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STUDY REPORT ON”ACCOUNTING ON FOOD, FERTILISERS & OIL SUBSIDY”

Prepared byCommittee on Public Finance & Government Accounting

The Institute of Chartered Accountants of India(Set up by an Act of Parliament)

The Committee on Public Finance & Government AccountingThe Institute of Chartered Accountants of IndiaA-29, Sector-62, Noida-201 309Phone: (0120) 3045950/968E-mail: [email protected]: www.icai.org

STUDY REPORT ON

“ACCOUNTING ON FOOD, FERTILISERS & OIL SUBSIDY”

Prepared By

COMMITTEE ON PUBLIC FINANCE & GOVERNMENT ACCOUNTINGTHE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

(Set up by an Act of Parliament)

© The Institute of Chartered Accountants of IndiaAll rights reserved

No part of this Report may be reproduced, stored in a retrieval system, or transmitted, in any form, or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior permission, in writing from the publisher.

First Edition: December 2011

Committee: Committee on Public Finance & Government Accounting

E-mail: [email protected]: http://www.icai.org

Published by

The Publication Department on behalf ofThe Institute of Chartered Accountants of India,ICAI Bhawan, Post Box No. 7100, Indraprastha Marg,New Delhi-110 002

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FOREWORD

In India, as elsewhere, subsidies account for a significant portion of government’s expenditure. These implicit subsidies not only cause a considerable draft on the already strained fiscal resources, but may also fail on the anvil of equity and efficiency. In the context of their economic implications, subsidies have been subjected to an intense debate in India in recent years.

A task force headed by Shri Nandan Nilekani, Chairman of Unique Identification Authority of India submitted an Interim report to Finance Minister on direct transfer of cash subsidies for fertilisers, cooking gas and kerosene.

The transition to direct transfer of subsidies will lead to best practices in modern retail being incorporated in public provisioning, and also to increased competition and efficiency in the manufacturing, distribution, and retailing. The use of technology makes it possible to strengthen and automate checks and balances, which will encourage participants to benefit from compliance, while simultaneously making it difficult to pilfer.

India’s growing oil subsidy bill may prevent Government from achieving target of keeping fiscal deficit at 4.6% of gross domestic product (GDP) in the current financial year 2011-12, global economic body of 34-nations, Organization for Economic Cooperation and Development (OECD) observed recently.

Tight control will have to be exercised over spending, given that in the past few years there have been consistent over-runs in budgeted outlays. Hence, a steadfast commitment to spending restraint will be essential for the government to meet its target.

I appreciate the efforts of CA. Anuj Goyal, group members of the study group and Committee Secretariat for visualizing and bringing out this Report.

I am confident that this Study Report would enrich the readers and provide an appreciable level of insights about the entire gamut of “Accounting on Food, Fertiliser and Oil Subsidy”.

With warm regards,

CA. G. RamaswamyPresident-ICAI

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PREFACE

The mounting burden of subsidies is compelling the policy planners to make a serious attempt to reform the subsidy policy related to food, fertilisers and oil sector. Government is intending to stop subsidising cooking gas and kerosene next year and move to direct transfer of subsidies on Liquefied Petroleum Gas (LPG), kerosene and fertilisers for the poor. It is also proposed to set up IT- driven Core Subsidy Management System (CSMS) to leverage the “Aadhar” unique identity numbers for distribution of subsidy. This would ensure increased transparency in the movement of goods, levels of stocks, prediction and aggregation of demand and identification of beneficiaries. Beneficiaries would receive subsidy transfers to their ‘Aadhar’-linked bank accounts on a real time basis, which could be accessed through various banking channels, such as bank branches, ATMs, internet and mobile banking.

The Committee on Public Finance & Government Accounting (CPF&GA) has prepared this Study Report on “Accounting on Food, Fertilisers and Oil Subsidy” which provides awareness on various subsidy related issues in India.

I wish to convey my sincere gratitude to CA. G Ramaswamy, President, ICAI and CA. Jaydeep N Shah, Vice-President, ICAI for their vision and supporting the research endeavors of the Committee on Public Finance & Government Accounting.

I would like to place on record my sincere appreciation for the efforts put in by CA. Shalini Jindal, Secretary, CPF&GA, Dr. Nikhil Saket, Senior Assistant Secretary, CPF&GA and the staff of the Committee for conceptualizing and preparing this Study Report. Members of the Study Group, viz. Shri R Bhatnagar (IOCL), Shri Ajay Kumar (FCI), Shri Manish Gambhir (NFL), Shri Manish Diwan (NFL), Mrs. R S Borah (Oil India Limited), Shri K V Rao and Shri Krushna Mahapatra (HPCL), Shri Vikram Gulati (HPCL), CA. Anil Kumar Gupta, CA. Madan Verma and CA. Pankaj Gupta deserve credit for the work done and also for the authorship of this study.

I sincerely believe that this Report will be a fruitful resource material on subsidy related issues for the interested readers.

With warm regards,

CA. Anuj GoyalChairman, Committee on Public Finance & Government Accounting

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ACKNOWLEDGMENTS

The study on ‘Accounting on Food, Fertilisers and Oil Subsidy’ deals with the current methodology, drawbacks and deficiencies in the current system for accounting of subsidies and recommendations for the improvement in the current practices. The study covers all the aspects from the perspective of the Government as well as from the perspective of the companies in accounting the subsidies provided in the sector of food, fertilisers & oil industry. The contribution of the members of the sub group is appreciated. Their technical inputs were vital in the finalization of the report. Special thanks are extended to sub group members Shri K V Rao , Executive Director, (Corporate Finance), Hindustan Petroleum Corporation Limited, Shri Ajay Kumar, CGM, Finance, Food Corporation of India, Mrs. R S Borah, General Manager, (Treasury), Oil India Ltd., Shri R Bhatnagar, Dy. General Manager, Indian Oil Corporation Ltd, Shri Krushna Mahapatra, Chief Manager-Pricing Hindustan Petroleum Corporation Limited, Shri Vikram Gulati, DGM-Corporate Accounts, Hindustan Petroleum Corporation Limited, Shri Manish Gambhir, Manager (F&A), National Fertilisers Limited, Shri Manish Diwan, Manager (F&A), National Fertilisers Limited, CA. Anil Kumar Gupta, co-opted member (2010-11), CA. Madan Verma, Special Invitee (2010-11) and CA. Pankaj Gupta.

Thanks also to CA. Shalini Jindal, Secretary, CPF&GA, Dr. Nikhil Saket, Sr. Asst. Secretary, CPF&GA for their effort in finalization of the report. Special thanks to Mrs. Shivani Taneja, Mr. Geevar P D, Mrs. Kavya Barry Kapur and Mrs. Gunjan Kohli for their continuous assistance in the finalization of the report. All these experts deserve thanks and appreciation for their most valued contribution in the preparation of this report.

with warm regards

CA. Anuj GoyalChairmanCommittee on Public Finance & Government Accounting

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CONTENTS

Chapter I- Subsidy-An Introduction

Chapter-II-Accounting on Food Subsidy

Chapter-III-Accounting on Fertiliser Subsidy

• Introduction 1• Rationale of Subsidies 1• Contemporary Issues 2• Accounting Standards issued by ICAI 5• The Standards 6• Budget Speech 6• Report submitted by Nandan Nilekani-Major Highlights 7• Measures for effective utilization of Subsidies 9

• Introduction 10• Constituents of Food subsidies in India 11• Short-Run Measures 15• Long-Run Measures 16• Trends at the Central Level 17• Decentralised Procurement Scheme 19• Extent of Food Subsidy in India 20• Food Subsidies & Leakages 20• Recommendations/Suggestions 20

• Introduction 24• Previous & New System 24• Major Subsidies in India 26• Trends in Fertiliser Production and Consumption 27• Beneficiaries of Fertiliser Subsidy 29• Policy Dilemma 30• Government notification regarding freeing of MRP of P&K fertilisers 30• Recommendations/Suggestions 31

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Chapter IV-Accounting on Oil Subsidy

Annexures

Bibliography

• Introduction 32• Historical Perspective of Indian Oil & Gas Industry 33• Govt. controlled Pricing & Administered Pricing Mechanism

(APM) for petroleum products 33• Main Recommendations given by Kirit Parikh Committee on

3rd February 2010 34• Under Recoveries and Losses 35• Under Recoveries & Compensation 36• Compensation in the form of Oil Bonds 37• Present Scenario 39• Accounting of Subsidy/ Compensation by OMCs 39• Concerns of Oil Marketing Companies 40• Concerns of Upstream Companies in Sharing of Under-recoveries 40• Recommendations /Suggestions 41

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76

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LIST OF TABLES



Chapter IV-Accounting on Oil Subsidy

Table 1 : Year wise break up of Subsidy released on foodgrains during the last 5 years

Table 2 : Year wise break-up of Subsidy related to FCI and incurred by FCI on foodgrains during the last 5 years

Table 3 : Allocation for Food Subsidy in the recent years

Table 4 : Quantum of Food Subsidies released by Government over the years

Table 5 : Food subsidy released to various States under DCP operations from 2007-08

Table 6 : The Food Subsidy released for subsidised foodgrains to BPL, AAY and APL families

Table 1 : Major Subsidies (in crores of Rupees) in India: 1990-91 to 2008-09

Table 2 : Production & Imports of Urea, DAP, Complex Fertilisers and MOP

Table 3 : Fertiliser Subsidy plan of Union Budget 2011-12

Table 1 : Year-wise break-up of total under-recoveries of OMCs and sharing among Upstream oil companies, OMCs and Central Govt

Table 2 : Trend of coupon rates fixed on Special Oil Bonds since issuance

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LIST OF FIGURES

Chapter I- Subsidy-An Introduction



Figure 1 : Giving Shape to Direct Cash Transfers

Figure 2 : The Proposed System & The Existing System of Subsidies

Figure 1 : Over 2-fold increase in food subsidy allocations since FY 2004-05

Figure 2 : Fluctuating trends of Food Subsidy as a % of GDP

Figure 3 : Share of Food Subsidy and Antyodaya Anna Yojana (AAY) scheme received by BPL families

Figure 4 : Significant leakages in distribution of Ration Cards

Figure 1 : Trends in Food & Fertiliser Subsidies (as percent of GDP at current prices) in India from 1990-91 to 2008-09

Figure 2 : Trends in Food & Fertiliser Subsidies (as percent of total Subsidies) in India from 1990-91 to 2008-09

Figure 3 : Trends in fertiliser production and consumption

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ABBREVIATIONS

APL Above Poverty Line

APM Administered Pricing Mechanism

AS Accounting Standard

AAY Antyodaya Anna Yojana

BPCL Bharat Petroleum Corporation Limited

BPL Below Poverty Line

CACP Commission of Agricultural Cost and Prices

CAG Comptroller and Auditor General of India

CAGR Compounded Annual Growth Rate

CIF Cost, Insurance & Freight

CIP Central Issue Price

CSMS Core Subsidy Management System

DAP Di-ammonium Phosphate

DCP Decentralized Procurement Scheme

FCI Food Corporation of India

FII Foreign Institutional Investors

GDP Gross Domestic Product

GOI Government of India

HPCL Hindustan Petroleum Corporation Limited

HSD High Speed Diesel

IAS International Accounting Standard

ICAI Institute of Chartered Accountants of India

IGAS Indian Government Accounting Standard

IPP Import Parity Price

IOC Indian Oil Corporation Limited

K Potassic

LPG Liquefied Petroleum Gas

MOP Muriate of Potash

MMT Million Metric Tonne

MRP Maximum Retail Price

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MT Metric Tonne

MSP Minimum Support Prices

MS Motor Spirit

NBS Nutrient Based Subsidy

NSS National Sample Survey

NPS New Pricing Scheme

OMCs Oil Marketing Companies

ONGC Oil & Natural Gas Corporation Limited

P Phosphatic

PDS Public Distribution System

PFs Provident Funds

PSUs Public Sector Units

RMS Rabi Marketing Season

RPS Retention Pricing Scheme

SKO Superior Kerosene Oil

TDPS Targeted Public Distribution System

UID Unique Identification Number

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Study Report on “Accounting on Food, Fertilisers & Oil Subsidy”

1

Introduction

Rationale of Subsidies

Subsidies, as converse of an indirect tax, constitute an important fiscal instrument for modifying market-determined outcomes. While taxes reduce disposable income, subsidies inject money into circulation. Subsidies affect the economy through the commodity market by lowering the relative price of the subsidised commodity, thereby generating an increase in its demand. With an indirect tax, the price of the taxed commodity increases, and the quantity at which the market for that commodity is cleared, falls, other things remaining the same.

Subsidies can have an appreciable impact in augmenting the welfare of the society provided these are designed and administered efficiently to serve a clearly stated set of objectives. However, subsidies can be very costly if they are poorly designed and inefficiently administered. Subsidies in sectors such as education, health and environment at times merit justification on grounds that their benefits are spread well beyond the immediate recipients, and are shared by the population at large, present and future.

In India, as also elsewhere, subsidies account for a significant portion of government’s expenditures although, like that of an iceberg, only their tip may be visible. These implicit subsidies not only cause considerable draft on the already strained fiscal resources, but may also fail on the anvil of equity and efficiency. In the context of their economic effects, subsidies have been subjected to an intense debate in India in recent years.

In general, subsidies are advocated in the presence of positive externalities. In such a case, the social benefit from the consumption of a particular commodity or service is greater than the sum of the private benefits to the consumers. Primary education, preventive health care, and research and development are prime examples of positive

SUBSIDY-AN INTRODUCTIONCHAPTER1

externalities. In these cases, private valuation of the benefits from such goods or services is less than their true value to society, and normal pricing mechanism will not produce the desired outcome. Subsidies can provide the necessary corrective impact in such cases. Subsidies have also been advocated for redistributive objectives, especially to ensure minimum level of food and nutrition to all sections of society.

However, subsidies need to be financed. These may be financed through additional taxation or borrowing. Taxation leads to dead weight losses in welfare. Therefore, whether introducing a subsidy is a welfare augmenting measure or not can only be judged in terms of additional welfare resulting from the subsidy against welfare loss from additional taxation. The implications of additional borrowing also need to be considered in a macro framework because of the pressure it may exert on interest rates and on crowding out of private investment.

Some of the important contemporary subsidy related issues in India are in the following paragraphs:

(i) Are budgetary subsidies provided for the right reasons?

Arguments often used for justifying subsidies pertain to distributional objectives and infant industry argument. It is to serve a distributional objective that food subsidies are advocated for below poverty line (BPL) population. Incomes of poor farmers are also sought to be protected by offering minimum support prices for their outputs and subsidizing inputs like fertilisers, irrigation water, power and seeds. Subsidizing kerosene or LPG helps poor households. In practice, however, in all these cases, subsidies have historically been extended to all households or farmers, rich and poor alike, and a distributional objective has rarely been served.

(ii) Are many inappropriate goods/services being subsidized?

In the extensive array of goods/services, under the categories of social and economic services, currently being subsidized, some deserve subsidization, and others do not. The group of services, where, for example, subsidization may be justified are: soil and water conservation, environment, forestry and wildlife, preventive health services, education, research and development, food control, drainage, roads and bridges, and ecology. These are budget heads where a prior grounds to believe that there are positive externalities.

Contemporary Issues

Subsidy-An Introduction

2


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Many subsidies are being provided for goods and services where there are no significant externalities. Thus, subsidies for manures and fertilisers, subsidies for specific crops like oilseeds and pulses, subsidization of milk and fish, cannot be justified on grounds of externalities. There is no case for subsidizing a vast array of industrial goods and services like power, irrigation, transport, chemicals and fertilisers. Subsidizing iron and steel, cement, sericulture, chemicals and pesticides, textiles, paper and news print, and atomic fuels also cannot be justified on grounds of externalities.

(iii) Does over-subsidization lead to harmful effects?

One cannot remain indifferent to the provision of subsidies because apart from being costly, these can also harm in many ways. The most important is their potential to damage environment. Over subsidization of irrigation leads to careless use of water resulting in long term damage to the fertility of soil. Excessive and wrong subsidization of different types of fertilisers leads to disproportionate use of one kind of fertiliser vis-a-vis others, leading to long term damage of soil quality. Excess subsidisation of power or water for agriculture makes it extremely costly for industry and commerce.

(iv) What are the implications of cross-subsidies and off-budget subsidies?

Cross-subsidies arise in the context of regulated price structures which distinguish between prices according to use/products for the same group of goods/services. It is often possible to distinguish between classes of consumers for a good or a range of goods. Similarly, within the broad group of petroleum products a distinction may be made between kerosene and diesel vis-a-vis petrol and turbine fuel. If a particular sector with one or more products is subjected to an administered price regime, it is possible to charge some consumers (product-wise or usage-wise) a price which is more than the cost so as to finance a subsidy given to other consumers by charging them a price which is less than the cost. Such intra-sectoral financing of a subsidy involves cross-subsidization. In such cases, if a net subsidy is still left after cross-subsidization, it will be a charge on the general budget. Some instances of important cross-subsidization in India relate to power and petroleum products.

