New Delhi: Rising costs of raw materials and feedstock, coupled with delays in subsidy payments, are hurting margins of domestic fertilizer makers.
The already cash-strapped companies say the government needs to focus on increasing domestic output. It should also look at reducing the number of farmers eligible for subsidy, and boost efficient fertilizer use, they say.
Currently, the government fixes the price at which a fertilizer firm sells to the government as well as the maximum retail price that a farmer pays for the product. The government subsidizes the difference.
Delays in subsidy payments mean fertilizer makers have to borrow money from the market for working capital, said a top official of a public sector company who did not wish to be identified.
“We borrow at high interest rates and that is never reimbursed by the government. With production costs going up four to five times in the past two years, the interest burden has severely eroded our profitability. The government has not made any payments for the price escalations since October 2006. And this is true for all companies,” the official said.
Subsidy payments have skyrocketed in the past four years from Rs15,779 crore in 2004-05 to an estimated Rs95,000 crore in 2008-09, or 1.9% of the gross domestic product. Last year, the subsidy stood at Rs40,338 crore, which includes Rs7,500 crore paid through the first-ever issue of fertilizer bonds.
Fertilizer production requires natural gas, naphtha or furnace oil as feedstock, which account for 70% to 80% of the production cost. All feedstock variations are derivatives of crude petroleum and their prices vary with oil prices. In the past two years, the prices of liquefied natural gas, naphtha and furnace oil have increased by 198%, 50% and 71%, respectively. Out of the 28 functional urea plants in the country, 12 use naphtha or furnace oil as feedstock.
Similarly, the prices of crucial raw materials like phosphoric acid, sulphur and rock phosphate have gone up by 331%, 867% and 297%, respectively, in the past two years.
Retail prices of fertilizers, however, have remained unchanged while subsidy has ballooned.
“Last year we lost Rs136 crore as interest payments just because of the delay in the payment of subsidy dues. On top of it, the government floated bonds with 15-year-long tenures. These bonds are more like a ‘bondage’ because its not cash, which we require to run operation today,” said a senior official of another public sector manufacturer, on condition of anonymity.
“Make bonds the currency and allow us to pay our taxes, too, in bonds,” said the first official, mocking the government’s tendency to defer actual cash payment.
With the subsidy bill expected to go up by 135% this year, many industry analysts expect more bonds to be floated. “The government will continue floating more bonds as long as it thinks the manufacturers have some elbow room,” said Amar Singh, the research head of commodities at Angel Broking Ltd. Singh says the government, too, is in a tight spot. “It is clear that the current levels of subsidies are not sustainable. Yet, with elections on the horizon, the government could be hit politically if it brings about any reforms.”
“Subsidy should be given only to the small and poor farmers. Why should it be given to rich farmers who are into cash crops? Better targeting would not only relieve the companies but also bring down the subsidy bill,” said the first official.
In 2007-08, the total domestic fertilizer production stood at 32.6 million tonnes, or mt, while India imported 14.5mt.
R.C. Gupta, deputy director general of industry body Fertiliser Association of India, said the government should also focus on improving efficient fertilizer use. “Such a move will reduce the demand for fertilizers and our dependence on imports which are abnormally costly,” he said.