gets full realization from the consumer, a urea producer gets 50-75% as subsidy from the government [for non-urea producer, this is 25-30%].
With so much money blocked in subsidy arrears for months, it won’t be possible for the manufacturer to continue operations. In the past, the government had given ‘fertilizer bonds’ in lieu of pending subsidy payments [as during 2007-08 and 2008-09] or special banking arrangement [SBA] under which the government directs public sector banks [PSBs] to give loans to manufacturers backed by sovereign guarantee [2014-15 to 2016-17]. But, this is no consolation as it comes at huge cost by way of loss of interest or bonds sold at substantial discount to recover the money.
The problem is not just procedural. Under the ‘other than DBT dispensation’ wherein 5%/15% of subsidy reimbursement for urea/complex fertilizers respectively is paid on confirmation of sales to farmers by state government, delay could be assigned to procedural factor. But, under DBT wherein, 100% of the amount has to be released on sale of material to the farmer and that too by way of ‘electronic transfer’ to the bank account of manufacturer, it can’t be attributed entirely to procedural or technical issues alone.
The crux of the problem lies in inadequate budget allocation. Ironically, allocation is dictated by ministry of finance [MoF] instead of relating to the requirement [this is prepared by the department of fertilizers (DoF) – the department responsible for administering the subsidy scheme – and communicated to MoF]. For arriving at the figure, MoF is guided by an overarching need to achieve target for ‘fiscal deficit’ [FD] decided on macroeconomic consideration. As a consequence, shortfall in availability of funds year-after-year is inevitable.
Fed up with the state of affairs, the fertilizer industry has time and again asked the government to do away with controls and instead give subsidy directly to farmers or DBT. The latter too agrees but has not walked the talk despite top functionaries including none other than the Prime Minister having made exhortations to that effect. Why has it not been done? Where is the hurdle?
This may also have to do with the terrible shortfall in budget allocation vis-à-vis requirement. Imagine, if instead of manufacturers acting as conduit [current scenario], farmers were to receive subsidy directly from the government. Also, imagine the shortfall that exists now would also prevail under DBT to farmers i.e. unpaid dues of Rs 60,000 crore to farmers. This sounds pretty logical, but for the ruling dispensation, this could be politically suicidal.
The farmers who don’t get paid would be up in arms against the government [palliatives like ‘fertilizer bonds’ or SBA will fail to enthuse them] even as the latter will be left with no other option but to increase allocation to meet all needs in full and leave no dues pending. This in turn, would mean fiscal target getting out control which too is not desirable. Hence, the ruling class continues with status quo.
But, don’t forget, the present scenario is inherently unsustainable. What if the pain gone through by the manufacturers goes beyond a point and they start closing down en mass. Then, the government will be forced to act. So, why not do it now?
It should get down to addressing factors which contribute to high subsidy. Foremost, it should hike MRP of urea which has remained at more or less at the level it was two decades ago. Second, it should replace the extant unit-wise system by a ‘uniform’ subsidy to all manufacturers. Third, it should innovative mechanisms to lower cost of gas and other inputs used in making of fertilizers. These measures should help in reducing the gap between the cost and MRP, in turn, subsidy outgo to level that can be managed under given budgetary constraints. After a transitional period of say, three years, the government may remove controls and latch on to DBT.
Will Modi bite the bullet?