Off-budget subsidies also arise due to administered prices. These have the potential of having budgetary implications if deficits and surpluses are not balanced over time. An important example of off-budgetary subsidies relates to guarantees extended by governments for borrowing by the public sector enterprises. These generate contingent liabilities for the budget, in case the


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concerned public sector enterprises default on servicing the debt which has been guaranteed by the government. Considering the performance of the public sector enterprises, the risk of defaults is very high, which makes servicing of debt a budgetary liability in the nature of subsidization of the concerned enterprises, in case the guaranteed loans are defaulted.

(v) What is the interface of subsidies with inefficiencies?

Inefficiency leads to a higher cost of production. This creates a wedge between subsidies that are actually received by the user of the service, and subsidies that are borne by the budget. Government’s participation in providing services is attended by several types of inefficiencies. Apart form direct costs like overstaffing, poor maintenance of assets, procedural delays, and delays in taking critical decisions, there are systemic inefficiencies. Subsidy interventions by the government distort market prices and often lead to sub-optimal use of inputs in the economy, thereby raising overall costs in the system. As a result of these and other inefficiencies, the costs associated with the governmental provision of services tend to be high.

(vi) Is there a case for increasing subsidies in some sectors?

There are two sectors namely, health and education, where the level of subsidy provided by the Government may be less than desirable. Both these sectors suffer from under financing and low quality of services. In these sectors, the degree of subsidization is more than the required level but the volume of subsidies is less than that required. Because of the poor qualities of services, public provisioning of these subsidies remains under-utilised whereas most of the demand shifts to private sector.

In the case of education, a distinction can be made between elementary and secondary education, on the one hand, and higher and technical education, on the other. In elementary education the degree of subsidization is close to 100 percent. People forgo this subsidy for better quality of education in private schools. This increases their chances of accessing the higher per capita subsidies in the higher and technical education streams. However, generally, the quality has also deteriorated due to lack of resources. Thus, in education and health the level of per capita subsidies may be increased, while the degree of subsidization may be lowered except for well-identified poor segments of population.


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Accounting Standards issued by ICAI

It is said about money that “a businessman earns it, an economist learns it, a banker turns it, a politician burns it, and a wise man spurns it”. While disinvesting in profitable public sector undertakings with intent to earn money, the Government also spends money in giving grants to undertakings that are not so healthy.

The grants could take various forms — general, asset-specific, liability-reduction or for reimbursement of expenses. Though simple, there could be issues in Accounting for Government Grants. Accounting Standard 12, on Accounting for Government Grants issued by the Institute of Chartered Accountants of India (ICAI), advocates both the capital and income approaches depending on the purpose of the grant.

Grants which have the characteristics similar to those of promoters' contribution should be treated as part of shareholders' funds. The income approach may be more appropriate in the case of other grants. In case a grant is given for immediate financial support of an organization rather than as an incentive to undertake specific expenditure, AS 12 recommends taking it as Extraordinary Income. Government grants may become receivable by an enterprise as compensation for expenses or losses incurred in a previous accounting period. Such a grant is recognized in the income statement of the period in which it becomes receivable, as an extraordinary item if appropriate.

A similar approach is advocated by International Accounting Standard 20 (IAS 20) — Accounting for Government Grants and Disclosure of Government Assistance — except for the fact that IAS 20 does not speak of extraordinary income but warrants disclosure.

Grants related to specific Fixed Assets are either reduced from the carrying value of the assets or are treated as deferred income over the useful life of the asset. Both AS 15 and IAS 20 are silent on the treatment to be accorded for grants given for reduction of liabilities — it appears logical that this could not be treated as income since the grant is liability-specific.

Government grants that become refundable are reflected as ‘Extraordinary Items' under AS 12 whereas IAS 20 considers it to be a revision to an accounting estimate. It is apparent from the above that the critical aspect to comprehend is the nature of the grant.

If the grant letter is specific there could be no complexity in opting for the capital or income approach but if the letter is generalistic — overall financial assistance being an example — one would be tempted to park the grant under ‘Income'. Any asset- or


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liability-specific grant would be parked under the respective account.

Indian Government Accounting Standard 2 (IGAS 2) drafted in 2007 is on Accounting and Classification of Grants-in-Aid. It states that grants-in-aid disbursed by a grantor to a grantee shall be classified and accounted for as revenue expenditure in the financial statements of the grantor irrespective of the purpose for which the funds disbursed as grants-in-aid are to be spent by the grantee.

The Standard does not talk of a capital approach, save when it says that expenditure on Grants-in-aid for the purpose of creating assets shall not, except in cases specifically authorized by the President on the advice of the Comptroller and Auditor General of India (CAG), be debited to a capital head of account in the financial statements of the Government.

Although some of IGAS are now notified, there could be a face-off between the CAG — who would be bound by IGAS — and the auditors of public sector undertakings — who would adhere to AS 12.

In the Budget Speech 2011-12, Finance Minister had announced the government's intention to move to direct transfer of subsidies on liquefied petroleum gas (LPG), kerosene and fertilisers. “To ensure greater efficiency, cost effectiveness and better delivery for both kerosene and fertilisers, the Government will move towards direct transfer of cash subsidy of people living below poverty line in a phased manner,” said Pranab Mukherjee, Hon’ble Union Minister of Finance in his budget speech.

Figure 1: Giving Shape to Direct Cash Transfers

The framework for implementation of direct cash transfer of subsidies for LPG, Fertiliser and Kerosene is explained in Figure 1.

The Standards

Budget Speech


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Report submitted by Nandan Nilekani- Major Highlights

• Poor consumers may get cash reimbursement on expenses incurred by them on cooking gas, kerosene and fertilisers if the Finance Ministry accepts the recommendations of a task force chaired by Unique ID Authority Chairman Nandan Nilekani.

• The task force has proposed a mechanism to facilitate direct transfer of subsidies in the bank accounts of beneficiaries. The move aims to curb pilferage and leakages.

• The task force has also called for setting up an IT-driven Core Subsidy Management System (CSMS) to leverage the 'Aadhar' unique identity numbers for distribution of subsidy. The system would have in-built checks and audits.

• Beneficiaries would receive subsidy transfers to their 'Aadhar'-linked bank accounts on a real time basis, which could be accessed through various banking channels, such as bank branches, ATMs, internet and mobile banking.

Giving Shape to Direct Cash TransfersThe Government has proposed an ambitious implementation framework for direct cash transfers of subsidies for threemajor items. To be carried out as pilots over phases, ET looks at the road ahead:

Govt. will cap consumption of subsidised cylinders perhousehold

All consumers start buyingLPG at market rates. Cashsubsidy comes into bankaccounts linked with UID

Govt indentifies specificsegments to be targettedslimming down subsidisedbeneficiaries

Capping subsidised cylinderswill require political will

Create software capability &technological support to trackmovement of fertiliser fromretailers to farmers

Set up infrastructure to facilitatedirect cash transfer tobank accounts of retailers

Enable system where farmersbuy at market rates fromretailers and get cash transfersto UID linked accounts

Govt will have to track fertiliserand subsidy movement

LPG FERTILISER KEROSENEStates purchase kerosene atmarket rates. Centre transferscash based on actual offtakeof kerosene

Consumers buy kerosene atmarket rates, state govttransfers cash to UID linked“kerosene” accounts

Highly centralised system,state will have to struggle toget cash. Good UID spread essential

` 16,000cr annually spent as subisidy ` 50,000cr subisidy provisional for ‘10-11 ` 20,000cr annually spent as subisidy

PHASE 1

PHASE 2

PHASE 3

PHASE 1

PHASE 2

PHASE 3

PHASE 1

PHASE 2

Challenge

ChallengeChallenge

Figure 1:

Source: The Economic Times, 6th July 2011


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• The task force has also suggested a transparency portal, which would allow customers to check real time stock movements of LPG and kerosene. This would also allow companies to see distributor-wise details of subsidized LPG cylinders.

• Creation of the transparency portal would check leakages and remove anomalies in the current system, under which many people receive subsidies on multiple connections of both LPG and kerosene.

• According to the roadmap suggested by the Task Force, administrative Ministries would launch pilot projects for transfer of direct cash subsidy from October in seven States-- Tamil Nadu, Assam, Maharashtra, Haryana, Delhi, Rajasthan and Orissa. The task force would give its report based on the pilot project in six months. The final report would be available by December 2011.

Nandan Nilekani has also talked about proposed system and existing subsidy related to subsidies in his report which is given in the following Figure 2.

Figure 2: The Proposed System & The Existing System of Subsidies

After decades of failed attempts to plug subsidy leakages, here’s blueprint that promises to ensure that most of the over `1,00,000 crore spent in several schemes to help the poor really does reach the poor. Proposed by a panel headed by Nandan Nilekani, the plan-to be tested on a pilot before being finalised-involves giving direct cash to the needy with built-in checks for pilferage. Here’s what it is and how it differs from the existing system.

The Proposed SystemThe Existing SystemBENEFICIARY GETS SUBSIDISED PRODUCT

Finance Ministry

Allocates subsidy to:

States/Ministries

pass on allocation to manufacturer

Manufactureradjusts price according to subsidy

Wholesaleradds his margin andsells to retailer

Retailersells to beneficiary with margin

Immense scopeof leakage atevery stage- upto 30% doesn’treach thebeneficiary

Estimated Subsidies

Kerosene`25 a litre

LPG`330/cylinder

Fertiliser`20 per kg

!

BENEFICIARY GETS CASH TO MAKE HIS PURCHASE

Finance Ministry

Provides money forcash payments

States/Ministries

Nodal BankA llocatesmoney tobeneficiariesaftercheckingwith CSMS...

Payment Network of BanksBeneficiary’sBank Account

withdrawssubsidy

A second check of beneficiary’s identity is done with the UIDAI

Beneficiary

Beneficiary

Core SubsidyManagementSystem (CSMS)Will maintain information onentitlements andsubsidies

Carry Outcomprehensivecheck onbeneficiaries

Buys thesubsidisedproduct fromthe market

Source: Economic Times, 6th July 2011


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Measures for effective utilization of Subsidies

• The focus should be on physical achievements and not on financial disbursements.

• The effects of subsidies should be monitorable and measurable in terms of quality or quantity.

• Subsidies should be given as a one- time help or for a short period. Subsidies on continuing basis should be avoided.

• The parameters fixed on subsidy should be transparent.

• Subsidies should be cost- effective. Most of the assistance should reach the intended beneficiary and very small amount should be spent on administrative arrangements.

• Subsidies should be properly targeted, i.e. benefit should go to the really deserving.

• Timing of subsidies should be made proper. For example, free seed distribution should be just before sowing.

• There should be a periodic review as to the utility of continuing a subsidy and a decision should be taken at the initial stage of its introduction as to the life of the subsidy.

Accounting on Food Subsidy

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ACCOUNTING ON FOOD SUBSIDY CHAPTER2

Introduction

In order to ensure food security, the Government of India (GOI) provides food subsidy to citizens. Food subsidy objectives are to maintain price stability, provide support to the poor, and ensure adequate returns to small and marginal farmers. The major components of the government's food management policy have included procurement from domestic producers, monopoly imports, trade regulations, price controls, food distribution through fair-price shops, and buffer-stock operations.

The main benefits of food subsidies are food security provided to citizens, particularly the poor, and incentives to farmers to keep foodgrains production at a comfortable level. However, there are distortions in the way food subsidies are delivered, leading to mounting food subsidy bills, without commensurate benefits to target beneficiaries.

The procurement and sales prices of foodgrains from the central pool are determined by the Central Government on the basis of recommendations from the Agricultural Prices Commission and views expressed by the National Development Council. However, agriculture being a State subject, the State Govts. also have the authority to declare additional bonus payable over and above the Central Govt. procurement price in which case the State Govt. reimburses such bonus paid by the central procuring agencies. For the purpose of Central Pool operations of the Central Government, FCI and State Governments and their Agencies are involved on behalf of the GoI in arranging procurement and storage. In addition, in some States, producers’ co-operatives also act as the procuring agents. Inter-State movement is the sole responsibility of FCI and distribution of foodgrains is also primarily done buy FCI except in Decentralised Procurement States where the State Govt. /agencies are doing the within-State procurement, storage movement and distribution operations. In case of non-DCP States the quantity procured by the State Govt. /agencies are transferred to FCI after procurement.


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In recent years, procurement has been undertaken mainly under price support operations. However, when the government had difficulties in obtaining adequate quantities for public distribution, compulsory means— such as monopoly procurement; a levy on farmers, millers, and trade; and pre-emption—were adopted. The States have used different procurement methods for different crops and have changed these methods from year to year.

FCI only issues foodgrains as per allocation issued by GoI to the nominees of GoI. FCI responsibility ends with delivery of stock ex-godown to such nominees (State Govt.). The fair-price shops and PDS mechanism is part of the State Machinery, generally through the State Civil Supplies Dept for which they are allowed to charge a margin over and above the Central Issue price from the final consumers.

In addition, FCI is also required to maintain the buffer stocks of foodgrains, over and above the normal requirement for PDS and other welfare operations, to ensure the food security of the country.

As FCI is operating under administered price mechanism both at purchase point as well as sell point, the sell price is not adequate to even cover the costs incurred by FCI. FCI is not allowed to load any operational profit. The difference between the cost of sales and the sale price realised in received in the form of consumer subsidy. In addition, the costs incurred in maintenance of buffer stocks is separately provided as buffer subsidy. Similarly, in DCP States, the State Govt. is allowed the difference of cost of goods sold and issue price as consumer subsidy for stocks distributed by them.

Food subsidy in India consists of:

• Consumer subsidies to FCI and DCP States on stocks issued through the public distribution system ands other welfare schemes, and

• Buffer Subsidies to FCI for maintenance of buffer stocks

Food subsidies are mainly on account of paddy and wheat. The rapid increase in food subsidy in recent years is mainly attributable to rapid increase on annual basis in procurement price payable to the farmers (Minimum Support Price and Bonus) while the Issue Price has remained static since 2002. The subsidy is provided to FCI by the Government of India.

Eleven States, namely Madhya Pradesh, Uttar Pradesh, Chhattisgarh, West Bengal, Uttarakhand, Tamil Nadu, Andaman & Nicobar, Orissa, Gujarat, Karnataka and Kerala have undertaken the responsibility of not only procuring foodgrains from within the

Constituents of Food subsidies in India


12

State but also distributing the same to the targeted population under TPDS and other welfare schemes. Under this scheme of decentralised procurement, State specific economic cost is determined by the Government of India and the difference between the economic cost so fixed and the Central Issue Prices is passed on to the State as food subsidy. However, from 2010-11, Uttar Pradesh as opted out of DCP system.

The year-wise break-up of subsidy released on foodgrains during the last five years is given as under in Table 1:-

Table 1: Year wise break up of Subsidy released on foodgrains during the last 5 years

It is also noted that the Subsidy released by the GoI to FCI does not match with the subsidy incurred by FCI and there is a time difference between incurrence of subsidy and release of subsidy.

The position of subsidy released and subsidy incurred by FCI for the above period are given as under in Table 2:

Source : Paper on Accounting Subsidy

Subsidy Released (` in crore)

Year FCI States Total

2004-05 23280 2466 25746

2005-06 19871 3200 23071

2006-07 20786 3042 23828

2007-08 27760 3500 31260

2008-09 36744 6924 43668

2009-10 44879 9660 54539(till 10.02.2010)


13

Table 2: Year wise break up of Subsidy released to FCI and incurred by FCI on foodgrains during the last 5 years

The Government (Ministry of Agriculture) notifies the purchase prices of the relevant food grains that it has to observe for the coming agricultural marketing season. These prices, known as minimum support prices (MSP) are based on the recommendations of the Commission on Agricultural Costs and Prices (CACP). In practice, the notified purchase prices have been consistently higher than the MSP recommended by the CACP in recent years. In addition, in certain years, the Ministry of Food and Public Distribution have also declared Bonus over and above the MSP to be paid to the farmers.

Periodically, an Official Committee is set up to recommend the volume of minimum buffer stocks to be maintained at the beginning of each quarter for the purpose of food security. The minimum buffer norms are fixed for four quarterly dates of the year. Such norms are applicable to the total stocks under the Central Pool whether held by FCI or State agencies and under non-DCP or DCP system. In addition, in recent years, the GoI has also decided to maintain additional safety stock levels in the form of strategic reserve.

