Taking a cue from petroleum bonds, the government has, for the first time, issued fertilizer bonds worth Rs7,500 crore to part-finance the additional subsidy burden due to rising price of imported feedstock and fertilizer.
“These bonds will be like the petroleum bonds and will be freely tradable in the market. The recoveries made by the department are not enough to pay for the additional subsidy,” said a senior fertilizer ministry official, who did not wish to be identified.
The government does not account for these bonds in the Centre’s fiscal deficit, or the gross borrowings target for the year, even though, in effect, the transaction would only postpone the actual expenditure.
M. Govinda Rao, director, National Institute of Public Finance and Policy, says: “These should ideally be a part of the fiscal deficit and come under the scanner of the Fiscal Responsibility and Budget Maintenance Act.”
Mint first reported on 9 August that the government was proposing to issue fertilizer bonds to help finance the burgeoning subsidy burden.
The issue of fertilizer bonds was included in the supplementary Budget for 2007-08, tabled by finance minister P. Chidambaram in the Lok Sabha on 16 August, under which the government sanctioned Rs15,000 crore for the fertilizer ministry, comprising the bonds, Rs6,550 crore as net cash outgo and Rs950 crore as recoveries under “crop husbandry”. The supplementary Budget is brought out when the expenditure allocated under a particular head is found insufficient for the financial year. Taking into account the budget allocation of Rs22,451 crore for this year, the total fertilizer subsidy comes to Rs37,451 crore—58% higher than the ‘actuals’ in 2006-07.
The fertilizer ministry had asked for an extra subsidy of Rs17,223 crore to tide over till December as rising oil prices have made imports expensive. “The total subsidy allocation for 2007-08 is still not adequate,” says a senior official of the Fertilizer Association of India, who did not wish to be identified. “According to our estimates, close to Rs12,000 crore were rolled over from last financial year as unpaid subsidy dues.”
“Right now, it is too early to know if the bonds would be of any help. The manufacturers are hard pressed for cash so liquidity is crucial. Also, the interest rate paid on these bonds is not yet known. If it is lower than the market rate, then the fertilizer manufacturers would have to pay the difference,” added the association official.
Experts warn that the government was once again reverting to incurring huge off-budget contingent liabilities, which were more than Rs35,350 crore in 2006-07. The petroleum ministry has already made a demand for Rs20,000 crore of new bonds for the current year to compensate the oil marketing firms for the losses incurred from rising global prices of crude oil.
Taking these and other liabilities into account, the Prime Minister’s Economic Advisory Council, in its Economic Outlook for 2007-08, said, “Realistically, another 2% of gross domestic product should be added to the reported revenue and fiscal deficits in order to get a more accurate picture of the state of government finances.”
An economist, who did not wish to be identified, also explained that the finance ministry was forced to resort to contingent liabilities because it didn’t want to shoulder the responsibility for the respective ministries, in this case, fertilizer, food and petroleum, which didn’t want to go ahead with the unpopular but inevitable decision of raising prices.