Budgeting for failure

Last Updated: Mon, Jan 28, 2013 04:15 hrs

The government, according to recent newspaper reports, finds itself unable to clear the mounting subsidy dues of the fertiliser industry - the budgetary allocation for this purpose has already exhausted. This is as much a reflection on the shocking flaws in the Budget-making exercise for this financial year as on India's misguided fertiliser subsidy policy. The arrears payable to fertiliser companies are already over Rs 19,000 crore and seem set to soar to between Rs 38,000 crore and Rs 40,000 crore by the end of the current financial year. Surprisingly, the current year's Budget had set apart only around Rs 61,000 crore for subsidy payment in 2012-13, against the anticipated actual subsidy bill of close to Rs 1 lakh crore - under-budgeting by a whopping 60 per cent.

Clearly, either the government grossly erred in estimating the likely subsidy requirement or it had intentionally under-provided for the same to project a lower overall fiscal deficit. Both of these are indefensible. The lag in the reimbursement of subsidy that the industry has already doled out to the farmers on the government's behalf causes a severe liquidity crunch for the fertiliser companies, making it difficult for them to pay for the feedstock. Some fertiliser units are reportedly on the verge of closure due to their incapacity to buy the raw material. Should that happen, the consequential higher imports would inflate the overall subsidy bill - given that the cost of imported fertilisers is much higher than that of domestically produced nutrients. On urea, for instance, the average subsidy on the imported stocks is estimated at Rs 16,000 per tonne, double that of Rs 8,000 per tonne indigenously.

This is not the first time that subsidy payments are being held back. The government has even issued bonds in lieu of cash, or asked banks to lend to fertiliser companies against the subsidy receivables guaranteed by the fertiliser ministry. Both are unsatisfactory. Fertiliser bonds are usually traded at heavy discounts in the market, causing financial losses to fertiliser companies; bank loans against subsidy dues further inflate expenditure because banks have to be paid interest. The best way to trim the subsidy flab and avert hardship to the industry owing to delayed payment of dues is to rationalise fertiliser prices and pay subsidy directly to farmers instead of routing it through fertiliser companies. However, this can best be done by decontrolling urea, bringing it under the nutrient-based subsidy regime along the same lines as phosphatic and potassic fertilisers. Its prices may be raised periodically in small doses since major upward price revision at one go may not be politically feasible. As with diesel, decisive action is needed now, and future Budget exercises must avoid the pitfalls now visible in this financial year's attempt.

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