However, the procurement under central pool are open-ended in that the Govt. agencies has to accept all the grains that are offered to it at the declared purchase price as long as such stocks meet the quality norms. This sometimes results in mounting stocks well beyond the buffer stock norms.

FCI: Subsidy Released and Incurred (` in crore)

Year Released Incurred

2004-05 23280 20774

2005-06 19871 21344

2006-07 20786 24028

2007-08 27760 30052

2008-09 36717 34787

2009-10 46457 42873

Source : FCI Website


14

Government at interval fixes the central issue prices (CIP) of rice and wheat. Stocks are issued to the concerned State Govts. ex-godown at this price. In addition, State Govts. are allowed to fix retailers’ margins to determine the prices at which consumers receive their entitlements at fair-price outlet. A common strategy to reduce the burden of food subsidy is to build in specific features that target the poor. Since June 1997, the existent uniform CIP system has been replaced by a targeted PDS (or TPDS), to provide greater subsidies to the poor. Consumers below the poverty line (BPL) pay a lower price and receive a higher quantum of foodgrains. A further sub-category within BPL has been created in the form of Antyodaya Anna Yojona (AAY) who gets foodgrains at ̀ 2 and ̀ 3 a Kg. There are indications that there are both inclusion and exclusion errors and its limitations have been highlighted by Coady and Skoufias 2004, Ravallion 2009,. Coady, Grosh, and Hoddinot (2004)]. Besides, there are wide disparities in PDS penetration in different States.

In the long-run, a properly decentralised two-tier intervention for food subsidisation needs to be developed and the Centre should maintain optimal buffer stock for strategic market intervention to meet the requirements of deficit states and for exigencies.

Since 2002 the Issue prices have remained frozen while procurement prices have increased significantly. As a result, in recent years, the procurement volume has rapidly grown practically 99% of the stocks in States like Punjab and Haryana coming to the Central Pool and private traders practically withdrawing from the market. Even the farmers, instead of retaining stocks for their internal consumption, prefer to first deliver the stocks to the central pool at the support prices and then drawing stocks from PDS at highly subsidised rates. As a result, even though offtakes have increased, the central pool is left with leaving larger stocks to carry forward, which entails additional cost as well as wastage of increasing stock of food grains.

Any reform in food subsidy needs to look into the policy of price support as the present regime appears to be killing private trade completely. A reform of food subsidy would require both short-term and long-run measures. Simultaneously, there is also a need to relook into the mechanism of determining issue prices as keeping them frozen for nearly a decade does not serve much purpose particularly where everything else including the minimum wages have continuously increased.

As a first step, it may be appropriate to consider abolishing the Above Poverty Line (APL) category altogether as its subsidisation is both undesirable and redundant in view of market prices often being lower than the economic cost of the FCI. At the same time, the benefit to Below Poverty Line (BPL) category should be increased both by increasing their entitlement and coverage of population. The latter may require undertaking a


15

fresh survey where the poverty line is uplifted and exclusion errors of the previous survey, if any, are rectified. This will eliminate the more serious issue of the targeting errors, known as type I or exclusion error, where the deserving are missed out. The price for BPL category can also be reduced as percent of economic cost.

The draft Food Security Bill appears to attempt to address certain part of the issue as it has defined an excluded sector and also linked the APL (General Household) issue prices as a percentage to the MSP. Simultaneously, it has also merged both BPL and AAY into AAY (Priority Household) with current AAY issue prices. Further, against present system of household entitlement, it has proposed individual based entitlement of foodgrains.

• The Minimum Support Price (MSP) for wheat and rice may be determined not just on a cost plus formula but also linking it to the position of existing stocks. The increase in MSP should be moderated according to the extent of excess of stocks over prescribed norms. Alternatively, MSP may be delinked from procurement price and Govt. agencies may be allowed to procure at a price higher than MSP in years when additional stocks are required.

• The budget allocation by the Central and the State Governments for rural infrastructure construction, and other labour-intensive infrastructure should be increased, so that targets of reducing poverty and increasing the demand for food at the lowest income levels can be achieved simultaneously. Exports of food grains should be facilitated so that excess stock and the carrying costs can be reduced.

• MSP should be differentiated according to surplus and deficit States – lower MSP being offered in surplus states. It is a fact that most surplus States have been utilizing the procurement operations as a means of collection of revenue by way of various taxes and levies as high as 14.5%. The CACP has recommended tax inclusive MSP for RMS 2012-13 with the rider that the maximum tax rate should not be more than 5%. While this is a welcome development, the rider of 5% cap in rates has reduced the benefits. Rather, it may be kept open ended with the States allowed to decide the amount they would like to retain as taxes and the amount they would prefer to be passed on to the farmers. This way, non-traditional procuring States can decide to give the benefit of higher prices to their farmers by keeping the tax rates at lower levels.

Short Run Measures:


16

• The issue prices need to be reviewed periodically and prices for APL linked to a percentage of MSP while prices for BPL linked to a percentage of minimum wages.

• A properly decentralised two-tier intervention for food subsidisation should be developed. The Centre should maintain adequate buffer stock for strategic market intervention and emergency purposes as well as for meeting the requirements of deficit states. The responsibility of procuring, storing, processing, and distribution should be handled by the State Governments to the extent of their respective requirement. For short-fall in case of deficit States, the States may be permitted to directly interact with the surplus States to fulfill their requirements of stocks. This will eliminate adverse implications arising from over-centralisation.

• The Centre can determine total amount of subsidy on the basis of the number of poor and the prevailing market prices and allocate to the states according to the number of poor and intensity of poverty. The Centre can have a supervisory role and should ensure unfettered inter-State domestic trade in food grains. States on the other hand, should integrate the dimension of access to food within the context of an overall poverty reduction programme. The whole issue of supporting agricultural incomes should be tackled by a separate policy instrument. Allocation for food subsidy in recent years is given as under in Table 3.

Table 3: Allocation for Food Subsidy in the recent years

Long Run Measures:

GOI allocation for food subsidy in FY 2010-11 (in crore) ` 55,578

GOI allocation for food subsidy as a % of GDP in FY 2009-10 0.9%

GOI food subsidy released in FY 2008-09 (in crore) ` 43,668

GOI food subsidy released to FCI in FY 2008-09* 84%

GOI subsidy released to states in FY 2008-09* 16%

*Calculated as a percentage of total food subsidy released


17

The above data shows that the GOI allocation for food subsidy in FY 2010-11 was ` 55,578 crore. GOI food subsidy released to FCI in FY 2008-09 was 84 % as a percentage of total food subsidy released. However, according to FCI, subsidy actually accrued during 2010-11 was ̀ 57925 crore.

Provision of minimum nutritional support to the poor through subsidized food grains and ensuring price stability in different States are the twin objectives of the food security system. In fulfilling its obligation towards distributive justice, the Government provides food subsidy. The Government, therefore, continues to provide a large amount of subsidy on food grains for distribution under the TPDS, other nutrition-based welfare schemes and open market operations.

Quantum of food subsidies released by the Government

Table 4: Quantum of Food Subsidies released by Government over the years

There has been over two-fold increase in food subsidy allocations since FY 2004-05. The current allocation for food subsidy in FY 2010- 11 is ` 55,578 crore as compared to` 25,798 crore in FY 2004-05 as explained in Figure 1.

Trends at the Central level

Year Food Subsidy* Annual Growth(` Crore) (Percent)

1999-2000 9,200.00 5.75

2000-01 12,010.00 30.54

2001-02 17,494.00 45.66

2002-03 24,176.45 38.20

2003-04 25,160.00 4.07

2004-05 25,746.45 2.33

2005-06 23,071.00 -10.39

2006-07 23,827.59 3.28

2007-08 31,259.68 31.19

2008-09 43,668.08 39.69

2009-10 46,906.68 7.42

*Figures upto December 29, 2009 Department of Food & Public Distribution


18

As a percentage of GDP, food subsidy allocations have seen no significant change. In FY 2009-10, 0.90 percent of GDP was allocated towards food subsidy as compared to 0.80 percent of GDP in FY 2004-05 as explained in Figure 2.

Over 2-fold increase in allocations for foodsubsidy since FY 2004-05

60,000

50,000

40,000

30,000

20,000

10,000

0

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

25,798 23,077 24,01431,328

43,62756,002 55,578

Source: Compiled from Expenditure Budget, Vol-II, for 2004-05 to 2009-10. Note: The figures for FY 2010-11 are budget estimates. The figures for the rest of the years are revised estimates. Figures in crores of rupees.

Figure 1: Over 2-fold increase in food subsidy allocations since FY 2004-05

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

1.0%

0.8%

0.6%

0.4%

0.2%

0.0%

Fluctuating trends of food subsidy as a% of GDP

0.8

0.60.6

0.6

0.8

0.9

Source: Compiled from Expenditure Budget, Vol-II, for 2004-05 to 2009-10. GDP figures are at current prices. Note: The figures for FY 2009-10 are revised estimates, Figures in percentages

Figure 2: Fluctuating trends of Food Subsidy as a % of GDP


19

The share of food subsidy received by BPL families and the Antyodaya Anna Yojana (AAY) scheme has been decreasing. The following Figure depicts the same:

• A number of States have opted for implementation of the (DCP) introduced in 1997, under which foodgrains are procured and distributed by the State Governments themselves.

• Under this scheme, the designated States procure, store and issue foodgrains under the TPDS and welfare schemes of the Government of India. The difference between the economic cost fixed for the State and the CIP is passed on to the State Government as subsidy.

• The decentralized system of procurement has the objectives of covering more farmers under MSP operations, improving efficiency of the PDS, providing foodgrains varieties more suited to local tastes and reducing transportation costs. Food subsidy released to various States under DCP operations from 2007-08 is given in the following Table 5. Uttar Pradesh has since opted out of the DCP scheme of procurement.

Decentralized Procurement Scheme (DCP)

Source : Ministry of Consumer Affairs, Food and Public Distribution. Lok Sabha Unstarred Question Number 743, answered on 24.11.2009. Note: Figures in percentages.

Share of food subsidy to BPL families has been decreasing

100%

80%

60%

40%

20%

0%

2006-07 2007-08 2008-09

84

16

82

18

80

20

BPL and AAY subsidy as a % of total subsidy under TPDS

APL subsidy as a % of total subsidy under TPDS

Figure 3: Share of Food Subsidy and Antyodaya Anna Yojana (AAY) scheme received by BPL families


20

Extent of Food Subsidy in India

Food Subsidies & Leakages

The food subsidy released for subsidised foodgrains distributed under Targeted Public Distribution System (TPDS) for Below Poverty Line (BPL) families including Antyodaya families (AAY) and Above Poverty Line (APL) families during last two years is given in the following Table.

A large amount of the subsidised foodgrain, targeted at BPL households, some APL households, and other vulnerable groups, finds its way to the open market, where it is sold off at a higher price than the stipulated ration shop price. The gap between the

Table 5: Food subsidy released to various States under DCP operations from 2007-08

Source: Department of Food & Public Administration (*as on December 29, 2009)

Madhya Pradesh 41,596 1,101.810 882.620

Uttar Pradesh 1,625.618 2,875.640 3,978.170

West Bengal 269.020 657.400 901.210

Chhattisgarh 621.000 842.830 655.610

Uttaranchal 68.650 98.050 180.400

Tamil Nadu 272.210 592.240 524.420

Orissa 503.480 742.820 727.800

Kerala 97.840 31.190 224.270

Karnataka 0.590 0.000 0.000

Total 3,500 6,923.98 8,074.50*

(` in crore)

State/UT 2007-08 2008-09 2009-10*

Table 6: The Food Subsidy released for subsidised foodgrains to BPL, AAY and APL families

(` in crore)

Year 2008-09 2009-10

BPL 16157 19564

APL 7294 12595

AAY 12615 14224

TPDS 36066 46383


21

offtake and the amount actually reaching households gives a measure of pilferage or diversion form the target population.

In 2001-02, 18.2 percent of PDS rice and 67 percent of PDS wheat was diverted (R.Khera). In other words, over 40% of all grain targeted at the poor missed the poor. Jha and Ramaswamy, using the NSS expenditure Survey of 2004-05, report an overall diversion of 55% of the grain meant for the poor. No matter where the exact figure lies between 40 and 55 percent, the fact of the matter is that the leakage that currently takes place is far too high.

Ration cards have been issued by State and Union Territory Governments to APL, BPL and beneficiaries under AAY. However, there are a large number of fake ration cards issued causing inefficiencies in targeting. Number of Bogus Ration Cards estimated in Orissa, Chhattisgarh, Uttar Pradesh, Gujarat, Andhra Pradesh and West Bengal is given in the following figure.

Significant Leakage in Distribution of Ration Cards

250,000

365,000

396,000

783,000

1,046,000

5,300,000

Odisha

Chhattisgarh

Uttar Pradesh

Gujarat

Andhra Pradesh

West Bengal

0 2,000,000 4,000,000 6,000,000

No. of Bogus Ration Cards Eliminated

Figure 4: Significant leakages in distribution of Ration Cards

Source: Statement referred to in reply to parts (a) & (b) of Unstarred Question No.1879 due for answer on 01.12.2009 in Lok Sabha. Statement showing the number of bogus/ineligible ration cards deleted by the State/UT Governments with effect from July 2006 onwards. Note: Figures in lakhs.


22

The Union Government provides subsidy support for various sectors on the premise that otherwise, the cost of these goods and services would be too high for the masses to afford. Over a period of time, subsidy has also become a populist method to woo voters. But fiscal responsibility would suggest that a degree of pragmatism should be injected into the whole discourse. Considering the sensitivity of the issue, the task poses tough challenges for any government.

The Finance Minister should review the existing unreformed food subsidy regime to curb the burgeoning expenditure. Growing levels of the food subsidy add to non-Plan expenditures, exacerbating the fiscal deficit. It’s a fact that the subsidy bill underwrites lower capital expenditure in the farm sector. It’s estimated that administrative costs of the public distribution system (PDS) amount to 85% of the total expenses for the system. For farmers, minimum support prices act as a hedge against price shocks.

• Government should think about steps like investing more in rural farm and physical infrastructure to offset a probable reduction in subsides.

• Farm sector needs reforms involving innovative institutional and governance mechanisms to check lower yields and soil degradation.

• PDS requires correctives to blunt the inefficiencies, corruption and leakages plaguing it. Providing direct subsidy to marginal farmers, reducing the magnitude of subsidies across the board, inviting free market self-corrective actions and bringing farmers nearer to the ultimate consumer through superior communication and transport facilities are some steps that can lessen the subsidy burden.

• Appropriate targeting is easier to attain if we switch from indirect subsidies to direct income support.

• Focus and thrust should be given to curtail issuance of bogus ration cards.

• To increase the impact of the subsidies on the poor the two ways that could be thought of are- either by increasing the participation rate of the poor, or by enhancing the fraction of subsidy going to the poor, or a combination of the two. Policies aimed at the latter will save resources that could be used to increase the participation rate.

• A food coupon alternative would eliminate the dual marketing system (of private and government), which would resolve the endemic issue of the

Recommendations/Suggestions


23

viability of the government marketing system. If there are staples other than rice (or wheat), a food coupon system could easily accommodate it without the need for physical and institutional infrastructure (procurement and distribution) that is specially set up for that purpose. In parts of India, poor consume “inferior” coarse grains such as sorghum and pearl millet, which are not subsidised by the current regime. However, any scheme of food coupons would need to be viewed taking into consideration the policy of open-ended MSP based procurement. In case food coupons are adopted then MSP based open procurement would have to be discontinued and an alternative means of providing price support to the farmers would have to be devised.

• Conditional cash transfers are another alternative to food subsidies. Such transfers have been widely and successfully used in many Latin American countries. In these transfers, the conditionality is of a different form to that of food coupons—relating to the use of social programs of education and health. Here cash transfers are conditional on attendance in schools and health clinics. Program benefits are designed to contribute to the long-term human capital development and to provide immediate poverty relief. However, in such case also MSP based open procurement would have to be discontinued and an alternative means of providing price support to the farmers would have to be devised.

Accounting on Fertiliser Subsidy

24

Introduction

Previous System

Fertiliser subsidies were introduced, in 1977, to increase agriculture production while insulating farmers from rising prices of a crucial input. Hence, the government fixed the price of fertiliser, at below market rates, and reimbursed companies for shortfalls in their cost of production. Since the subsidy went to the company, every farmer, rich or poor, benefited from it, leaving the government with a hefty bill.

Until 31.3.2003, the subsidy on urea was being regulated in terms of the provisions of the unit specific pricing system under the Retention Pricing Scheme (RPS). The Retention Pricing Scheme, as the first avatar of the subsidy system was called, was designed to keep domestic fertiliser prices stable, international prices of fuel and raw materials notwithstanding.

