Cabinet set to ratify ECC decision today: GIDC reduction seen hitting fiscal deficit

As the federal cabinet is all set to ratify the decision of ECC on GIDC reduction by Rs 400 per bag of urea Tuesday (today), one section of fertilizer industry termed the decision to control inflation has been marred by inefficient myopic decision making, coupled with poorly thought policies leading to confusion and a total failure to implement a consistent policy framework to enable sustainable growth.

The fertilizer industry maintains that reports of impending wheat shortage had been looming large for a while and concerns had been raised over supply disruptions, the concerned authorities only put actions to motion once the problem had escalated beyond control. The urgency created has led to erratic decision making on the government side with little impact on the goal.

"The government's recent decision pertaining to a significant reduction in GIDC from Rs 405/bag to 5/bag for the fertilizer industry seems like a decision made in haste," said one the stakeholders.

The decision is being termed as baffling for the government to take a major hit on its fiscal deficit after going through a tormenting 2019, which saw fiscal deficit to GDP ratio escalating to an all-time high of 8.9 percent.

In pursuing an out of court GIDC settlement, the government risks putting its case in the Supreme Court in jeopardy as it seeks to recover GIDC from all sectors. Should the Supreme Court deliver a verdict against the government, it would end up losing Rs 800 billion.

There are various reports of an alternate proposal which through increase in fertilizer feed gas prices would have earned the government a fiscal revenue of Rs 40 billion per annum.

One segment of the fertilizer sector says that the government could really use this money in the current dire times which see state owned gas companies suffering from massive Gas Development Surcharge (GDS) deficits, which if allowed to continue to grow, could cause a crisis as big as the circular debt problem faced by the power industry.

Another segment of the fertilizer sector argues that its entire gas is procured at the Fertilizer Policy 2001 on which it has to pay GIDC, while Fatima Fertilizers receives gas at concessionary gas pricing owing to the investments it made in line with Fertilizer Policy 2001, and is thus not required to pay any GIDC on its portion of feed gas.

It has been presumed by one segment that price reductions due to reduction in GIDC will be different across companies. This disparity would allow the dealers to charge the maximum possible price. The large land owners would be able to negotiate better prices owing to their strong networks and buying capability, but small farmers would however continue to suffer. The end result would be disappointing, as lower fertilizer prices will not translate into lower prices for the farmer, thus having no impact on output prices or inflation.

It has also been argued that the farmers would struggle and the middlemen left with piling unsold stocks and required to absorb colossal losses due to the confusion caused by the Government's decision making.

The fertilizer industry on the other hand, which has made massive investments in the country has been dealt a major blow which could severely hurt investor confidence and such inconsistent policy making could really hamper investments in the country. The fertilizer industry through major investments has ensured import substitution of $ 2 billion per annum in the country while ensuring a strict governance mechanism the government should also ensure that the investor confidence in the country is not impaired.

Another argument is that the government should remain aware of the fact that if it seeks to rely on imported urea instead, it will have to provide a subsidy of around Rs 400-500/bag to bring the prices to the current level of Rs 2,040/bag.