29 January 2021, Mumbai, IN: Domestic fertiliser sales are set to surge 10% – well above the compound annual growth rate of ~3% seen in the five fiscals through 2020 – to a record ~68 million tonne (see annexure) this fiscal following a good monsoon.
That, and timely disbursement of the Rs 65,000 crore additional subsidy announced by the government under the Atmanirbhar Bharat Package 3.0 last November can support the credit profiles of fertiliser manufacturers.
For the government, the upcoming budget for fiscal 2022 is an opportunity to address the issue of subsidy arrears in two ways: by providing the entire additional subsidy for this fiscal, and budgeting for adequate subsidy next fiscal.
Says Manish Gupta, Senior Director, CRISIL Ratings Ltd, “Rising subsidy arrears and, as a result, piling up of debt have been a structural issue for the fertiliser industry since long. The additional subsidy, assuming there is no further build-up of arrears going forward, can spawn a structural improvement in the credit profiles of fertiliser companies. Disbursement of additional subsidy can reduce the industry’s debt1 by a significant three-fourth, and debtor days to below 50 days from 200 days by the end of this fiscal.”
To incentivise farmers to use fertilisers for better crop yield, the government keeps the retail selling price of fertilisers significantly lower than the actual cost, and reimburses the deficit to fertiliser manufacturers through subsidy payments.
The fertiliser industry’s subsidy arrears are estimated to have ballooned to ~Rs 50,000 crore by the end of last fiscal because of rising sales and continuous under-budgeting over the years.
For the current fiscal, the subsidy budgeted was ~Rs 71,000 crore. If the additional subsidy of Rs 65,000 crore is added, total subsidy allocated this fiscal will be ~Rs 1.36 lakh crore. Given that the subsidy required is Rs 82,000-85,000 crore this fiscal, there would be a surplus of Rs 52,000-55,000 crore. This can clear almost the entire backlog of subsidy arrears. Going forward, it is crucial that the government continues to adequately budget for annual fertiliser subsidy to avoid any material build-up in arrears.
In addition, healthy demand augurs well for fertiliser manufacturers.
Says Nitesh Jain, Director, CRISIL Ratings Ltd “Higher sowing and early fertiliser purchases by farmers to secure supply amid the pandemic-induced uncertainty have meant the sales volume rose 11.7% in the first nine months of this fiscal. The monsoon this season has been a bounteous blessing at 109%2 of the long period average and the third-highest in 30 years, with good spatial and temporal distribution. Additionally, reservoir levels are at 117%3 of the past 10-year average, and soil moisture levels materially better. Not surprisingly, kharif sowing was the highest ever, while rabi sowing is up 2% on-year.”
The fertiliser sector is of high strategic importance to the government given its direct impact on agriculture and the rural economy.
Clearance of subsidy arrears can also speed up structural reforms in the agriculture sector, such as rollout of direct subsidy benefit to farmers, and persuade more balanced fertiliser usage, which is currently skewed towards urea.
Timeliness in the disbursement of additional subsidy, and adequacy of subsidy in the Union Budget for next fiscal are key monitorables for a sustainable reduction in the debt levels of fertiliser manufacturers.