This was replaced by New Pricing Scheme (NPS) for urea manufacturing units with effect from 1.4.2003. It aims at inducing the units to achieve internationally competitive levels of efficiency, besides bringing in greater transparency and simplification in the administration of subsidy.

The subsidy on fertilisers as defined in India is the difference between net realization by the domestic fertiliser manufacturers (farmer’s price minus distribution margins) and the ex-factory retention price (inclusive of equated freight) fixed by the government. In the case of imported fertilisers, the subsidy is the difference between the C.I.F. (cost, insurance and freight) price of imported fertiliser plus the pool handling charges and the farmer’s price (excluding dealer’s margins and sales tax).

Over the years, although the cost of domestic and of imported fertilisers has increased the sale prices of fertilisers were not raised commensurate with the increase in the cost. This apart, the consumption of fertiliser has increased rapidly. Therefore, subsidy bill has continuously increased over the years. Subsidy on fertilisers is common in most of

ACCOUNTING ON FERTILISER SUBSIDY

CHAPTER3


25

the developing countries, though the rate of subsidy varies across countries and types of fertilisers. Though the direct effect of fertiliser subsidy is to provide fertiliser to the farmers at a price lower than its economic price, the ultimate benefits of the subsidy accrue either to the farmers or to the consumers or both depending on the package of other policies including product price policies.

Starting next year, the government will stop its 34-year-old practice of giving the fertiliser subsidy to companies. It will instead begin a step-wise migration to a cash-transfer system, where the subsidy will eventually move directly to the bank accounts of farmers. The government hopes, this transition, which began in 2010, will be the panacea for all the ills that distorted the previous system in its various forms.

The Government, now, intends to correct all this, by overhauling the subsidy system.

New System

Table 1: Major Subsidies (in crores of Rupees) in India: 1990-91 to 2008-09

1990-91 2450 3730 659 - 4389 1215821991-92 2850 3500 1300 - 5185 12253

1992-93 2800 4800 996 - 5796 119951993-94 5537 3800 762 - 4562 116051994-95 5100 4075 1166 528 5769 118541995-96 5377 4300 1935 500 6735 126661996-97 6066 4743 1163 1672 7578 154991997-98 7900 6600 722 2596 9918 185401998-99 9100 7473 333 3790 11596 235931999-00 9434 8670 74 4500 13244 244872000-01 12060 9480 1 4319 13800 268382001-02 17499 8044 47 4504 12595 312102002-03 24176 7790 - 3225 11015 435332003-04 25181 8521 - 3326 11847 443232004-05 25798 10243 494 5142 15879 459572005-06 23077 10653 1211 6596 18460 475222006-07 24014 12650 3274 10298 26222 571252007-08 31328 12950 6606 12934 32490 709262008-09 (RE) 43627 16517 10981 48351 75849 129243

Sources: Government of India (2009)

Year Food Indigenous Imported decontrolled Total TotalUrea Urea fertilisers Subsidies

Fertilisers

2 includes Rs 385 crores fertiliser subsidy given to smm and margtinal farmers.


26

The latest reform began in April 2010, when the government ended the cost-plus basis of compensation to companies, the government brought in three big changes. One, it decontrolled all fertilisers except urea, which accounts for two-thirds of all production. Two, it brought out roadmap to decontrol urea where RPS was changed to NPS. For 2011-12, companies will receive a subsidy of ̀ 20,111 for every tonne of nitrogen used. Three, the list of nutrients eligible for a subsidy was expanded to include sulphur, boron and zinc. Then, in Budget 2011, Finance Minister Pranab Mukherjee announced the fourth change: the subsidy will, be given to the farmer as a direct cash transfer.

Major Subsidies in India from 1990-91 to 2008-09 is given in the following Table:

Estimates of fertiliser subsidy as per Central government budgets over the years in the post-reforms era show that fertiliser subsidy has increased significantly. Preceding Table 1 presents the estimates of major subsidies including the food and fertiliser subsidies in the post-reforms period (1991-92 to 2008-09). It is evident from the table that total subsidies have increased from ̀ 12158 crore in 1990-91 to ̀ 129243 crore in 2008-09, an increase by 10.6 times. The fertiliser subsidy has increased from ` 4389 crore in 1990-91 to ̀ 75,849 crore in 2008-09 representing an increase of over 17 times.

As a percentage of GDP, this represents an increase from 0.85 percent in 1990-91 to 1.52 percent in 2008-09 (Figure 1). The fertiliser subsidy in India as percentage of the GDP varied from 0.47 in 2002-03 to 1.52 percent in 2008-09. The total food subsidy has

Major Subsidies in India

1990-91

1991-92

1992-93

1993-94

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2005-06

2006-07

2007-08

2008-09

Sources : Government of India (2009 & 2009a)

% o

f G

DP

at

curr

ent

pri

ces

1.6

0.8

1.2

0.4

0.0

Figure 1 : Trends in food and fertiliser subsidies (as percent of GDP at current prices) in India: 1990-91 to 2008-09

Food subsidy Fertiliser subsidy

2004-05


27

jumped to ` 43627 crore in 2008-09 from 2450 crores in 1990-91, about 18-fold increase in less than two decades in absolute terms. But if one looks at the percentage of GDP, then the burden of food subsidies in India is much less than that of many other developing countries. The food subsidy in India as percentage of the GDP has varied from 0.41 in 1992-93 to 1.02 in 2002-03, and on an average remained at 0.66 percent over the last 19 years.

During the nineties (1990-91 to 2000-01), fertiliser subsidy accounted for about 47 percent of the total subsidies and share of food subsidy was 35.1 percent (Figure 2). In the 2000s (2001- 02 to 2008-09), food subsidy became dominant, accounting for 49.1 percent of the total subsidy while fertiliser subsidy accounted for 39.5 percent. However, during the last three years, fertiliser subsidy has taken the largest share and accounted for 58.7 percent of total subsidies in 2008-09.

The above analysis shows that the volume of subsidies increased substantially during the post-reforms period (1991-92 to 2008-09). The rate of increase, however, was higher for food subsidy (compound annual growth rate of 16.9% per year) than for fertiliser (12.9%).

Fertiliser use has been and will continue to be a major factor in the increasing agricultural production and productivity. Typically, very few countries, even advanced

Trends in Fertiliser Production and Consumption

Sources : Government of India (2009)

Food subsidy Fertiliser subsidy

% o

f t

ota

l su

bsi

die

s

70

40

60

30

20

10

0.0

Figure 2 : Trends in food and fertiliser subsidies (as percent of total Subsidies) in India from 1990-91 to 2008-09

1990-91

1991-92

1992-93

1993-94

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2005-06

2006-07

2007-08

2008-09

2004-05


28

ones, have relied entirely on the free market system to set fertiliser prices. It is, therefore, not surprising that governments in developing countries are promoting use of fertilisers through various policy instruments including subsidies.

The Indian fertiliser industry has come a long way since its early days of post independence era. India today is one of the largest producer and consumer of fertilisers in the world. The domestic production of urea in the year 2009-10 was 211.12 lakh MT, as compared to 199.20 lakh MT in 2008-09. The production of DAP increased sharply in 2009-10 and was at 42.46 lakh MT as compared to 29.93 lakh MT in 2008-09. The estimated production of urea in 2010-11 is projected at 215.37 lakh MT and that of DAP and complexes at 39.58 lakh MT and 91.66 lakh MT respectively as shown in Table 2.

Table 2: Production & Imports of Urea, DAP, Complex Fertilisers and MOP

India’s production in terms of nutrients (N and P2O5) reached a level of 15.96 million tonnes in 2006-07 from 38.7 thousand tonnes in 1951-52. Similarly, consumption of fertilisers in terms of nutrients (NPK) has also grown from 65.6 thousand tonnes in 1951-52 to nearly 22.57 million tonnes in 2007-08 (Figure 1).

The trends in fertiliser production and consumption is given in the following Figure.

(lakh MT)

Production Imports

Year 2008-09 2009-10 2010-11* 2008-09 2009-10 2010-11*

Urea 199.2 211.12 215.37 56.67 52.09 45.83

DAP 29.93 42.46 39.58 61.91 58.89 68.12

Complex Fertilisers 68.48 80.38 91.66

MOP Nil Nil Nil 56.72 52.86 47.84

Source : Department of Chemicals and Petrochemicals

Note : *estimated; MT-Metric Tonne.

Source: Economic Survey 2010-11


29

Beneficiaries of Fertiliser Subsidy

Although it is a fact that fertiliser subsidy exits because fertiliser is sold to the farmers at a price lower than its economic cost it is not true that the benefits of this subsidy accumulate only to the farmers who use the fertiliser. In this connection, it is important to recognize that the fertiliser subsidy although induces farmers to use more fertiliser which increases the production of agricultural commodities if as a part of the overall price policy, the prices of farm products are also kept low, the benefits of fertiliser subsidy also accrue to the consumers of farm products. The consumers are able to get food products at affordable prices and the industries, which use raw material from the agricultural sector, are able to keep the cost of production of such manufactured goods low.

There is a debate as to whether the fertiliser subsidy benefits the farmers or the fertiliser industry (Gulati 1990; Gulati and Narayanan 2003). Furthermore, the benefits of fertiliser subsidy are heavily tilted towards the large farmers growing water-intensive crops like rice, sugarcane, wheat and cotton in a handful of States. As per the estimates by Gulati and Narayanan (2003), the share of farmers in the fertiliser subsidy increased from 24.54% in the triennium average ending (TE) 1983-84 to 75.62% in TE 1995-96 with an average share of 67.5% for the period 1981-82 to 2000-01 and the rest went to the fertiliser industry. These estimates have been arrived at by comparing subsidy estimates through import parity price (IPP) and farm gate prices of fertilisers with the amount of subsidy given in the central government budget.

1951-52

1955-56

1959-60

1963-64

1967-68

1971-72

1975-76

1979-80

1983-84

1987-88

1991-92

1995-96

1999-00

2003-04

2007-08

24000

18000

12000

6000

0

Production Consumption

(’0

00

to

nn

es)

Figure 3: Trends in fertiliser production and consumption

Source: FAI (2008)


30

Policy Dilemma

Government notification regarding freeing of MRP of P&K fertilisers

• The challenge before the Government is to preserve its pro-agriculture and pro-poor objectives while correcting the floors that kept in.

• As is mentioned earlier, from 2012, the government will stop its 34-year-old practice of giving fertiliser subsidy to companies. It will instead begin a step-wise migration to a cash-transfer system, where the subsidy will eventually move directly to the bank accounts of farmers. The Government hopes, this transition, which began in 2010, will be the panacea for all the ills that distorted the previous system in its various forms.

The Budget for 2010- 11 also announced the operationalization of the Nutrient Based Subsidy Policy for fertilisers effective 1 April 2010.

• Finance Minister Shri Pranab Mukherjee took it forward in Budget 2011 with the announcement that the government will, sooner rather than later, transfer the subsidy directly to farmer bank accounts. The Fertiliser Subsidy plan of Union Budget 2011-12 is given in the following Table.

Under the nutrient-based subsidy (NBS) regime introduced from April 1, 2010, the retail prices of 22 varieties of P & K fertilisers have been freed.

The Government on 8th July 2011 notified the Cabinet decision to allow fertiliser firms to fix the retail price of phosphatic (P) and potassic (K) nutrients such as DAP but asked them to keep the rates at "reasonable level".

Expenditure Budget Vol. I, 2011-201219

NON-PLAN EXPENDITURE BY BROAD CATEGORIES(in Crores of Rupees)

Actuals Budget Revised Budget2009-2010 2010-2011 2010-2011 2011-2012

3. Subsidies3.1 Major Subsidies 134658.20 108666.91 153962.21 134210.853.1.1 Fertiliser Subsidy3.1.1.1 Imported (Urea) fertilisers 4603.32 5500.00 6395.95 6983.003.1.1.2 Indigenous (Urea) fertilisers 17580.25 15980.73 15080.73 13308.003.1.1.3 Sales of decontrolled fertilisers

with concessions to farmers 39080.72 28500.00 33500.00 29706.87Total Fertiliser Subsidy 61264.29 49980.73 54976.68 49997.87

Table 3: Fertiliser Subsidy plan of Union Budget 2011-12


31

For the 2011-12 fiscal, Government has raised NBS of P&K fertiliser to insulate companies from high global prices, but restricted them from hiking the MRP beyond ` 600 a tonne.

The other related detailed notifications regarding Fertiliser Subsidy have been reproduced as Annexures.

• A technology mission on fertilisers may be constituted comprising of experts from agricultural research institutes and agricultural universities to study the changes in pattern in usage of fertilisers in years to come.

• To increase the capacity of urea by about 12 million tonnes to a total of 31.5 million tonnes by 2011-12, India will need to invest more in the sector at current capital costs.

• To strengthen the domestic production capacity of urea, which is not only cost competitive but would also help in attaining self-sufficiency in production of urea which is of utmost importance in the interest of food security.

• Setting up of sector specific Special Economic Zone with the fertiliser production is a necessary activity.

• Urgent need to progressively move towards a nutrient based subsidy and pricing mechanism from the present product based subsidy and pricing mechanism. The pricing of value added/fortified fertilisers can be left to the market forces.


Accounting on Oil Subsidy

32

Introduction

The subsidy and under-recovery on sale of sensitive petroleum products by the Public Sector Oil Marketing Companies (OMCs) to domestic consumers have a direct relationship with and arises out of the pricing methodology of these petroleum products. As India imports around 80% of its Crude Oil requirement, the International Oil prices have a significant impact on the oil companies in India. Besides imports, crude Oil is also procured by these OMCs from domestic companies such as ONGC & Oil India Ltd. These OMCs have several Refineries across the country and several storage and selling installation units and a widespread reseller network.

Oil subsidy is the difference between the notional sale price (based on import/trade parity pricing principle) of the Oil Marketing Companies (OMCs) and the actual sale price.

Retail prices of three major product viz. Diesel, Kerosene Oil under the Public Distribution Scheme & LPG for domestic use, which account for a major portion of the total sales of these OMCs, are still controlled by Government. OMCs incur huge amount of under-realisation / under-recoveries (explained later) on sale of these three products.

These under realizations are partly compensated by Govt. through the following means:

• Discounts on Crude Oil, Domestic LPG and PDS Kerosene from Upstream Oil Companies viz ONGC & OIL and discount on Domestic LPG purchased by OMCs from GAIL.

• Govt. Assistance (cash)

The extent and timing of release of compensation vary from year to year and has an impact on the profitability of the PSUs Oil Companies.

ACCOUNTING ON OIL SUBSIDY

CHAPTER4


33

Historical Perspective of Indian Oil & Gas Industry

Govt. controlled Pricing & Administered Pricing Mechanism (APM) for petroleum products

Three distinct growth phases post independence:

I. Early Phase-1947 to 1969- Free Pricing

• Initially few Anglo-American companies shaped the Indian Industry

• Industrial Policy Resolution of 1956 gave prominence to the public sector resulting in formation of ONGC (Upstream) and IOC (Downstream)

II. Development Phase- 1970 to 1990- APM introduced in 1976 & only NOCs

• Take over of multinationals like Burmah Shell, Esso & Caltex (1974-79)

• Dominance of National Oil Companies (NOCs)

III. Economic Liberalization Phase from 1991-APM Dismantled in 2002

• APM dismantled for Refinery sector delicensed in 1998

• New Exploration Licensing Policy (NELP) launched in 1999

• APM dismantled in 2002 & Private Companies started marketing Transportation fuels after fulfilling certain stipulated conditions.

GOI announced in November, 1997, the phased dismantling of APM over a period of 1998-99 to 2001-02 based on the recommendations of the ‘Strategic Planning Group on Restructuring of the Oil Industry’ (‘R’ Group). One of the main feature of this policy was that Refineries were agreed to be compensated based on Import Parity Price for their products effective 1/4/1998. Government also decided that customer prices of major petroleum products will be moved to market prices, price of Diesel will be fixed on the principle of import parity pricing with immediate effect and prices of other major products, viz Domestic LPG, Aviation Turbine Fuel, PDS Kerosene and Petrol will be moved towards principle of import parity in a phased manner.

During the period 2002 to 2006 (June), import parity principle for petrol & diesel was implemented for compensating the refineries. However the pricing principle was shifted to “Trade Parity Principle” w.e.f 16th June, 2006 for MS and HSD with 80% weightage for import parity price and 20% weightage for export parity price. Since the


34

selling prices were controlled by Govt., the under recoveries incurred by OMCs were compensated partially through upstream discounts & GOI Special Oil Bonds and balance amount was absorbed by the OMCs.

Pricing of petrol was de-regulated w.e.f 25th June, 2010. Selling price of diesel continues to be under Govt. control.

