Delayed subsidies, gas trouble haunt urea makers

Satish Chander, DG, Fertiliser Association of India, in an interview with CNBC-TV 18 last week, had said the Rs 9,000-crore subsidy will only suffice for the on-account payment of the companies up to mid-November and the remaining four-and-a-half months will see dearth of funds.

“If you look at the industry as a whole, we will still be short by Rs 25,000 crore... and this (Rs 9,000-crore aid) is only for on account payment. We still haven’t got the balance payments yet, which is pending since 14 months (November 2012),” he had said.

While the introduction of nutrient-based subsidy in complex fertilisers and a dip in the import parity price (IPP) of urea have helped the government contain the overall subsidy bill, fiscal constraints have meant repeated under-budgeting of subsidy leading to delayed payments, said the CRISIL report.

This has particularly impacted urea manufacturers and compelled them to seek more working capital loans, which has increased their interest cost burden.

“Even though payments by the government are a certainty and it supports manufacturers through special banking arrangements (SBA), where it bears most of the interest cost, the stress due to delay is expected to continue into the next fiscal,” said Sudip Sural, Senior Director, CRISIL Ratings.

According to the CRISIL, while the SBA does provide temporary relief to fertiliser manufacturers in the form of cash-flow and lower interest burden, it believes the problem of under-budgeting, especially when the urea subsidy bill is likely to bloat in the next fiscal, will need to be addressed.

This fiscal, the IPP of urea has declined as have prices of raw materials to make complex fertilisers. This could translate into a reduction in subsidy in the next fiscal. “However, what will complicate matters is the re-pricing of domestic gas to international benchmarks effective April 1, 2014. This will raise the subsidy burden from urea manufactured using domestic gas as feedstock,” Sural said.

Chander said the urea industry is becoming sick with every passing day. “We need more funds to save and protect the urea industry and the domestic production of urea needs to be protected,” he said adding that various costs in industry have not been changed for over 10 years.

A meeting of group of ministers (GoM) headed by Sharad Pawar on fertiliser sector is scheduled on Thursday. GoM meet will consider relief in the form of fixed subsidies and vintage allowances to the fertiliser industry.