The recently announced Rs53,000 crore all-cash subsidy for the fertiliser industry, up from Rs30,000 crore announced in this year's Budget was a critical move by the government to save the fertiliser industry. But this is not enough. Only Rs22,000 crore will soon be released to players in the industry, the balance is expected over the next few months. The government will raise this amount through bank loans by the department of fertilisers and use it to clear the monthly subsidy due to fertiliser companies. Yet analysts say that even a six-month delay could prove to be a little too long. Fertiliser companies in India have been reeling under a working capital crunch because of rising input costs; caused specifically by rising prices of crude oil, naphtha and liquefied petroleum gas -raw material that keeps their factories chugging. Moreover, the cost for this raw material has to be paid in advance to the seller. "It's been happening for the past four to five years," says Sankalpa Bhat-tacharjya, manager (commercial intelligence), kpmg. "The ratio of working capital to sales has been consistently increasing." When the budget was announced in February this year, the subsidy allocation was around Rs30,000 crore - less than the Rs40,000 crore allocated in the previous year; a clear indication that all forecast numbers have gone awry. A new allocation has been announced only after the initial allocation was fully exhausted, within the first half of the financial year. For 2008-09, apart from the budgetary allocation, sources say by year end the government subsidy could well touch Rs120,000 crore. When the budget was being readied for Parliament, the fertiliser department had asked for approval from the finance ministry for a sanction of around Rs66,000 crore, but was only promised half the amount. Even now, it took the prime minister's intervention to assure an all-cash deal. Fertiliser companies have not been expanding capacities in the country because the price of key fertilisers, like urea, is controlled by the government, and it isn't profitable for players to do so. Subsidy, which accounts for nearly 80 per cent of the price of some fertilisers, is crucial for the running of the company. "Moreover, demand for fertilisers has been increasing at a constant 6 to 7 per cent annually," says Sudhir Nair, head, Crisil Research. "All fertiliser companies in India are running their factories at full capacity, yet the government had to import eight million tonnes of urea last year. This year the number could well touch 10 million tonnes." In dire straits Since the problem for fertiliser companies has to do with their working capital requirement, it was essential to have the subsidy disbursed in cash. "Almost every player - Chambal Fertilisers, Godavari Fertilisers and Chemicals, Zuari Chambal, Spic Fertilisers, to name a few - is in a bit of a dire straits," says an analyst. While most allocations to the fertiliser industry are in the form of budgetary allocations - and then released in cash - at times in the past, the government has doled it out in the form of bonds. The fertiliser companies in turn sell these to a bank, and receive a monetary benefit in return. The problem is that the bonds, which mature over a long term, have to be sold at a discount - "If they are worth Rsl00, the bank will buy it for Rs95," says Nair - which is why the companies prefer to receive the subsidy in cash. About a month ago, the government announced a new policy to push greenfield investments in the sector. The new policy states that if fertiliser companies go ahead and make investments in developing new capacities, they will be reimbursed on the sale of the products, and that price will be pegged to the import parity price - hovering in the price band of 15 to 16 per cent return on equity. "This is a good move by the government and may see new capacities being developed. Yet even if started today, these facilities are, at least, three years away from starting production," adds Nair.