As regards Kerosene Oil under the Public Distribution Scheme & LPG for domestic use, their prices continue to be controlled by Govt. till date. Subsidy during 2002-03 was based on difference between cost price and selling price during March, 2002 under an approved subsidy scheme. The subsidy was progressively reduced by one third in subsequent years. Since then there has been sustained increase in cost price due to changes in international prices. However, the selling price of kerosene and LPG have only been revised upward marginally from the level of 2002 price. As a result, the compensation through the subsidy scheme is very nominal. As is mentioned previously, balance under-realisation is compensated partially through upstream discounts & GOI Special Oil Bonds and balance amount is absorbed by the OMCs.

An Expert group, with Dr. Kirit S. Parikh as Chairman, was appointed by Ministry of Petroleum & Natural Gas, Govt. of India in August, 2009 to look into all aspects of petroleum pricing, under recoveries, price control and subsidies etc. The Committee submitted its report in February, 2010.

Petrol & Diesel

• Petrol & Diesel prices should be market determined both at the Refinery Gate and at the Retail level.

• Levy of an Addition Excise Duty of ̀ 80000 on Diesel vehicles to collect the same level of tax that Petrol car users pay from those who use a Diesel vehicles for passenger transport.

PDS Kerosene and Domestic LPG

• There should be one price in the market. Kerosene price should be close to the price of Diesel. Subsidies to be targeted to BPL households through Smart Cards with biometric identification / UID framework. Until it becomes operational, the following measures be taken:

Main Recommendations given by Kirit Parikh Committee on 3rd February 2010


35

PDS Kerosene

• Allocation across all states should be rationalised to bring down all India allocation by atleast 20%.

• Price to be increased at least by ̀ 6/ltr.

• Thereafter, price to be increased every year in step with the growth in per capita agricultural GDP at nominal price.

Domestic LPG

• Price to be increased at least by ̀ 100/cylinder.

• Thereafter, price to be increased periodically in line with increase in paying capacity as reflected in the rising per capita income.

For financing the Under-recoveries/Subsidies, the Expert Group has recommended mopping up a portion of the incremental revenue accruing to ONGC/OIL from production in nominated blocks at the rates indicated below:

Remaining gap in under-recoveries of OMCs to be met by way of cash subsidy from the Budget.

Under-recoveries and losses of oil companies are two distinct concepts. The concept of “under-recoveries” and “losses” were examined by the “Committee on Pricing and Taxation of Petroleum Products” – under the chairmanship of Dr. C. Rangarajan, PM’s Economic Advisory Council. The committee observed that:

“Refining of crude oil is a process industry where crude oil constitutes around 90% of the total cost. Since value added is relatively small, determination of individual product-wise prices becomes problematic. The oil marketing companies (OMCs) are

The OMCs marketing PDS Kerosene and Domestic LPG should be compensated fully for their under-recoveries.

Under-recoveries and losses

Price Range ($/bbl) Rate (% of the incremental price)

60 -70 20%

70 – 80 40%

80 - 90 60%

Above 90 80%


36

currently sourcing their products from the refineries on import parity basis which then becomes their cost price. The difference between the cost price and the realized price represents the under-recoveries of the OMCs.

The under-recoveries as computed above are different from the actual profits and losses of the oil companies as per their published results. The latter take into account other income streams like dividend income, pipeline income, inventory changes, profits from freely priced products and refining margins in the case of integrated companies.”

As a result of the price control over the selling prices of Diesel, PDS Kerosene Oil & domestic LPG, OMCs have been suffering huge under recoveries. Govt. has been reimbursing OMCs for such losses through subsidy, discount from upstream oil companies, issuance of oil bonds & lately Cash assistance but the following are the constraints:

• The extent & time of release varies from year to year.

• Such compensation received by the OMCs, except for the year 2008-09, is only partial and oil companies have borne substantial under recoveries which have affected their profitability & liquidity.

• Release of compensation is mostly delayed, which leads to increased borrowings to ease liquidity and consequential interest costs.

• No compensation is granted for interest cost incurred on the additional borrowings due to delayed release of compensation.

• Losses on sale of Oil Bonds.

There should be a fair and transparent mechanism for sharing of under-recoveries wherein under-recoveries of OMCs are allocated among all parties in such a manner that a part of increase in crude price is retained by upstream oil companies to meet increased cost of production and to meet existing and future plans and obligations.

The subsidy/compensation places enormous stress on the Govt. exchequer/ Govt.’s Finances. The increasing volatility in international oil prices and the efforts of Govt. to insulate the domestic consumers against such volatility have led further burden on the Govt. by way of subsidies/ compensation.

The under recoveries also reduce the liquidity of the OMCs and affect their

Under Recoveries & Compensation


37

diversification efforts like exploration, acquisition of profitable ventures abroad besides affecting Capex plans to supplement their infrastructure in line with business plans. The resultant increase in borrowings, loss on sale of Oil Bonds & delayed issuance of compensation further affect the profitability of OMCs.

Because of the subsidised products being made available, the consumers have not had the incentive to economize on the consumption of petroleum products and the demand has been registering a continuous rise. This is expected to lead to a spiraling effect on under recoveries and subsidy/compensation.

The quantum of under-recoveries, compensation/discount from the Government/upstream discount received by the OMCs for the under-recoveries has kept on changing from year to year and are given as under in Table 1.

The Government’s share of compensation for under-recoveries till the year 2008-09 was received in the form of oil bonds.

The Special Oil Bonds carry a fixed coupon rate and have a maturity period of 15- 20 years. The coupon rates of Special Oil Bonds are fixed based on the prevailing rates of

Compensation in the form of Oil Bonds

` Crore

2003-04 9,274 3,118 33.62 6,156 66.38 - 0.00

2004-05 20,146 5,947 29.52 14,199 70.48 - 0.00

2005-06 40,000 14,000 35.00 14,500 36.25 11,500 28.75

2006-07 49,387 20,507 41.52 4,759 9.64 24,121 48.84

2007-08 77,123 25,708 33.33 16,126 20.91 35,290 45.76

2008-09* 104,235 32,943 31.60 - 0.00 71,292 68.40

2009-10 46,051 14,430 31.33 5,621 12.21 26,000 56.46

2010-11 78,189 30,297 38.75 6,891 8.81 41,001 52.44

Total 4,24,405 1,46,950 34.62 68,252 16.08 2,09,204 49.29

Allocation of under-recoveries

Year Total - Upstream Oil Down-stream Central Govt.

Under- Cos. Oil Cos.

recoveries Total % Total % Total %

Table 1: Year-wise break-up of total under-recoveries of OMCs and sharing among Upstream oil companies, OMCs and Central Govt.:

(*) includes Import Loss of ` 943 crore


38

corresponding Government Securities for similar maturity plus 20-25 basis points (0.20-0.25%). The Special Oil Bonds cannot be liquidated at a single instance and have to be disposed off in branches. Due to time lag between issuance and disposal of bonds on account of restriction of sale of bonds, unfavorable market conditions and limited appetite for sale in secondary market, it is observed that Special Oil Bonds are normally sold at a discount. Further, the delay in issuance of the bonds also results in increased borrowings and an additional burden of interest cost on OMCs.

The bonds do not have SLR status as a result of which they cannot be subscribed by the banks. However, they are considered as an eligible security for investment by PF’s and Insurance companies.

OMCs have been incurring substantial losses on disposal of Oil Bonds. Such losses are not reimbursed to them. The trends of coupon rates fixed on Special Oil Bonds since issuance are given as under in table 2:-

Table 2: Trend of coupon rates fixed on Special Oil Bonds since issuance

Year of Issuance Tenure (years) Coupon Rate

2005-06 7 7 .00 %

3 7.33 %

6 7.47 %

9 7.61 %

3 7.07 %

6 7.44 %

9 7.59 %

2006-07 15 8.13 %

15 7.75 %

17 8.01 %

17 8.20 %

19 8.40 %

2007-08 17 7.95 %

17 8.40 %

2008-09 15 8.20 %

16 6.35 %

17 6.90 %

17 8.00 %

2009-10 15 8.20 %

Source: I.O.C.L.


39

Oil Bonds have not served the purpose of compensation as they usually result in further losses to OMCs upon disposal, the delayed receipt and disposal of these Bonds causes further stress on liquidity & interest costs. Further there is limitation on disposal of bonds that not more than 25% of the oil bonds issued in a tranche can be sold in a quarter.

Besides being disadvantageous to OMCs, issuance of such Bonds put a heavy financial commitment & burden on Govt. for their redemption on the maturity date. The cumulative effect of maturity value of all Oil Bonds and Bonds issued to other industry such as Fertiliser etc put together may be very high and will put an enormous burden on the exchequer. This is bound to have a significantly adverse effect on the financial budget of the Govt. as well as on the economy.

Prices of three petroleum products viz. Diesel, Kerosene Oil under the Public Distribution Scheme & LPG for domestic use continue to be regulated by the Govt. The resultant under-recoveries are compensated by the Govt. partially through cash compensation, subsidy, discount from upstream oil companies and are partly absorbed by the OMCs.

Govt. has not issued any Oil Bonds since 2009-10 and the compensation released has been in the form of cash but the release of funds takes place after a delay of as much as 6-8 months.

A substantial portion of the Under Recovery, which is left uncompensated, has to be absorbed by OMCs, affecting their liquidity & profitability.

The rising subsidy burden on up-stream oil companies is also adversely affecting their investments in future expansion plans which are important in view of the sharply rising oil demand and the increasing import dependency.

The subsidy on PDS Kerosene & Domestic LPG, under the subsidy scheme, as also the compensation in the form of oil bonds or cash assistance is accounted as ‘Recovery under Subsidy Schemes’. The accounting for compensation in the form of oil bonds or cash assistance is done only when a formal letter of approval is received from the Govt. This compensation, is classified as “Current Assets, Loans & Advances” till the compensation is actually received. On receipt, Bonds are treated as “Investment”. The upstream discount received against crude by the OMCs is adjusted in the raw material consumed.

Present Scenario

Accounting of Subsidy/ Compensation by OMCs


40

Upstream companies account the share of under-recoveries by adjusting their sales.

• The public sector OMCs and upstream oil companies have suffered financially due to absorption of huge under-recoveries and their financial health has deteriorated considerably.

• Rising oil prices and consequent under recoveries adversely affect liquidity leading to increased borrowings and higher interest cost.

• Non receipt of budgetary support on monthly basis leads to dependence on borrowings which is putting pressure in raising of funds.

• The working capital loans of the public sector OMCs has gone up from ̀ 23,000 crore in 2004-05 to ̀ 1.07 lakh crore in 31st March 2011, forcing them to borrow heavily from banks with massive rise in interest costs. There is a delay in grant of compensation from the Government against under-recoveries to the OMCs which have resulted in huge interest cost.

• Quarter to quarter profit is erratic and is not comparable either sequentially or with previous year.

• Capital investment decisions cannot be taken because of uncertainty of cash flows.

• Difficult to estimate profit for payment of advance tax under Income tax Act resulting in imposition of interest.

• Investor sentiments badly affected due to uncertainty in burden sharing mechanism.

Upstream companies viz ONGC, OIL and GAIL share the part of under-recoveries of OMCs by extending discount in the prices of crude oil, Domestic LPG and PDS Kerosene. The issues faced by upstream companies are as below:

a) Minority shareholders of upstream companies including Foreign Institutional Investors (FIIs) and retail shareholders, have been expressing serious reservations on the adhoc under-recoveries sharing mechanism and upstream companies’ increasing contribution towards under-recoveries.

b) Upstream Companies normally bear 1/3rd of under-recoveries on account of

Concerns of Oil Marketing Companies

Concerns of Upstream Companies in Sharing of Under-recoveries:


41

price sensitive products. Consumption of these products (excluding MS after deregulation) during 2010-11 was 86.14 MMT. Thus upstream oil companies bear under-recoveries on sale of 28.71 MMT of such products. On the other hand, the sale quantity of crude oil subjected to under recoveries by upstream oil companies during 2010-11 was 23.95 MMT. It is thus seen that consumption of these products on which upstream companies bear under-recoveries is 20% higher the sale of crude oil of upstream oil companies.

c) Further, the total production of crude oil by ONGC and OIL is almost stagnant during past few years, whereas consumption of LPG (Domestic), SKO (PDS) and HSD shows a CAGR of 6% (approx).

d) Besides, it has also been observed that generally international prices of HSD/ SKO/ LPG increase more than increase in crude prices. In other words, increase in crude price by 1 USD/bbl, generally results into increase in the prices of above products by more than 1 US$/bbl.

e) International prices of crude oil which was around US$ 30/bbl during 2003-04, increased significantly to touch US$ 147/bbl during July, 2008. Presently, crude prices are hovering around US$ 115/bbl. Costs of services normally increases in tandem with crude oil prices. Though upstream companies have not been able to get significant price advantage of increase in crude oil prices due to sharing of under-recoveries, cost of procurement of oilfield services and materials have increased significantly.

f) Increased burden of share of under-recoveries on ONGC/OIL would not only hamper their planned activities but also the financial capability to acquire oil and gas assets overseas to ensure energy security for the country.

g) Various tax authorities have raised issues on such discounts being allowed by ONGC/OIL to OMCs from time to time.

• A viable and long term pricing strategy for petroleum products, which will be true over a wide range of international prices, needs to be evolved. Such a policy will take into account the social objectives of the Govt., the profitability & growth plans of OMCs and will aim for reducing the fiscal burden on the Govt. on a sustained basis till pricing of all petroleum products is made market driven.

• The prices of Diesel, Kerosene Oil under the Public Distribution Scheme & LPG for domestic use needs to be de-regulated and made market driven.



42

• Pending de-regulation, OMCs should be compensated in full for their under recoveries.

• Kerosene allocation may be rationalized/reviewed. Price of kerosene may be gradually increased to bridge the vast gap between kerosene and diesel to prevent any possible diversion of kerosene.

• The compensation should be in the form of Cash and should accrue on sale of petroleum products by OMCs. The OMCs should be compensated on monthly / quarterly basis.

• As per Nandan Nilekani’s Report it is proposed to set up an IT-driven Core Subsidy Management System (CSMS) to leverage the 'Aadhar' unique identity (UID) numbers for distribution of subsidy. The system would have in-built checks and audits.

• In case one-third under-recoveries are allocated to upstream, upstream companies’ net realization and PAT would go down significantly. As a result, upstream companies would not be able to generate sufficient funds required for ongoing and future plans and thus would not be able to fulfill their obligation of achieving self sufficiency and energy security for the country.


43

Annexures

No. 12012/3/2006-FPP(II)

Government of India

Ministry of Chemicals & Fertilisers

Department of Fertilisers

Shastri Bhawan, New Delhi.

8th March, 2007

To,

Chief Executives of all urea companies/Cooperatives

(As per list attached)

Sir,

The Stage-III of New Pricing Policy for urea manufacturing units will be implemented w.e.f. 1.10.2006. Salient features of the policy as also the modalities for implementation of the Scheme are given in Annexure I-A.

2. The Fertiliser industry Coordination Committee, as before, will continue to administer and operate the new Pricing Scheme for urea units.

3. The urea manufacturing unit(s) may communicate their participation in the Scheme as per proforma of the undertaking enclosed at Annexure-II to this letter, duly executed by the competent authority on behalf of the company so as to reach this Department before March, 31 2007. The undertaking will be required to be executed on the Stamp Paper of the requisite value, for each unit separately. Further, the undertaking will be required to be attested either by Judicial/Metropolitan Magistrate or a Notary Public.

4. The receipt of this letter may kindly be acknowledged.

Yours faithfully,

(Deepak Singhal)

Joint Secretary to the Government of India

Tel No. 23381294

Annexure

44

Annexure. I-A.

(A) Duration

No. 12012/3/2006-FPP

Government of India


(Department of Fertilisers)

Shastri Bhawan. New Delhi,

8th March 2007

To,

The Executive Director,

Fertiliser Industry Coordination Committee,

8th Floor, Sewa Bhawan,

R. K. Puram,

New Delhi.

Subject Policy for Stage-III of New Pricing Scheme for urea manufacturing units.

Sir,

I am directed to refer to this Department’s letter No. 12019/5/98-FPP dated 30th January 2003 and No. 12019/19/2003-FPP, Dated 29-7-2003 vide which the salient features of Stage- I & II of New Pricing Scheme (NPS) introduced w.e.f 1.4.2003, were communicated. It was, inter alia, communicated that the modalities of Stage-III would be decided by the Department of Fertilisers (DOF) after review of the implementation of Stage-I and Stage-II. It has been decided to implement Stage-III of NPS with certain modifications as contained in the succeeding paragraphs.

2. The Policy for NPS Stage-III will be effective from 1.10.2006 to 31.3.2010. Stage-II Policy has been extended up to 30.9.2006. The policy for incentivizing additional production of urea during Stage-III of NPS will be applicable from the date of notification and till then the additional production of urea by units beyond 100% of their capacity will be governed by the existing policy of sharing of the net gain between the Government and the unit in the ratio of 65:35.


