DBT to impact fertiliser industry’s working capital: Report
Mumbai, Feb 21 : Bringing the fertilizer subsidy payout under the direct benefit transfer (DBT) scheme is likely to have a negative impact on the working capital cycle of the industry in the near term, says a report.
The fertilser DBT implemented on a national basis from February 1, aims to address the challenges such as diversion of urea for non-agricultural use, imbalanced use of fertilisers, delay in subsidy receipts from government and protection of some of the legacy and inefficient plants.
However, rating agency Icra feels that due to large subsidy backlog, inadequate subsidy provisioning in the Budget as well as shifting of subsidy realisation from point-of-dispatch to point-of-retail sales, DBT is likely to have a negative impact on the working capital cycle of the fertilizer industry in the near term.
The agency estimates the subsidy backlog to be over Rs 23,000 crore by March, which is nearly 33 per cent of the budgetary allocation of Rs 70,000 crore for FY19.
“In light of gradual increase in price of key fertiliser raw materials like ammonia, phosphoric acids and natural gas and an additional 7 per cent levy on imports, the overall subsidy requirements are expected to increase beyond what is budgeted for 2018-19,” said K Ravichandran, a senior vice-president at Icra.
Under the existing subsidy framework, sale is reported when fertilisers are sold to wholesalers or retailers, whereas under the new DBT regime, sales would be reported only on sale to farmers.
This in turn, according to Icra, would lead to a “significant increase in the carrying cost of inventory for the industry, besides some amount of lumpiness in sales recognition in the books”.
“However, to provide some relief to the industry, the option of providing a special banking arrangement is being explored, though it remains a stop-gap arrangement as it does not resolve the issue of a large backlog,” said Ravichandran.
While a number of steps have been taken to reduce the rate of authentication failure and lowering of transaction time, which were faced during the pilot stage, he said the system may take some more time to stabilise.
The report notes that despite the challenges, the new system has increased the overall accountability of stakeholders, including manufacturers, wholesalers, and retailers, besides enhancing the transparency with improved tracking of physical movement of fertilisers.
“These steps have helped reduce diversion of fertilisers for other purposes,” it concluded.