India Govt’s ambitious fertilizer subsidy reform plan

Union minister for chemicals and fertilizers Ananth Kumar’s ambitious plan to clear the fertilizer subsidy backlog before the implementation of the direct benefit transfer (DBT) scheme next fiscal year (FY19) has come as surprise to many.

The huge subsidy backlog (estimated at Rs35,000 crore as of FY17) has been the source of much financial discontent for the industry. Payment delays worsened the working capital situation for many, raising finance costs and crimping profits. In this backdrop, the minister’s statement has not only come as a surprise but is also viewed by many with some scepticism.

First, estimates of the quantum of subsidy backlog vary greatly. The minister puts the current subsidy backlog at Rs23,000 crore whereas industry body Fertiliser Association of India pegs the current fiscal year (FY18) subsidy backlog at Rs30,000 crore.


According to a person associated with the industry, the subsidy backlog has come down this year due to a reduction in raw material costs. But he doubts if the subsidy backlog will be as low as the figure the minister is alluding to as raw material prices have rebounded again.

Even then, with the budgeted subsidy for a fiscal year usually exhausted in the first eight months of the year itself, the government will have to seek a supplementary grant to clear the subsidy backlog, a tough task given the constraints in FY18.

Secondly, the message implied in the minister’s statement is implementation of DBT next year (the plan is to clear the subsidy backlog before the implementation of DBT), which again is a grey area. Pilot projects and studies show huge infrastructure constraints at the retailer’s end.

“Fertiliser retailers are worried that transactions authenticated through PoS (point of sale) may not be feasible during upcoming peak ‘Kharif’ season due to high transaction time. Assuming 5 minutes per transaction time and 10 hours of operation; retailers can only handle 120 transactions in a day, which is insufficient to handle rush of 300-500 farmers per day during peak periods,” says an assessment report on the Aadhaar-enabled fertilizer distribution system (pilot project).

Even the producers are not fully convinced. But the lure DBT holds out is that the subsidy will be disbursed to the companies within seven days of the actual sale at the retailer’s end. If implemented as envisaged, it can significantly reduce the fertilizer industry’s working capital requirement and ease the financial woes of the sector. The question, however, is preparedness.

“We have a theoretical clarity how it will function, but practically we have to experience. We know if we book the sales in PoS, subsidy will be disbursed in seven days’ time from the time the sale happen at the retail counter, but we have to experience this and I think it will take some time to settle down,” Coromandel International Ltd’s management said in a post-September quarter results conference call.

Overall, while the government is trying to reform the fertilizer subsidy payment mechanism, the challenge is to make sure the new system works before implementation.