45

(B) Grouping of urea units

( C) Resumption of urea production by units under shutdown

3. During Stage-III of NPS, the following measures will be taken to calculate concession rates of urea units:-

(i) Existing six group classification will continue as given in Annexure. I-A.

(ii) Group averaging will be done after updation of all costs upto 31.3.2003.

(iii) Capacity utilization levels of 93% for pre-92 Naphtha and FO/LSHS based plants and 98% for pre-92 gas, post-92 gas, post-92 Naphtha and mixed energy based plants will be considered for calculating the base concession rates of urea units as on 31. 3.2003.

(iv) Transportation cost of gas will he computed and paid separately.

(v) The updated notional concession rates of all urea units as on 1.4.2003 so determined on the pattern followed during Stage-I of NPS will from the basis to calculate the concession rate payable to each urea unit during Stage-III of NPS commencing from 1.10.2006. No outlier benefit will be admissible to any unit in Stage-III of NPS.

(vi) On the base concession rate so determined for each unit, only escalation and de- escalation on components of variable cost on actual basis subject to pre-set energy norms given in Stage - III.

(vii) A deduction of Rs 50/MT from the concession rates of pre92 Naphtha and FO/LSHS based and Rs.75/MT from the other units for the reduced capital related charges (CRC) will be made.

(viii) The respective pre-set energy consumption norm of each urea unit during Stage-II of NPS or the actual energy consumption achieved during the year 2002-03, whichever is lower, will be recognized as the norm for Stage-III of NPS.

(ix) Saving on energy over the pre-set norms will be paid as per the basic rate of the weighted average of feed/fuel used during Stage-III of NPS.

4. Resumption of production by urea units currently not in production, viz, RCF-Trombay-V, FACT-Cochin and Duncans Industries Limited (DIL)-Kanpur is allowed based on natural gas/LNG/CBM/Coal gas. Upon resumption, the base concession rate of these units will be the Stage-III concession rate of the group

Annexure

46

to which they belonged, or their own concession rate updated till 31.3.2003 for all costs and thereafter adjusted for the feedstock changeover, whichever is lower.

5. (i) All functional Naphtha and FO/LSHS based units should get converted within a period of 3 years (of these, Shriram Fertilisers & Chemicals Ltd (SFC) Kota is expected to convert by the end of the current financial year). On the expiry of the aforementioned period, the Government will not subsidize the high cost urea produced by the non-gas based urea units and rate of concession of such units will be restricted to the lower of the prevalent import parity price (IPP) or their own rate. Units not able to tie up gas will have to explore alternative feedstock like Coal Bed Methane (CBM) and coal gas.

(ii) In order to provide incentives for conversion to gas, since there is no recognition of investment made by units for conversion there will be no mopping up of energy efficiency for a fixed period of 5 years for Naphtha based as well as for FO/LSHS based units. Capital subsidy will be considered for FO/LSHS based units for which DOF will notify a separate scheme in consultation with Department of Expenditure (DOE) Ministry of Finance.

(iii) For conversion of the non-gas based Urea Plants to Natural Gas (NG) / Liquefied Natural Gas (LNG), a Committee headed by Petroleum Secretary comprising of Secretaries of Planning Commission, Department of Fertilisers and Department of Expenditure has been constituted for facilitating the connectivity and supply of gas to non-gas based units converting to gas and to develop appropriate mechanism for fixing the price of gas in a transparent manner.

6. The following measures are decided to be implemented to incentivise additional Urea production in the country:-

(i) No permission will be required from the Government for production beyond 100% of re-assessed urea capacity of the unit.

(ii) All production between 100% and 110% of the existing reassessed capacity, if so required by the government as per the approved production plan will be incentivized on the existing net gain sharing formula between the Government and the unit in the ratio of 65:35 respectively with the proviso that the total amount paid to the units, after including the component of variable cost will be

(D) Conversion of non-gas based units to NG/LNG

(E) Incentives for additional urea production


47

capped at the unit’s own concession rate.

(iii) Units increasing production beyond 110% may be compensated at their concession rate, subject to the overall cap of IPP.

(iv) While procuring additional urea beyond 100% of the reassessed capacity of urea units, a merit order system of procurement will be followed. In other words, the units which supply urea at the least cost would be given preference in procurement

(v) The cost of feedstock/fuel allowed will be in the ratio of gas/LNG/Naphtha etc. with reference to actual ratio of consumption of annual actual production of urea up to that portion of the incremental production of urea required by the Government for sale to agriculturalists. Energy/inputs for non-agricultural sale/exports and surplus ammonia shall be allocated on costlier feed/fuel basis.

(vi) To the extent that the Government does not require any quantities of additional production for direct sale to agriculturalists, the concerned units would be free to dispose of the remaining quantities by way of exports, sale to complex manufacturers etc. Without seeking prior permission of DOF.

(vii) Government will not subsidize the additional production, if not required by it for agricultural consumption.

7. The following measures have been decided to be implemented for movement of Urea to District level and below :-

(i) The Government will continue to retain the authority to direct movement of urea stock up to 50% of production depending upon the exigencies of the situation.

(ii) States would be required to allocate the entire quantity of planned urea arrivals i.e. both regulated and de-regulated urea in a District- wise, month-wise and supplier wise format.

(iii) Each unit will maintain a district level stock point in the districts where it is required to supply urea. These district level stock points will be the primary Godowns.

(iv) Subsidy to individual units will be reimbursed based on conformity to planned movement up to district level for both controlled and decontrolled urea. The

(F) Distribution and Movement Issues

Annexure

48

monitoring of the movement and distribution of urea throughout the country will be done by an On-line computer- based monitoring system. The time limit of existing payment system i.e., 45 days will be adhered to. It will be ensured that no certification by State Governments is required for release of subsidy to urea Units. Subsidy will be paid only when the urea reaches the district.

(v) The Department will operate a buffer stock through the State Institutional Agencies /Fertiliser Companies in States up to a limit of 5% of their seasonal requirement.

(vi) The Department will work through the agricultural department of the states to realize the objective of adequate and timely availability of urea at the Block level.

8. The freight reimbursement to urea units under NPS-III will be done as follows:-

(i) Primary Freight will be reimbursed on the basis of actual leads for rail movement;

(ii) Reimbursement of railway freight will be as per the actual expenditure;

(iii) For the road component of the primary freight, road leads will be as per actual distance to the primary godown and per tonne Km. rates will be escalated by the composite road transport index {weighted average of the Wholesale Price Indices (WPIs) of HSD oil Motor Tyres, Truck Chassis and All Commodities};

(iv) One time enhancement of 33% will be granted on the road component of primary freight to offset the impact of Supreme Court directed maximum truckload limit of 9 MT on road vehicles;

(v) Tariff Commission will be requested to fix average leads and per tonne km base rates for road transportation in the case of secondary movement. These rates will be escalated by WPI (composite road transport index) every year;

(vi) Pending finalization of leads and rates by the Tariff Commission, secondary freight which was frozen at 2002-03 rates during Stages I & II of NPS will be escalated by the increase/decrease in WPI (composite index) since 2002-03;

(vii) The Freight computed and paid as per the policy shall not exceed the actual freight expenditure incurred by the units.

(viii) The existing scheme for special freight subsidy will continue for supplies to the North Eastern States and Jammu & Kashmir.


49

(G) Policy in respect of high cost units (producing at higher than IPP)

(H) Policy for import of urea

(I) Policy for Joint Ventures Abroad

(J) Other Measures

9. In order to disincentivise high cost production of 8 Naphtha and FO/LSHS based units whose cost of production is higher than the prevalent IPP, to facilitate their early conversion to gas, these units are allowed to produce 100% of capacity should they adhere to an agreed timetable for conversion to gas and tie up of gas/LNG/CBM/CoaI gas If they do not, they will be given only 75% of the difference between the rate of concession and variable cost component (i.e, 75% of the balance fixed costs beyond 93% of capacity utilization) in the 1st year (1 4.2007) and 50% of the fixed cost beyond 93% capacity utilization from 2nd year ( 1.4.2008) onwards.

10. The existing system of import of urea through designated State Trading Enterprises (STEs) i.e. Minerals & Metals Trading Corporation (MMTC). State Trading Corporation (STC) and Indian Potash Limited (IPL) will continue.

11. To encourage setting up of JV fertiliser plants abroad in countries where gas is available in abundance and is much cheaper, the JVs for production of urea will be set up abroad subject to the condition that the Government will enter into/ encourage long term buy back arrangements with JVs abroad depending upon merits. Accordingly, suitable mechanisms be evolved for effectively securing long term fertiliser related supplies, including through investments and joint ventures abroad

12. Cost of bags

The cost of bags, which was frozen during Stage-I & II of NPS, will now be allowed based on moving weighted average cost of bags to compensate for the rise in prices over the last three years. For the year 2006-07, the weighted average of the cost of bags for each unit will be for the three years beginning 2002-03 and accordingly thereafter.

13. Taxes on inputs

For Stage-III, it is decided that sales tax on inputs and other taxes recognized under RPS will be paid on actual basis. Where Value Added Tax (VAT) has been introduced, such of the above taxes as are subsumed in it will be recognized to

Annexure

50

the extent they are non- vattable

In case of any issue/dispute relating to interpretation of the policy, the decision of Department of Fertilisers shall be final. The above provisions will remain in force during the Stage-III of NPS or until further orders, whichever is earlier.


51

ANNEXURE- I-A Classification of urea units into 6 groups

S. N o Name of the Group Name of the units

I Pre-1992 Gas based Namrup-IIIunits 8. Indian Farmers Fertiliser Cooperative (IFFCO)-Aonla-I

9. Indo-Gulf Jagdishpur10. Krishak Bharati Cooperative (KRIBHCO)-Hazira11. National Fertilisers Limited (NFL)-Vijaipur-I12. Rashtriya Chemicals & Fertilisers Limited (RCF)Trombay –V*

II Post-I 992 Gas 8. Nagarjuna Fertilisers & Chemicals Limited (NFCL) Kakinada-Ibased units 9. Chambal Fertilisers & Chemicals Limited (CFCL) Gadepan –I

10. Tata Chemicals Limited (TCL)-Babrala11. Oswal Chemicals & Fertilisers Limited (OCFL)/Kribhco ShyamFertilisers Limited (KSFL)-Shahjahanpur12. NFCL-Kakinada-II13. IFFCO-Aonla-II14. NFL-Vijapur-II

III Pre-1992 9. Fertilisers & Chemicals Travancore Limited (FACT)-CochinNaphtha based 10. Duncans Industries Limited (OIL). Kanpur units 11. IFFCO-Phulpur-I

12. Mangalore Chemicals & Fertilisers Limited (MCFL) Mangalore13. Madras Fertilisers Limited (MFL)-Manali14. Sriram Fertilisers & Chemicals Limited (SFC)-Kota15. Southern Petrochemical Industries Limited (SPIC) Tuticorin16. Zuari Industries Limited (ZIL)-Goa

IV Post-1992 3. IFFCO-Phulpur-IINaphtha based 4. CFCL- Gadepan –II units

V FO/LSHS 5. Gujarat Narmada Valley Fertilisers Corporation Limited (GNVFC)-based Bharuch units 6. NFL-Nangal

7. NFL-Bhatinda8. NFL-Panipat

VI Mixed 4. Gujarat State Fertilisers Corporation Limited (GSFC)-Vadodara energy based 5. IFFCO-Kalolunits 6. RCF-Thal

7. Brahmaputra Valley Fertilisers Corporation Limited (BVFCL)

* Not in production.

Annexure

52

File No. 23011/1/2010-MRP (pt)

Government of India

Ministry of Chemicals & Fertilisers, Department of Fertilisers

Room No. 101-B, Shastri Bhawan,

New Delhi, the 11th February 2011

To

1. Chief Secretaries/ Agriculture Production Commissioners/ Secretaries (Agriculture) of the State/UT Governments

2. Commissioners/ Directors, Commissionerate/ Directorate of Agriculture of the State / Ut Governments.

Subject: Implementation of the Nutrient Based Subsidy (NBS) policy for Phosphatic and Potassic (P&K) Fertilisers w.e.f. 01.04.2010 and 01.4.2011- Inclusion of fertiliser grade 16-44-0-0 regarding.

Madam/Sir,

In continuation of this Department letter of even nos. dated 4th March 2010, 16th March 2010, 19th April 2010, 19th November 2010 and 1st December 2010 regarding implementation of NBS w.e.f. 1st April 2010 and 1st April 2011, I am directed to say that Department of Fertilisers has announced inclusion of fertiliser grade 16-44-0-0 (DAP Lite) indigenously produced and imported, under the NBS w.e.f 1st February 2011.

2. Per MT NBS for fertiliser grade 16-44-0-0 (DAP Lite) indigenously produced and imported, w.e.f 1st February 2011 for 2010-11 and w.e.f 1st April 2011 for 2011-12 would be as follows:

(`.per MT)

16-44-0-0 14991 12152

3. All the terms and conditions of the NBS policy for import, production, sale and claim and payment of subsidy will apply.

4. This issues with the approval of the competent authority.

(H. Abbas)

Deputy Secretary to the Government of India

Tel: 2338 3814

Grades of fertilisers NBS w.e.f 1st

February 2011 April 2011

NBS w.e.f 1st


53

File No. 23011/1/2010-MRP(pt)

Government of India



101-B, Shastri Bhawan, New Delhi

9th March 2011

To

1. Chief Secretaries/ All Agriculture Production Commissioners/Secretaries (Agriculture) of the State Government/UTs

2. Commissioners/ Directors, Commissionerate/ Directorate of Agriculture of the State Governments/ Uts.

Subject: Implementation of the Nutrient Based Subsidy (BBS) policy for Phosphatic and Potassic (P&K) Fertilisers w.e.f. 01.04.2011-NBS Policy w.e.f. 1st April 2011 for 2011-12 and Revised per MT Subsidy regarding.

Madam/Sir,

In supercession of this Department letter of even no. dated t9 November 2010 relating to NBS w.e.f 1u April 2011 for 2011-12, 1 am directed to say that the Department of Fertilisers has announced revised NBS for P&K fertilisers (including SSP) w.e.f 1st April 201 1 for 2011-12 as per the details below

2. NBS will be applicable for indigenously produced and imported Di-Ammonium Phosphate (DAP, 18-46-0), Di-Ammnonium Phosphate Life (DAP Life, 16- 44-0), Mono Ammonum Phosphate (MAP. 11-52-0), Triple Super Phosphate (TSP 0-48-0), Muriate of Potash (MOP, 0-0-60), 15 grades of complex fertilisers, Single Super Phosphate (SSP, 0-16-0-11) and indigenous Ammonium Sulphate (AS. 20-6-0-0-23 Caprolactum grade produced by GSFC and FACT).

3. Primary nutrients, namely Nitrogen ’N’ Phosphate ‘P’ and Potash ‘K’ and secondary nutrient Sulphur ‘S’ contained in the fertilisers mentioned above will be eligible for NBS. Per Kg NBS for nutrient ‘N’ ‘P’ ‘K’ and ‘S’ for 2011-2012 w.e.f 1st April 2011 would be as follows:

Sl No. Nutrients NBS (*per kg of Nutrient)1 “N” 27.4812 “P” 29.4073 “K” 24.6284 “S” 1.692

Annexure

54

4. Per MT NBS for different P&K fertilisers for 2011-2012 w.e.f 1st April 2011 would be as follows:

5. In addition to the NBS mentioned above, a separate additional subsidy will be provided to the indigenous manufacturers producing complex fertilisers using Naphtha based captive Ammonia to compensate for the higher cost of production of ‘N’. However, this will be available up to 31st March 2012 during which the units will have to convert to gas or use imported Ammonia therafter.

Sl. No Fertilisers NBS (`per MT)

1. DAP(18-46-0-0) 18474

2. DAP Lite (16-44-0-0) 17336

3. MAP (11-52-0-0) 18315

4. TSP (0-46-0-0) 13527

5. MOP (0-0-60-0) 14777

6. SSP (0-16-0-11) 4891

7. NPS: 16-20-0-13 10498

8. NPS: 20-20-0-13 11598

9. NP: 20-20-0-0 11378

10. NP: 23-23-0-0 13084

11. NP: 24-24-0-0 13653

12. NP: 28-28-0-0 15929

13. NPK: 10-26-26-0 16797

14. NPK: 12-32-16-0 16648

15. NPK: 14-28-14-0 15529

16. NPK: 14-35-14-0 17588

17. NPK: 15-15-15-0 12227

18. NPKS: 15-15-15-09 12380

19. NPK: 16-16-16-0 13042

20. NPK: 17-17-17-0 13858

21. NPK: 19-19-19-0 15488

22. Ammonium Sulphate (20.0-0-0-23) 6050


55

6. Any variant of the fertilisers mentioned above coated/fortified with secondary and micronutrients (except Sulphur ‘S’), as provided for under FCO) will also he eligible for subsidy. The secondary and micro-nutrients (except ‘S’) in such fertilisers will attract a separate per tonne subsidy to encourage their application along with primary nutrients as below:

1 Boron ‘Bn’ 300

2 Zinc’Zn’ 500

7. The distribution and movement of fertilisers along with import of finished fertilisers, fertiliser inputs and production by indigenous units will continue to be monitored through the online web based “Fertiliser Monitoring System (FMS) “.

