New urea subsidy system a right move: Sunidhi Securities

Tarun Surana, research analyst (Institutions), Sunidhi Securities & Finance Limited, says that the agricultural department, at the district level, does the certification and then it is communicated to the Centre and based on that subsidy is given. Around 85-90 percent of subsidy is given based on the sales from companies to dealers.

Below is the edited transcript of his interview to CNBC-TV18. Q: The cabinet committee on economic affairs has approved the payment of fertilizer subsidies to firms will be based on receipt of fertilizers and acknowledgement by the retailer and the acknowledgement of the receipt will be tracked on the ICT-enabled mobile fertilizer monitoring system. Till now, who was getting that subsidy or how was it tracked, at what end is the retailer roped in?
A: Till now, manufacturers were getting subsidy after dispatch of fertilizers. The role of the state is to certify the receipt. Q: Who certifies the receipt at the district level?
A: The state government certifies the receipt. The agricultural department, at the district level, does the certification and then it is communicated to the Centre and based on that subsidy is given. Around 85-90 percent of subsidy is given based on the sales from companies to dealers. Then the risk is available after certification from state.
They are adding retailer in the loop of acknowledgement, wherein a retailer through their mobile-based applications or via SMS is also required to acknowledge the receipt of fertilizers at their shops, then it will be crossed checked by shipment data from companies by department. Once the department is satisfied with the data subsidy will be released.     Q: You mentioned that 80 percent of the subsidy is paid on the basis of sales that they report, these sales are verified from the agricultural department and this 80 percent is verified by the agricultural department and the retailer now?
A: We are yet to get details and don't have clarity on that. Earlier retailer did not played any role in the process but now the retailer is added in the phase II of direct subsidy transfer. Now, the government will transfer the subsidy to the retailer instead of giving it to the manufacturers.
It is a preparation of phase II wherein the retailers will get subsidy directly by next year. To get retailer into the system, the government is first getting them only on the data part, the actual transfers will begin next year or when the pilot project in ten districts becomes successful. Q: An incentive of Rs 50 is given to the retailer to report data. This will add to the government’s burden for the moment, no reduction in their outgo?
A: Correct. The retailer is required to give a daily report of sales and inventory and also need to wait for the government to payback subsidy in their account. To make a retailer part of the process they are paying then Rs 50 per tonne. Q: Will it be positive for any fertilizer company in the near term or at least for the next one year till the retailer level gets the subsidy or do you think there is no positive for any fertilizer company?
A: It will not be positive in the near term but the government is moving in the right direction. The government cannot test the system by adding crores of farmers directly. So they are adding few retailers and it’s a step in right direction. Q: The government is trying to stop the pilferage and it might help them on their subsidy burden. How does it benefit the companies even in the longer term?
A: In the longer term it will benefit the working capital management of the company because they will sell the material at full price to their distribution chain and hence will not be part of waiting game for subsidy receipts which are often delayed due to lack of funds especially towards the year end. Q: There is some additional information available from media that retailers will be paid an incentive of Rs 50 and urea price is hike by Rs 50 per tonne. What information can you provide? Is it just a means to ensure that the price pay to the retailer is not adding to extra burden and it is going to be faced by the consumer?
A: According to my information the government has not increased the prices of urea until now. Price hike proposal is separate from this decision. A proposal of 10 percent price hike is pending with the government which is Rs 531 per. As of now, a questions still remains if this Rs 50 per tonne incentive to dealers will be passed out to farmers or not. The commission of the dealer is confirmed as of now.