Budget FY21: Mixed bag for Fertilizer sector

June 15, 2019 (MLN): On the agricultural front, the government has been in a continuous effort to increase welfare of the farmers through various measures. In the budget for the FY21, the government has allocated Rs 10 billion to combat locust plague in Agriculture.

The amount allocated to address this threat is important as the crop damage due to locust attack has recently worsened alarmingly. This step is a major positive for the fertilizer sector as it might ultimately ensure that fertilizer sales remain close to previous years’ average, a report by Intermarket securities stated. In addition, this would also help in ensuring food security.

This is in addition to the to the Rs 50 billion agriculture package announced earlier. To recall that ECC had approved a package of Rs 50 billion for the agriculture sector, which includes a subsidy of Rs 37 billion to farmers in the form of Rs 925/bag on DAP and other phosphatic fertilizers and Rs243/bag on urea and other nitrogen fertilizers. Continuation of Subsidy to fertilizer sector would keep the demand of fertilizer products integral in the coming months.

Additionally, government has decided to eliminate advance tax under section 236U on insurance premium. For non-filers it is 0% to 4% for general insurance and 0% to 1% for life insurance if the annual premium exceeds Rs 0.3 million. As per Shajar Capital research, this would have a positive impact on fertilizer sector as this will result in improved gross premium earned.

The government also intends to boost productivity in the agriculture products such as wheat, cotton sugarcane, rice and oil seed crops as in FY21 budget, the government has allocated Rs 14 billion under National Agriculture Emergence Programme to uplift agriculture and livestock sector which includes Rs 12 billion for Food & Agriculture and Food Security.  

Apart from this, government has taken several other important decisions which might have a neutral impact on the fertilizer sector’s standing. For instance, Subsidy to LNG sector for providing gas on lower rates to industry is revised down to Rs10bn from Rs24bn in FY20, in line with the lower international oil prices, this would have a negative to neutral impact on LNG based fertilizer plants i.e. Fatimafert (Pvt) Limited and Agritech Limited. The impact of which will be neutral as these plants have very minimal impact on total fertilizer production when operational, another report by Taurus Securities highlighted.

Moreover, decrease in amount for subsidized gas to RLNG plant has made the government’s stance clear that it does not want RLNG based plants to operate, Intermarket Securities in its report mentioned.

Furthermore, rationalizing tax on imports by shifting from person specific rate to goods specific rates cascaded according to the type of goods, with tax at 1% for capital goods, 2% for raw materials and 5.5% for finished goods irrespective of status of the importer, would cause neutral impact on the fertilizer as the duty structure is been maintained.

The government kept GST on all fertilizer products unchanged at 2% while GST (input) on feed gas and phosphoric acid remained unchanged at 5%, this again would have a neutral impact on the fertilizer sector.

Speaking of GIDC, the government has set GIDC target of Rs15 billion against Rs 30 billion in FY21.

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