8. 20% of the price decontrolled fertilisers produced/Imported in India will continue to be in the movement control under the Essential Commodities Act I 955 (ECA). Department of Fertilisers will regulate the movement at these fertilisers to bridge the supplies in underserved areas.

9. Freight subsidy under NBS on the decontrolled subsidized fertilisers (including SSP) will be announced separately.

10. Manufacturers/marketers of P&K fertilisers, including SSP, will be required to continue to ensure that fertilisers are transported up to the retail point at their cost since freight is being paid to them.

11. Though the market price of subsidized P&K fertilisers will be open and will be announced by the fertiliser companies, they will be required to print Maximum Retail Price (MRP) along with applicable NBS per MT on the fertiliser bags clearly. Any sale above the printed. MRP will be punishable under the EC Act.

12. Boron 'Bn' has been included as a nutrient under the NBS for additional subsidy. Boronated SSP being a premium, vale added fertiliser, manufactures/marketers of Boronated SSP will be allowed to fix its MRP accordingly and if necessary, higher than Powdered and Granulated SSP.

13. Manufacturers of customized fertilisers and mixture fertilisers will be eligible to source subsidized fertilisers from the manufacturers/importers after receipt in the districts as inputs for manufacturing customized fertilisers and mixture fertilisers for

Sl No. Nutrients for fortification Additional subsidy*

as per FCO per MT of fortified/

coated fertilisers

Annexure

56

agricultural purpose. There would be no separate subsidy on sale of customized fertilisers and mixture fertilisers.

14. The NBS will be released through the industry during 2011-12. The payment of NBS to the manufacturers/importers of DAP/DAP Lite/MAP/TSP/MOP/15 grades of Complex Fertilisers/As shall be released as per the procedure followed vide notification No. 19011/59/2003-MRP (Pt) dated 12.3.2009 of the Department and as emended from time to time. Payment of NBS to the manufacturers/marketers of SSP shall be relesed as per the procedure and terms and conditions mentioned in notification No. 22011/4/2007-MRP dated 13.8.2009 of the Department and as amended from time to time by the Department and No. 23011/1/2010-MPR dated 21st April 2010.

15. This issues with the concurrence of the IFD dated 9th March 2011 and approval of the competent authority.

(H.Abbas)

Deputy Secretary to the Government of India

Tel: 23383814


57

No.12012/19/2009-FPP

Government of India



Shastri Bhavan. New Delhi

Dated the 17th March 2010

To,

The Executive Director, Fertiliser Industry Coordination Committee, 8th Floor, Seva Bhawan, R.K. Puram, New Delhi.

Subject: Policy for Stage-III of New Pricing Scheme for urea manufacturing units-Extension of provisions of policy from 1.4.2010 on provisional basis-reg.

Sir

As you are aware, the formulation of a pricing policy for Stage-IV of New Pricing Scheme for urea units commencing from 1.4.2010 is under consideration of the Government. As it may take some more time before the policy for Stage-IV of NPS is communicated, the provisions of NPS Stage-III policy dated 8-3-2007 including conversion of Naphtha, FO/LSHS based units to gas, the payment of subsidy to urea units. w.e.f from 1.4.2010 at the present rates of concession based upon Stage-III of NPS has been extended till further orders on provisional basis. This may kindly be communicated to urea units.

Yours faithfully

(B.N.Tiwari)

DDG(E&S)

Annexure

58

23011/1/2010-MPR (Pt)

Government of India



Shastri Bhawan, New Delhi

The 5th May 2011

To

1. Chief Secretaries/ All Agriculture Production Commissioners/ Secretaries (Agriculture) of the State Governments/UTs

2 Commissioners/Directors, Commissioner ate/Directorate of Agriculture of the State Governments/UTs

Subject: Implementation of the Nutrient Based Subsidy (NBS) policy for Phosphatic and Potassic (P&K)Fertillzers w.e.f. 01.04.2011-NBS policy w.e.f 1st April 2011 for 2011-12 and Revisid per MT Subsidy, regarding.

Madam /Sir.

In supercession of this Deportment letter of even no. dated 9th March relating to NSS w.e.f 1st April 2011-12. I am directed to say that the Department of Fertilisers has announced revised NBS for P&K fertilisers (including SSP) w. e .f 1 April 2011-12 as per the details below.

2. NBS will be applicable for indigenously produced and imported Di-Ammonium

Phosphate (OAP, 18-46-0), Di-Ammonium Phosphate Lite (DAP Lite, 16-44-0). Mono Ammonium Phosphate (MAP, 11-52-0 ), Triple Super Phosphate (TSP,. O-46-O), Muriate of Potash (MOP, 0-O60), 15 grades of complex fertilisers, Single Super Phosphate (SSP, 0-16-0-11) and indigenous Ammonium Sulphate (AS, 2O.6-0-0-23 Caprolactum grade produced by GSPC and FACT).

3. Primary nutrients. namely Nitrogen ‘N’, Phosphate P’ and Potash’ K’ and secondary nutrient Sulphur ‘S’ contained in the fertilisers mentioned above will be eligible for NBS. Per Kg NBS for nutrient ‘N’’P’’K’ and ‘S’ for 2011-12 w. e. f 1st April 201 1 would be as


59

Sl. No Fertilisers NBS (` Per MT)

1. DAP (18-46-0-0) 19763

2. DAP Lite (16-44-0-0) 18573

3. MAP (11-52-0-0) 19803

4. TSP (0-46-0-0) 14875

5. MOP (0-0-60-0) 16054

6. SSP (0-16-0-11) 5359

7. NPS: 16-20-0-13 11030

8. NPS: 20-20-0-13 12116

9. NP: 20-20-0-0 11898

10. NP: 23-23-0-0 13683

11. NP: 24-24-0-0 14278

12. NP: 28-28-0-0 16657

13. NPK: 10-26-26-0 18080

14. NPK: 12-32-16-0 17887

15. NPK: 14-28-14-0 16602

16. NPK: 14-35-14-0 18866

17. NPK: 15-15-15-0 12937

18. NPKS: 15-15-15-09 13088

19. NPK: 16-16-16-0 13800

20. NPK: 17-17-17-0 14662

21. NPK: 19-19-19-0 16387

22. Ammonium Sulphae (20.6-0-0-23) 5979

follows:

4. Per MT NBS for different P&K fertilisers for 2011-2012 w.e.f 1st April 2011 would be as follows:

Sl No. Nutrients NBS (` per kg of Nutrient)

1 “N” 27.153

2 “P” 32.338

3 “K” 26.756

4 “S” 1.677

Annexure

60

5. In addition to the NBS mentioned above a separate additional subsidy will be provided to the indigenous manufacturers (M/s FACT, M/s MFL and M/s GNVFC) producing complex fertilisers using Naphtha based captive Ammonia to compensate for the higher cost of production of ‘N’. However, this will be available up to 31st March 2012 during which the units of these three manufacturers (FACT, MFL and GNVFC) will have to convert to gas or use imported Ammonia thereafter.

6. Any variant of the fertilisers mentioned above coated/fortified with secondary and micronutrients (except Sulphur ‘S’), as provided for under FCO, will also be eligible for subsidy. The secondary and micro-nutrients (except ‘S’) in such fertilisers will attract a separate per tonne subsidy to encourage their application along with primary nutrients as below;

7. The distribution and movement of fertilisers along with import of finished fertilisers, fertiliser inputs and production by indigenous units will continue to be monitored through the online web based “Fertiliser Monitoring System (FMS)”.

8. 20% of the price decontrolled fertilisers produced/imported in India will continue to be in the movement control under the Essential Commodites Act 1955 (ECA). Department of Fertilisers will regulate the movement of these fertilisers to bridge the supplies in underserved areas.

9. Freight subsidy under NBS on the decontrolled subsidized P&K fertilisers (except SSP) for rail movement would be paid as per actual claim as per Railway Receipt (RR). Secondary freight for the P&K fertilisers (except SSP) will be paid in line with the Uniform Freight applicable for urea. Freight for direct road movement would be subject to lower of actual freight claim and equivalent rail freight. Direct road movement will be allowed to a maximum distance of 500 KM. For the purpose of admissibility of equivalent rail freight for direct road movement, following rates would be applicable:

Sl No. Nutrients for fortification Additional subsidy*

as per FCO per MT of fortified/

coated fertilisers

1 Boron ‘Bn’ 300

2 Zinc’Zn’ 500


61

Policy for freight for secondary movement and direct road movement as mentioned above is provisional.

10. In addition to the NBS for SSP mentioned in paragraph 4 above, a lump sum freight of Rs. 200 per MT will be provided.

The policy mentioned in the above-mentioned Para 9 and 10 will be governed by letter No. 23011/1/2010-MPR dated 21.4.2011.

11. Manufacturers / marketers of P&K fertilisers, including SSP, will be required to continue to ensure that fertilisers are transported up to the retail point since freight is being paid to them.

12. Though the market price of subsidized P&K fertilisers will be open and will be announced by the fertiliser companies, they will be required to print Maximum Retail Price (MRP) along with applicable NBS per bag on each fertiliser bag clearly. Any sale above the printed MRP is punishable under the EC Act The companies have the freedom to increase the MRP of DAP by Rs. 600/- PMT in addition to the MRP prevailing at present (Rs. 10750/- per MT). Proportionate increase in MRPs of NPKS complexes would also be admissible.

Counter Vailing Duty/Excise Duty as applicable would also be recoverable by way of suitable increase in MRPs.

13. Boron ‘Bn’ has been included as a nutrient under the NBS for additional subsidy.

14. Manufacturers of customized fertilisers and mixture fertilisers will be eligible to source subsidized fertilisers from the manufacturers/ importers after their receipt in the districts as inputs for manufacturing customized falters and mixture fertilisers for agricultural purpose. There would be no separate subsidy on sale of customized fertilisers and mixture fertilisers.

15. The payment of NBS to the manufacturers/importers of DAP/DAP Lite/MAP/TSP/MOP/15 grades of Complex Fertilisers/ AS shall be released as per the

Movement (KM) Rate Rs. Per MT

Up to 100 108

101-200 183

201-300 256

301-400 327

401-500 400

Annexure

62

procedure followed vide notification No.19011/59/2003-MPR (Pt.) dated 12.3.2009 of the Department and as amended from time to time Payment of NBS to the manufacturers/marketers of SSP shall be released as per the procedure and terms and conditions mentioned In notification No. 22011/4/2007-MPR dated 13.8.2009 of the Department and as amended from time to time by the Department and No. 23011/1/2010- MPR dated 21st April 2010 and 3rd May 2011.

16. This issues with the concurrence of the IFD vide diary no. 197/AS&FA dated 5.5.2011 and approval of the competent authority.

(Sham Lal Goyal)

Joint Secretary to the Government of India

Tel: 2338 6481


63

Provision for Payment of Subsidies in Central Budget in India

(2000-2001 to 2009-2010) (` in Crore)

Particulars 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10(R.E) (B.E)

Food subsidy 12010 17494 24176 25181 25798 23077 24014 31328 43627 52490

Sugar subsidy 50 5 - - - - - - 0 0

Fertiliser subsidy 9492 8092 7790 8521 10737 11774 26222 32490 75849 49980

(a) Imported fertilisers 12 48 - - 494 1121 3274 6606 10981 5948

(b) Indigenous fertilisers 9480 8044 7790 8521 10243 10653 12650 12950 16517 9780

© Subsidy to manufactures/agencies for confessional sale of decontrolled fertilisers 4319 4504 3225 3326 5142 6596 10298 12934 48351 34252

Export promotion & market development 621 616 628 764 741 887 1224 1939 2946 1598

Subsidy to railways 812 896 1046 1328 954 986 1517 2105 2381 2686

Subsidy to new industrial units in backward areas 124 142 191 106 166 136 91 585 56 56

Subsidy to Calcutta Port Trust for river dredging 304 316 200 261 262 250 375 393 472 438

Subsidy to GIC for Central Crop Insurance Fund 289 314 - - - - - - - -

Subsidy to Hindustan & Cochin Shipyards for shipbuilding 18 20 25 15 15 101 111 162 170 175

Subsidy to SCI for shipping 19 18 16 1 - - - 27 60 371

Subsidy for tea and coffee plantations 10 30 64 26 104 40 57 36 72 51

Subsidy to manufacturers/ agencies for concessional sale of decontrolled fertilisers 4319 4504 3225 3326 5142 6596 - - - -

Subsidy to Power Finance Corporation Ltd. 295 345 260 192 250 300 456 - 0 0

Petroleum subsidy - - 5225 6292 2956 2683 2699 2820 2877 3109

Subsidy to Jute Corporation of India - - 30 30 30 30 28 30 37 30

Subsidy on marine products to Export Development Authority 20 30 40 41 44 54 50 84 95 95

Subsidy on agricultural products to Export Development Authority 33 30 22 30 30 43 61 63 62 65

TABLE - I

Annexure

64

Interest subsidy 111 210 750 170 564 2177 2809 2311 4063 2601

Subsidy to D.R.D.A for development of women and children in rural areas - - - - - - - - - -

Subsidy for operation of Haj Charters 137 155 178 200 225 280 374 514 620 620

Subsidy to rural artisan for supply of tool kits - - - - - - - - - -

Subsidy Component for Indira Awaas Yojana/Samagra Awas yojana - - - - - - - - - -

Subsidy to D.R.D.A and others for Swaranjayanti Gram swarozgar yojana* - - - - - - - - - -

Subsidy to Coal and Lignite companies for payment against collection of cess (Excise duty) on coal and coke 64 74 61 64 100 66 80 150 132 135

Subsidy to Coal and Lignite companies for payment against collection of cess (Excise duty) towards development of transportation infrastructure in coalfield areas 56 40 25 50 - - 14 24 0 22

Subsidy to NAFED for MIS/PSS 120 260 560 860 375 425

Transport subsidy - - - - - -

Subsidy to Rural Electrification 200 1100 2800 3893 4934 6300

Others 391 228 148 1139 959 -5908 -10156 -11734 -43318 -33310

Total 29175 33559 44100 47737 49397 51618 63684 81014 143861 122189

Total as per cent of GDP 1.39 1.47 1.79 1.73 1.57 1.39 1.49 1.64 2.58 1.96

Source : Indiastat.com


65

Amount Spent on Various Subsidies by Central Government in India(1999-2000 to 2010-2011)

(`. in Crore)Actual

Item 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 (RE)

Major Subsidies 22678 25860 30447 40716 43535 44753 44480 53495 67498 123581 124786 - Food 9434 12060 17499 24176 25181 25798 23077 24014 31328 43751 56002 55578 Indigenous (Urea) Fertiliser 8670 9480 8044 7790 8521 10243 10653 12650 12950 17969 14080 15981 Sale of decontro-lled fertiliserwith concessionto farmers 4500 4319 4504 3225 3326 5142 6596 10298 12934 48555 34952 28500 Imported (Urea) Fertiliser 74 1 47 - - 494 1211 3274 6606 10079 3948 5500 Total Fertilisers Subsidy - 13800 12595 11015 11847 15879 18460 26222 32490 243935 233768 - Petroleum Subsidy - - - 5225 6351 2956 2683 2699 2820 2852 14954 3108 Grand to NAFED for MIS/PPS - - 353 300 156 120 260 560 860 375 850 - Other Subsidies 1809 978 763 2817 788 1204 3042 3630 3428 6127 6239 - Import/Export of Sugar, Edible oils etc 50 40 8 - - - - - - - - - InterestSubsidies 1371 111 210 750 170 564 2177 2809 2311 3493 2719 4416 Other subsidies 388 827 545 2067 618 640 865 821 1117 2634 3520 3141 Total Subsidies 24487 26838 31210 43533 44323 45957 47522 57125 70926 129708 131025 116224

TABLE - II

Source: indiastat.com

Annexure

66

Abbr. : NA : Not Available. P : Provisional.Note: From 1992-93 on wards (w.e.f. 25.8.1992, the figures of subsidy on fertilisers area only on Urea) and figures are ` in crore.* : Assistance for fertiliser promotion. ** : ` 7500 crore given in the form of special securities. # : Plus an additional amount of ` 38863 crore allocated in the first supplementary. In addition, ` 14000 crore granted in the form of special securities. 1 crore = 10 million.

