Three current issues addressed in
The Inside Story of Indian Banking.
Why is Bharat Not Atmanirbhar?
How are subsidies for the Indian farmer siphoned off to benefit corporates?
Are financial institutions put to high risk by bureaucrats and politicians?
Political Fiefdom : Banks and India’s Farm Sector Funding
Chapter 2 : Page 28 to 31 : Extract.
From Self-sufficiency to ‘Largest Fertilizer Importer’
The UPA government took two major policy decisions when it came to power in 2004. One was to increase the procurement of fertilizer through the import route, and the second was to subsidize fertilizer prices heavily, including prices of imported fertilizer. This higher subsidy policy resulted in the consumption of imported fertilizer rising sixfold (Fig 2.1 -only in PDF/ print ) less than 2 million metric tonnes to over 12 million metric tonnes—between 2002 and 2012. The domestic fertilizer production, on the other hand, stagnated between 14 million metric tonnes and 15 million metric tonnes during the same period. Fertilizer importers began to make heavy profits during those years, as India became the largest fertilizer importer in the world.
There was a five-fold rise in subsidies during the period 2007 to 2010, peaking at Rs. 67,200 crore. The entire banking system, and other financial institutions, were at high risk during this import spree.
Though India had two experienced state-owned importers in MMTC and STC, most of the importing of fertilizer during this period was done by the little-known Indian Potash Ltd (IPL), a private company in which IFFCO had 34 per cent stake. IPL had, on its board, several IAS officers, and like IFFCO, it had had one P.S. Gahlaut as its managing director for more than 20 years, well past any reasonable superannuation age. Apart from IFFCO, quite a few other fertilizer companies had minor stakes in IPL, which had a tiny equity base of less than Rs10 crore and a turnover of around Rs 1,600 crore in the year 2004.
After the fertilizer policy on imports was modified, IPL aggressively stepped into the shoes of the state-owned importers, with political support. In May 2007, Dr J.S. Sarma, the then secretary in the Department of Fertilizer (DOF), issued two notifications to chief secretaries of states, to give 100 per cent advance for the import of fertilizers to IPL on top priority. The two orders made IPL virtually a monopoly importer of fertilizers and armed it with huge advances, though fertilizers could be, and usually were, imported on Letters of Credit (LCs).
Between 2006 and 2008, IPL’s loan funds grew tenfold, from Rs 228 crore to well over Rs 2,030 crore, and this debt was dangerously leveraged at an extremely high debt-equity ratio* of 15:1 (Fig. 2.2 -only in PDF/print ). The safe leveraging norm is usually 2:1. In IPL’s case, its debt was 15 times its net worth during the period. Its auditors, Deloitte, Haskins & Sells, did not red flag it, and the debt doubled the following year. The operations put the entire banking industry at risk as the LCs were drawn on nearly half a dozen PSBs, with SBI, PNB and Allahabad Bank in the fray.
Though such high leveraging is not permitted by the RBI, thanks to political patronage, IPL continued with high leveraging for several years—and this does not include the non-fund based borrowings.
Import Price Spike and Irregularities
International prices of Urea and Di-Ammonium Phosphate (DAP) rose to their peaks in 2008, as India became the largest global importer of fertilizers. In 2002, India was a self-sufficient country with negligible fertilizer imports. After India opened imports in 2004, international urea prices jumped by 44 per cent in the year 2007, to $404 per metric tonne, while DAP prices jumped two and a half times to $790 per metric tonne. A report from the American Antitrust Institute stated that the profitability of American fertilizer companies went up by 300 per cent during 2007 and 2008, when all other industries were suffering from the banking recession.
This was the biggest spurt in fertilizer prices in four decades. Using round-trip trading and with the help of international fertilizer cartels, the prices of procured fertilizer kept on rising. The subsidies for the small farmer were usurped while the big fertilizer companies and importers got huge subsidies, which were borne by the taxpayer. The strong Indian demand made the fertilizer markets extremely volatile through 2009, despite a global slowdown.
As per the Comptroller and Auditor General (CAG), between June 2007 and February 2008, 17.58 lakh metric tonnes of DAP were imported in 43 shipments by IPL against 100 per cent advances from state governments, for which IPL failed to submit the requisite monthly sales reports even after two years. Imports of fertilizer through IPL continued and rose from Rs.3,600 crore in 2006–07 to Rs.32,600 crore in 2007–08. Despite CAG’s censure on quantity and price mismatches in fertilizer purchases by IPL during the 2009 audit, no action was taken.
Looking into it in detail, we find that not only was the Indian buying volume huge, it had no relevance to market prices. The round-trip trading and over-invoicing theory also gains ground because the IPL balance sheets show several gross aberrations and undue risks taken—which, surprisingly, were not pointed out by its auditor, Deloitte, Haskins & Sells. Fertilizer subsidies, which were supposed to benefit the farmers, were usurped by the nexus of politicians, bureaucrats and corrupt businessmen who imported the fertilizers. Banks and financial institutions bore the risk as importers made hay.
Related Posts :
#Farmer #FarmEconomics #FarmSubsidies #FarmBill2020
This was one of the biggest scams in the last decade that went uninvestigated, despite the CAG flagging it. The mammoth subsidies from the taxpayers’ money meant to facilitate the farmer, instead landed in the fertilizer importers’ kitty, thanks to the politicians and bureaucrats who milked the system and also put the banking industry at risk.
Excerpts from the book : The Inside Story of Indian Banking