The budget announcement of an increase in the fertiliser subsidy for fiscal 2021 by Rs 62,638 crore, and subsidy allocation of Rs 79,529 crore for fiscal 2022 can lead to a sustainable reduction in the debt of fertiliser companies and bolster their credit profiles.

Almost the entire amount of additional subsidy of Rs 65,000 crore announced under the Atmanirbhar Bharat Package 3.0 in November 2020 has been added to the revised estimate for fiscal 2021, taking the fertiliser subsidy budget for the fiscal to a record ~Rs 1.34¹ lakh crore from Rs 71,309 crore.

Furthermore, the allocation of Rs 79,529 crore for fiscal 2022 should broadly cover the subsidy requirement, which means no material build-up of subsidy receivables assuming steady demand of fertilisers and input prices. Going forward, it is crucial that the government continues to adequately budget for annual fertiliser subsidy to avoid any material build-up in arrears and a sustainable reduction in the debt levels of fertiliser manufacturers.

These two developments can address the structural issue of subsidy arrears for the industry.

Over the past many years, due to continuous under-budgeting of fertiliser subsidy, arrears had ballooned to ~Rs 50,000 crore as of fiscal 2020 end, resulting in substantial working capital debt and interest outgo for fertiliser companies.

The increased subsidy allocation of ~Rs 1.34 lakh crore would meet the subsidy requirement for fiscal 2021 as well as clear almost the entire backlog of subsidy arrears. This can help prune the industry’s debt² by three-fourths and reduce receivables to less than 50 days by the end of this fiscal, from 200 days earlier. Timeliness of disbursement of the additional subsidy will remain the key monitorables.

Crisil Ratings is assessing the exact impact of these announcements on credit profiles of its rated companies and will shortly take necessary rating actions.

¹ As on December 2020, Rs 75,927 crore of subsidy has been disbursed as per fertiliser ministry “https://fert.nic.in/sites/default/files/2020-082021-01/English-December-2020.pdf”
² Crisil Ratings has considered financials of seven industry players accounting for around 75% of fertiliser sales in India