Source : The Fertiliser Association of India.

Central Subsidy on Food and Fertilisers in India

(1976-1977 to 2008-2009)

(` Million)

Year Food Fertilisers Decontrolled Total Subsidy % of Total

Imported Indigenous Total P and K on all Govt.

Fertilisers Fertilisers Expenditure

1976-77 4773 NA NA 600 - - -

1977-78 4801 2410 250 2660 - - -

1978-79 5694 1710 1722 3432 - - -

1979-80 6000 2830 3208 6038 - - -

1980-81 6500 3350 1700 5050 - - -

1981-82 7000 1000 2750 3750 - - -

1982-83 7110 550 5500 6050 - - -

1983-84 8350 1420 9000 10420 - - -

1984-85 11010 7273 12000 19273 - - -

1985-86 16500 3237 16000 19237 - - -

1986-87 20000 1971 17000 18971 - - -

1987-88 20000 1140 20500 21640 - - -

1988-89 22000 2007 30000 32007 - - -

1989-90 24760 7711 37710 45421 - - -

1990-91 24500 6593 37297 43890 - - 2.33

1991-92 28500 12996 35000 47996 - - 2.56

1992-93 2800 996 4800 5796 340* 6136 2.27

1993-94 5537 599 3800 4399 517* 4916 3.9

1994-95 5100 1166 4075 5241 528 5769 2.8

1995-96 5377 1935 4300 6235 500 6735 2.78

1996-97 6066 1163 4743 5906 1672 7578 2.46

1997-98 7900 722 6600 7322 2596 9918 3.23

1998-99 9100 333 7473 7806 3790 11596 3.11

1999-00 9434 74 8670 8744 4500 13244 3.03

2000-01 12060 1 9480 9481 4319 13800 -

2001-02 17499 47 8044 8091 4504 12595 -

2002-03 24176 - 7790 7790 3225 11015 -

2003-04 25181 - 8521 8521 3326 11847 -

2004-05 25798 494 10243 10737 5142 15879 -

2005-06 230710 14181 104602 118782 6596 18460 -

2006-07 238280 10935 104104 115039 10298 26222 -

2007-08 312600 27035 114004 141039 17134 40338** -

2008-09P 436680 - - - - - -

TABLE -III


67

Food Subsidy Released to FCI in India

(2002-2003 to 2006-2007)

(` in Crore)

Year Consumer Subsidy Buffer Total

2002-03 16700.36 5973.36 22673.72

2003-04 20376.36 3497.68 23874.04

2004-05 21688.99 1591.01 23280.00

2005-06 19507.61 363.39 19871.00

2006-07 20376.49 409.72 20786.21

TABLE - IV

Abhr FCI: Food Corporation of India

Source : Lok Sabha Unstarred Question No 4783 dated 28-04-2008

Annexure

68

TABLE - V

Revised Estimates of Food Subsidy in India (2005-2006)(` in Crore)

Economic Cost Per Tonne Issue Price BPL APL Buffer CarryingPer Tonne Cost Per Tonne

FCI Wheat 10315.1 4150.00 6100.00 3406Rice 13506.7 5650.00 8300.00 Subsidy on TPDS (FCI) Qty in Lakh Subsidy Per Total

Tonnes Tonne (` Crores)(I) BPL Wheat 49.00 6165.10 3021 Rice 61.00 7856.70 4793 Total 7814(II) APL Wheat 28.00 4215.10 1180 Rice 30.00 5206.70 1562 Total 2742(III) Antyodaya Wheat 21.00 8315.10 1746 Rice 32.00 10506.70 3362 Total 5108Gross Subsidy on TPDS (FCI) 15664Subsidy on TPDS (States) (I) BPL Wheat 9.80 4200.00 412 Rice 24.00 5550.00 1332 Total 1744(II) APL Wheat 0.10 2250.00 2 Rice 8.00 2900.00 232 Total 234(III) Antyodaya Wheat 4.00 6350.00 254 Rice 10.00 8200.00 820 Total 1074Gross Subsidy To States 3052 Qty in Lakh Subsidy Per Total

Tonnes Tonne (` Crores)Buffer Carrying Cost (a) Carry over charges 174(b) Normal Buffer 4.61 3405.70 157Gross Buffer Subsidy 331Subsidy on other Schemes Wheat 25.00 4196.00 1049 Rice 33.50 7848.00 2629Total on other Schemes 3678Deduct shortage pending regularisation 257Total Subsidy to FCI on TPDS+Buffer+Other Schemes 19416Deduct 5% for audited accounts 971Arrears for previous years 1426Net Subsidy to FCI (rounded) 19871Gross Subsidy to States 3052Deduct 5% for audited accounts 153Arrears for past years 301Net Subsidy to States 3200Total Subsidy on 2005-2006 (RE) transactions 23071

Source : Ministry of Consumer Affairs, Food and Public Distribution, Govt. of India.


69

Food Subsidy Released in India

(2000-2001 to 2004-2005*)

Subsidy Released to Year

2000-2001 2001-2002 2002-2003 2003-2004 2004-2005* (BE)

FCI 11462 16724 22674 23874 23280

States 548 770 1503 1286 2466

Total 12010 17494 24177 25160 25746

TABLE -VI

Note : * : Upto 26.10.2004, ` 15985 crore and ` 1302 crore, totaling ` 17287 crore have been released to the FCL and the states.Sources : Background Material For the Economics Editors Conference, November 17-18,2004, Department of Food and Public Distribution, Govt. of India.Year: Period of fiscal year in India is April to March, e.g. year shown as 1990-91 relates to April 1990 to March 1991. Units: (a) 1 Lakh (or Lac) = 100000. (b) 1 Crore (or Cr.) = 10000000.Some part of the footnotes/units may not be applicable for this table.

Note : * : Acquisition cost consists of cost of grains, statutory taxes, storage & interest charges etc. at acquisition stage. $ : Carryover charges have been included in buffer carrying cost from 2001-02. Compiled from the statistics released by : Rajya Sabha Unstarred Question No. 891, dated, 10-12-2004. Year: Period of fiscal year in India is April to March, e.g. year shown as 1990-91 relates to April 1990 to March 1991.Units: (a) 1 Lakh (or Lac) = 100000.(b) 1 Crore (or Cr.) = 10000000.Some part of the footnotes/units may not be applicable for this table.

Major Components of Food Subsidy in India

(1999-2000 to 2003-2004)

(Amount in ` Crore)

Subsidy Components 1999-00 2000-01 2001-02 2002-03 2003-04

Acquisition Cost* 17675 14620 27391 44237 41270

Sales Realisation 15061 10661 18363 31302 30914

Difference [2-1] 2614 3959 9028 12935 10356

Distribution Cost

(i) Freight Charges 1633 1119 1712 3238 3010

(ii) Handling Charges 866 856 1027 1298 1465

(iii) Storage and Interest Charges 2786 3630 4518 4732 3909

(iv) Transit and Storage Shortages 358 248 220 333 485

(v) Administrative Overheads 494 522 584 691 727

Carryover Charges Paid to

State Agencies $ 0 0 916 2145 2104

TABLE -VII

(Amount in ` Crore)

Annexure

70

Food Corporation

of India (FCI) 23280.00 19871.00 20786.21 - - -

Decentralized

Procurement (DCP) States

Madhya Pradesh 118.75 219.71 34.74 41.596 1101.810 882.62

Uttar Pradesh 1377.96 1821.27 1779.80 1625.618 2875.640 3978.17

West Bengal 179.97 191.21 197.23 269.020 657.400 901.21

Chhattisgarh 628.87 550.40 419.05 621.000 842.830 655.61

Uttarakhand 92.73 78.08 94.19 68.650 98.050 180.40

Tamil Nadu 27.21 221.40 272.81 272.210 592.240 524.42

Orissa 40.96 70.79 180.13 503.480 724.820 727.80

Kerala - 37.07 63.43 97.840 31.190 224.27

Karnataka - 10.07 - 0.590 0.000 0.00

India 25746.45 23071.00 23827.59 3500.00 6923.98 8074.50

Amount of Food Subsidy Released to FCI and DCP States of India

(2004-2005 to 2009-2010)

(Amount in ` Crore)

States 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10*

Category-wise Amount Spend on Food Subsidy for Poor in India(2000-01 to 2002-03)

(Amount in ` Crore)

Category 2000-2001 2001-2002 2002-2003

BPL 4446.18 5086.41 6336.21

AAY 0.00 1130.66 2640.95

APL 0.00 457.90 923.90

Food for Work 113.97 1799.03 56.35

Mid-Day-Meal 374.13 1130.51 1221.14

Defence 10.76 23.12 27.04

Open Sale 120.55 616.10 1206.23

Export 1213.00 1368.37 5742.69

Arrears 1498.66 0.00 0.00

Others 0.00 0.00 48.84

Buffer Carrying Cost 4232.75 5881.90 5973.10

Total 12010.00 17494.00 24176.45

TABLE - VIII

Note : Andhra Pradesh has not opted for the DCP scheme so far and no subsidy is released directly to the State. * : As on December 29, 2009. Source : Rajya Sabha Unstarred Question No. 55, dated on 16.11.2007. & Ministry of Finance, Govt. of India. (11307)

Source : Rajya Sabha Unstarred Question No. 3064, Dated 21.08.2003. Year: Period of fiscal year in India is April to March, e.g. year shown as 1990-91 relates to April 1990 to March 1991.Units: (a) 1 Lakh (or Lac) = 100000.(b) 1 Crore (or Cr.) = 10000000.

Some part of the footnotes/units may not be applicable for this table.

TABLE - IX


71

State-wise Estimated Subsidy on Liquid Petroleum

Gas (LPG) from Budget in India

(2005-2006 to 2007-2008)

( ` Lakh)

States/UTs Total

2005-06 2006-07 2007-08

Andaman and Nicobar Islands 69.33 73.90 77.15

Andhra Pradesh 12831.47 13276.32 13776.90

Assam 3903.72 3661.00 3664.86

Bihar 4705.20 4994.12 5461.39

Chhatisgarh 1163.19 1686.20 1919.22

Delhi 5364.20 5470.36 5727.16

Goa 570.17 588.56 610.73

Gujarat 6698.76 6908.72 7253.95

Haryana 7426.99 8931.61 9124.73

Himachal Pradesh 656.30 1078.83 1005.56

Jammu and Kashmir 1608.37 1727.25 1934.59

Jharkhand 1595.69 1419.84 1581.40

Karnataka 8692.32 9130.06 9923.61

Kerala 5055.19 5166.89 5356.00

Maharashtra 16098.23 16534.26 17375.44

Madhya Pradesh 5864.19 6134.89 6633.20

Nagaland 75.65 350.84 303.52

Orissa 2049.17 2146.13 2184.96

Pondicherry 380.26 344.17 385.50

Punjab 9351.36 9907.63 10526.18

Rajasthan 5803.20 5913.65 6229.63

Sikkim 314.73 314.88 313.18

Tamil Nadu 13962.43 16936.54 17959.67

Tripura 365.81 374.21 391.02

Uttar Pradesh 18510.31 20008.46 21274.36

Uttaranchal 1921.59 2014.65 2119.95

West Bengal 9065.65 9723.90 10022.02

Spell Over/Carry Forward/IBP 16374.52 590.13 3148.12

Total Subsidy Paid From Budget 160478.00 155408.00 166284.00

TABLE - X

Source : Lok Sabha Unstarred Question No. 1844, dated 11.12.2008.

Annexure

72

Phosphatic and

Potassic Fertilisers

1992-93 - 339.73

1993-94 - 517.34

1994-95 - 527.95

1995-96 - 500.00

1996-97 - 1671.77

1997-98 - 2596.00

1998-99 - 3789.94

1999-00 8744.07 4500.00

2000-01 9480.98 4319.00

2001-02 8304.34 4503.52

2002-03 7790 3224.52

2003-04 8521 3326.00

2004-05 (BE) 3338.11 4046.00

Amount of Subsidy/Concession Paid on Fertilisers in India

(1992-1993 to 2004-2005)

(Amount in ` Crore)

Period Amount of Subsidy Amount of Concession

Paid on Urea Paid on Decontrolled

Source : Rajya Sabha, Unstarred Question No. 99, Dated 09.07.2004 & Annual Report 2003-04, Ministry of Chemical & Fertilisers, Govt. of India.Year Period of fiscal year in India is April to March, e.g. year shown as 1990-91 relates to April 1990 to March 1991.Units: (a) 1 Lakh: (or Lac) = 100000.(b) 1 Crore (or Cr.) = 10000000.Some part of the footnotes/units may not be applicable for this table.

TABLE - XI


73

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Sub

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Ind

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(19

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XII

Annexure

74

Scheme-wise Food Subsidy Released under Targeted Public Distribution System (TPDS) and Other Welfare Schemes (OWS) in India

(2006-2007 to 2008-2009)

Source : Lok Sabha Unstarred Question No. 743, dated on 24.11.2009.

Total Subsidy 23827.59 31259.68 43668.08

Scheme-wise Subsidy

Below Poverty Line (BPL) 10149 11685 16157

Above Poverty Line (APL) 3349 4673 7294

Antodaya Anna Yojana (AAY) 7852 9006 12615

TPDS (BPL, APL & AAY) 21350 25364 36066

Mid-Day Meal (MDM) 1284 1343 2135

Other Welfare Schemes 622 906 1039

Subsidy Released (` in Crore)

Scheme 2006-07 2007-08 2008-09

Urea Imports on Government Account, Gross Expenditureand Net Subsidy Paid on Imported Urea in India

(1999-2000 to 2009-2010)

Source : Lok Sabha Starred Question No. 257, dated on 30.08.2007 & Rajya Sabha Starred Question No. 123, dated on 05.03.2010.

Year Urea Imports Gross Expenditure

(In Lakh MT) ( in Crore) ( in Crore)

Net Subsidy

` `

1999-00 5.33 293 74.07

2000-01 0 11.85 0.98

2001-02 2.2 147.5 47.34

2002-03 0 1.16 0

2003-04 0 0.82 0

2004-05 6.41 742.64 493.91

2005-06 20.57 2164.71 1201.43

2006-07 47.19 5071.06 3274.09

2007-08 69.28 2838.19 2206.15

2008-09 56.67 2838.19 2206.15

2009-10 (Upto Jan., 10) 48.66 2838.19 2206.15

TABLE - XIII

TABLE - XIV


75

Company-wise Subsidy Paid on Imported Nitrogen and Potassium Fertilisers in India

(2006-2007 to 2009-2010, Upto 20.07.2009)

(Amount in ` Crore)

Company 2006-07 2007-08 2008-09 2009-10 (Upto 20.07.2009)

CFACL 75.120 32.700 754.341 146.160

CFL 97.680 66.540 665.984 301.680

DEEPAK 49.870 31.000 106.487 125.050

FACT 0.020 16.220 36.654 14.220

GNVFC 160.210 156.430 107.793 2.840

IPL 1607.457 4667.470 12643.959 5310.950

MFL 0.270 0.000 4.238 0.000

MMTC 1.781 0.000 0.000 0.000

NFCL 9.880 0.000 0.000 0.000

PPL 107.360 99.060 302.362 170.870

RCF 110.450 320.860 1016.781 740.280

SF&C 304.900 143.870 1.819 0.000

SPIC 1.890 0.000 0.000 0.000

TCL 215.100 160.900 1006.465 351.470

TFCL 0.380 2.830 64.215 94.870

ZIL 167.110 162.790 1519.251 635.910

GFCL 13.251 8.400 0.219 0.000

GSFC 0.001 0.000 0.000 0.000

IFFCO 414.600 366.070 10863.068 1377.330

MIPL 245.930 287.100 3407.020 318.250

KRIBHCO 51.460 23.710 0.000 0.000

INDO GULE 2.860 0.000 0.695 0.000

DIL 0.640 0.000 0.022 0.000

MCFL 11.520 53.970 96.127 83.990

RIL 0.210 0.080 0.000 0.000

Total 3649.950 6600.000 32597.500 9673.870

TABLE - XV

Source : Lok Sabha Unstarred Question No. 2623, dated on 23.07.2009.Source: India stat.com

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NOTES

NOTES

STUDY REPORT ON”ACCOUNTING ON FOOD, FERTILISERS & OIL SUBSIDY”

Prepared byCommittee on Public Finance & Government Accounting

The Institute of Chartered Accountants of India(Set up by an Act of Parliament)

The Committee on Public Finance & Government AccountingThe Institute of Chartered Accountants of IndiaA-29, Sector-62, Noida-201 309Phone: (0120) 3045950/968E-mail: [email protected]: www.icai.org

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