Industry unhappy with terms of proposed fertilizer bonds

Industry unhappy with terms of proposed fertilizer bonds

New Delhi: To defer payment of fertilizer subsidy arrears in the current year, the finance ministry proposes to issue Rs7,500 crore in bonds with a 14-16 year tenure, and an interest rate of 8.20%, a senior government official said on condition of anonymity.

Modelled after India’s oil bonds, it will be the first time the government is employing this instrument to defer the fiscal pressure from the growing fertilizer subsidy dues.

But industry representatives said they were sceptical about the government initiative.

“The tenure is too long and the interest rate much below our expectations. Moreover, it is still not very clear whether they will be tradable or not. The government must understand that it is giving us these bonds in place of hard cash. If they are not saleable, then manufacturers will be compelled to borrow the working capital at 12-14% from banks," said a senior Fertilizer Association of India (FAI) official, who wants to remain anonymous as the matter is sensitive.

A 15-year Government of India bond issued by the Reserve Bank of India (RBI) carries a yield of 8.13%.

The bonds worth Rs7,500 crore are part of Rs15,000 crore disbursed during the first supplementary budget in August in order to meet the government’s fertilizer subsidy dues to the manufacturers. The supplementary budget—a second one was presented to Parliament last week—allows the government to allocate fresh funds when the initial budgeted amount proves inadequate. The actual fertilizer subsidy for the current year is expected to be around Rs48,000 crore while the initial budget allocation was Rs22,451 crore.

The sharp rise in subsidy payments this year has primarily been due to the rise in the price of imported fertilizers and raw materials even as the domestic administered prices remained unchanged.

The subsidy is the difference between the total delivered cost of fertilizers at the farm gate and the maximum retail price fixed by the government.

By issuing bonds, the government will reduce payouts by Rs7,500 crore in the current year. Since the government manages its accounts on a cash basis, the bonds that have been issued will only show up in the books at the time of maturity, 14 or 16 years later. Assuming that the government sticks to the model followed for oil bonds, then the companies will be able to recover their dues by selling these bonds in the money market.

According to estimates of industry lobby body FAI, even if the bonds are tradeable and the industry is able to sell them at a 5% discount, it will still suffer a loss of Rs350 crore over the total sum of Rs7,500 crore for which the bonds are being floated. The FAI official said the industry requested the government to restrict the tenure of the bonds to a maximum of five to seven years.

He also said the industry wanted the interest rate on these bonds to be at par with the commercial bank prime lending rate—presently 12.75-13.25%—in order to keep the bonds cash-neutral for the companies.

FAI also demanded that the bonds should be made eligible for Statutory Liquidity Ratio so that they are easily tradeable and provide cash to the manufacturers.

A senior fertilizer ministry official confirmed that they were in talks with the finance ministry in order to make the terms of the bonds more favourable to the manufacturers. According to the FAI official, RBI was not in favour of providing differential treatment to the fertilizer industry as opposed to the oil companies.

The FAI official said the unattractive proposal for fertilizer bonds would further compound the fertilizer industry’s woes. Last week, the finance ministry had deferred the disbursement of an additional Rs9,000 crore towards the payment for fertilizer subsidy dues.