Post Budget Analysis Fertilizer Industry: A Shot In The Arm

The Union Budget 2012-13 has been a positive one for the Indian Fertilizer Sector. While there still continues to be no clarity on the urea de-regulation front, it was comforting to see certain measures undertaken by the govt. to spur growth in the sector. It is commendable to note that the growth for the fertilizer sector would not only come by way of direct infusion but the impetus given on agricultural reforms would also indirectly impact the sector for good.

Highlights of Budget 2012-13: A shot in the Arm

Positive

With a view to encourage investment in the sector and consequently fuel growth the Finance Minister has proposed a string of custom duty cuts. These include a proposal to fully exempt fertilizer plants which import equipments for initial setup or expansions from customs duty of 5 per cent for a period of 3 years i.e. up to 31st March 2015. There is also a proposal to reduce basic customs duty on water soluble fertilizers and liquid fertilizers, other than urea, from 7.5 per cent to 5 per cent and from 5 per cent to 2.5 per cent. Moreover, FM has proposed to provide investment linked capex incurred by fertilizer companies at an enhanced rate of 150 per cent as against 100 per cent.

In order to provide low cost of funds to the fertilizer sector along with some other distressed sectors the FM proposed to lower the rate of tax on interest payments arising out of external commercial borrowings from 20 per cent at present to 5 per cent for a period of 3 years.

Moving on, the FM has clearly shown his intention to encourage the use of potassium and phosphate fertilizers like single supper phosphate (SSP) through a wider extension network as this fertilizer which is completely manufactured domestically will help reduce dependence on imports. This development is a positive one for Liberty Phosphate as the company is one of the largest manufacturers in the country.

The agricultural reforms that FM has proposed to move will also lead to an indirect demand upswing for fertilizers. Ranging from the enormous Rs 202 billion allocated towards farm outlay in FY13 to the interest rate subvention provided to farmers who pay loans on time to raising the farm credit limit and finally the boost to Green revolution, all these will positively impact the fertilizer sector in times ahead.

Neutral

In view to speed up the mechanism to set up a route to directly transfer subsidies to end users the FM has announced the set up of a mobile based Fertilizer Management System (mFMS). This system would help provide end-to-end information on the movement of fertilizers and subsidies, from the manufacturer to the retail level. With plans to roll out this system on a nation-wide basis in CY2012 the direct transfer of subsidy to the retailer, and eventually to the farmer will be implemented in subsequent phases. According to the FM, this step will benefit 12 crore farmer families, while reducing expenditure on subsidies by curtailing misuse of fertilizers. However, this move is a very old one and until and unless the govt. decides to de-regulate urea prices, it won’t augur well for urea manufacturers given that urea is the most widely used fertilizer in the country.

The proposal to provide Viability Gap Funding (VGF) to fertilizer companies in order to spur investment must also been taken with a pinch of salt as the govt. for long has notoriously been know for its whimsical interference into the fertilizer sector.

Also the envisaged plan to make the country self sufficient in terms of urea will not prove of much help because the government’s recent proposal to introduce the new urea investment policy did not go down very well with industry players as the floor and ceiling prices in linkage with natural gas prices set by govt. was far below industry expectations. This we feel will not do much to spur investments in the sector unless the govt. revises and introduces some better policies.

Negative

The FM failed to give any clear indication to curtail subsidy burden on fertilizers. In fact it was very disappointing to see the FM completely ignore the urea de-regulation policy despite having started the speech on strong note citing the need to take hard decisions and make do with some subsidies if they hurt macro economic growth. However, the FM has merely upped the FY13 fertilizer subsidy target to Rs 60974 crore, 21 per cent more than last year’s budgeted amount.

Conclusion

Despite ignoring the urea de-regulation issue and upping the fertilizer subsidy targets, on the whole the budget has presented some good opportunities for the fertilizer sector. In conclusion, we expect that the takeaways from this budget will really augur well for fertilizer industry players in the long run.