THE government has announced an increase in subsidy on phosphatic and potassic fertilisers to the tune of Rs 900 to Rs 1,400 per tonne on both indigenous as well as imported fertilisers. These have been done for the kharif season 1997-98, with retrospective effect and the announcement has come at a time when the sowing of rabi crop is complete.

For DAP the subsidy has been increased by Rs 900 per tonne from Rs 3,500 per tonne to Rs 4,400 per tonne. Imported DAP on the other hand has recieved a hike in subsidy by Rs 1,400 from Rs 2,000 per tonne to Rs 3,400 per tonne. Subsidy on MOP has been increased from Rs 2,000 per tonne to Rs 3,000 per tonne.

The industry will no doubt be relieved to some extent as the subsidy has been increased rather than the threat of it coming down as was down in the previous year for DAP, that too on a retrospective basis. However, the demand of the industry for an increase in subsidy by Rs 1,500 per tonne though has not been met. In fact, the currenthike is lower than the benefit announced by the government earlier in the year. Earlier, the government had raised the concession rate on DAP from Rs 3,500 per tonne to Rs 4,000 per tonne and abolished the price ceiling, leaving it free to the manufacturers to fix the selling prices. But the decision of allowing flexibility in fixing selling prices of imported and domestic DAP was reversed within a month amidst indications that prices might rise Rs 1,000 per tonne.

This led to cancellation of about 1,00,000 tonnes of DAP import contract and also affected domestic production, which caused shortages at sowing time. The country is heavily dependent on imports for phosphatic and potassic fertilisers. Thus, the higher subsidy on imported DAP is likely to benefit companies like Hind Lever Chemicals, RCF among others.

However, on the macro level increase in subsidy makes little sense. The government had an excellent opportunity to increase the farm-gate price as the `black market' rates for DAP shot up to aroundRs 13,000 to 14,000 per tonne. Instead, the government has taken the softer though costlier option of increasing the subsidy.

Already the fertiliser subsidy bill has been mounting during the year. The budgetary provision of Rs 6,983 crore for 1998-99 towards subsidy on indigenous urea was also inadequate as it had no room for additional production coming from the newly commissioned expansion projects.

The situation on phosphatic and potassic front was much more complicated. The 1997-98 budget provided for Rs 2,000 crore towards concession on decontrolled fertilisers whereas the revised estimate for concession during the year was Rs 2,600 crore as against an estimated requirement of Rs 3,400 crore. This is likely to increase with the new subsidies being announced.

Government has also said that it will fix subsidy for the current rabi season on a quarterly basis. This though looks very good on paper is unlikely to be achieved considering the decision making speed of the government. Subsidies on only SSPhas been announced by the government which have been increased from Rs 600 per tonne to Rs 900 per tonne. The government has however said that pending the implementation of the new subsidy rates, 80 per cent of the concession amount would be paid to the manufacturers and importers at the kharif 1998 levels.

The solution given by the government will no doubt increase the supply of potassic and phosphatic fertilizers in the country, both of which had taken a drastic beating during the current year as importers shied away from bringing material in the country due to unclear policies. Farmers were hit by shortages, especially of-- DA-- at the time of the crucial rabi sowing season, a factor which is likely to adversely affect overall foodgrain output this year.

In a nutshell, increasing the subsidy level is no solution at all. As the farmgate prices remain unchanged, demand will still be skewed towards urea. Further, with the pathetic state of the central government finances disbursal of subsidy will becausing a dent to companies profitability.

Industry continued to face liquidity problems as about Rs 850 crore remained locked up with the government in form of arrears for de-controlled phosphatic and potassic fertilisers.

Telco

Telco seems to be intent on moving from a truck manufacturer to an automotive assembler. A fact which is clearly revealed in the company's intentions to reduce its levels of vertical integration. Exemplfying which is the recent move by the company to hive off its gear box, axle and engine businesses into seperate joint venture companies. This comes close on the recent decision by Telco to spin off its construction equipment division.

The practise to reduce levels of vertical integration is in conformance with international standards. But it would be in Telco's interest to tread cautiously in this regard, given that accountability in terms of quality control and adherence to production schedules could become difficult.

However, it would be prudent here to mention thatit has been the need for fresh funds to beef up technology and operations, that has necessitated the hiving off of these businesses. Infusing monies now from its own coffers would only lead to a strain on the company's balance sheet. Especially, given that Telco has already pumped in a substantial portion of its cash flows into the Indica project.

Also given that the benefits far exceed the drawbacks, the exercise should help Telco. The move would eliminate all the fixed costs involved with managing such ancillary ventures and allow Telco the liberty to concentrate on distribution and sales. Additionally, with Telco hiving off its stake to the equity partner that it ropes in, the company would be able to garner a good price for its stake. The one time profit on sale, should also help cushion the earnings growth.

Emcee (With contributions from Shishir Asthana and Percy Dubash)