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Last Updated : Jan 16, 2019 02:23 PM IST | Source: Moneycontrol.com

Budget 2019: Focus on alleviating rural distress to benefit fertiliser sector

ICRA expects the GoI to take several steps for enhancing farmer income like ensuring crop realisation, focus on improving crop insurance scheme (Pradhan Mantri Fasal Bima Yojna, PMFBY) and allocation for development of agricultural markets.

Moneycontrol Contributor @moneycontrolcom

Varun Gogia

With general elections around the corner and the constraint of fiscal consolidation, the upcoming Interim Union Budget for FY2020 is expected to focus on alleviating rural distress and spur consumption, which may lead to spill over of subsidy to FY2020 from FY2019.

ICRA expects the GoI to take several steps for enhancing farmer income like ensuring crop realisation, focus on improving crop insurance scheme (Pradhan Mantri Fasal Bima Yojna, PMFBY) and allocation for development of agricultural markets.

Additional allocations are also expected towards investment for development of irrigation infrastructure, management of soil health and better availability of farm credit. These steps should have a positive rub-off effect on the fertiliser industry.

The year of 2018-19 has been adverse for the agri sector starting with the weakness in monsoon in the agriculturally important areas like Marathwada, Northern Karnataka and parts of Gujarat, continued lower farm realisations despite the announcement of higher MSPs and lower reservoir levels at the beginning of the current Rabi season.

All these factors have resulted in nearly 4.8% YoY decline in the rabi sowing levels so far. Despite the farm loan waivers announced in eight states over the last twelve months, agri distress has persisted which can negatively impact the consumption of fertilizer, agrochemicals and other farm inputs. With agri distress visible in the economy, stimulus measures by the GoI in the upcoming budget will remain imperative for improvement of the state of the farmers in the country.

Fertiliser industry continues to be buffeted by the delay in subsidy receivables from the government owing to inadequate subsidy provisioning resulting in strained working capital cycle. The budgetary allocation for the fertiliser subsidy is expected to remain around Rs. 70,000 crore resulting in the continuation of the subsidy backlog which as per ICRA estimates should be around Rs. 32,000-35,000 crore by the end of FY2018-19. The budgetary allocation for the NPK subsidy is expected to increase given the increase in raw material prices and currency depreciation.

On the other hand, driven by lower domestic gas availability, the share of R-LNG in the overall consumption mix for the fertiliser sector has been on an uptrend resulting in higher pooled gas price.

Higher gas costs result in higher cost of production for the urea players and higher subsidy outgo for the GoI as the retail price of urea remains fixed. Moreover, with three new urea plants expected to be operational in fiscal 2019-20, subsidy on urea will also increase as the cost of indigenous production will be higher than imports.

These will pose a challenge for the government to balance the subsidy allocation between urea and NPK fertilisers unless the budgetary allocation increases. To promote the use of R-LNG, the basic customs duty on R-LNG could be reduced to nil along with exemption of transmission charges from the levy of GST which currently stands at 18% leading to lowering of the cost of production of urea in the country.

Urea players also await the receipt of ~Rs. 4800 crore of revised fixed costs accrued over the last five years under Modified New Pricing Scheme-III (Modified NPS-III). Since the government’s focus will be on meeting its fiscal discipline commitments, the possibility of revised fixed costs being paid out to the sector in current fiscal remains low.

Further, ICRA expects the budget to outline the next steps to be taken for progress to the next phase in Direct Benefit Transfer (DBT) in fertiliser sector as the first phase will be achieving a full year of implementation in March 2019.

Varun Gogia, Senior Analyst, ICRA Ltd
First Published on Jan 16, 2019 02:23 pm
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