India is likely to overshoot its fertiliser subsidy bill for this financial year by 300 billion rupees ($4.2 billion), three sources with direct knowledge of the matter said, and the government could tap state banks to fund the extra spending.
Prime Minister Narendra Modi's government budgeted 700.8 billion rupees for fertiliser subsidies for the 2018/19 year ending March 31, but the sources said nearly half of the money was used to settle dues from the previous year.
A rise in fertiliser prices overseas and a fall in the rupee currency also made imported fertilisers more expensive, lifting the total subsidy requirement for the year to 1 trillion rupees, the highest ever, the sources said.
Since the Ministry of Finance denied extra money to the Ministry of Chemicals and fertilisers for this year, the government is considering a "special banking arrangement" for local fertiliser companies, two of the sources said.
Such a move would be in keeping with other recent financially-draining measure taken by Modi's government to win the support of farmers, small business owners and the less well-off after the ruling party suffered setbacks in state elections and with a general election due in months.
The bank route could also help the government meet its decade-low headline fiscal deficit target of 3.3 per cent of the gross domestic product.
The Comptroller and Auditor General of India, which has the authority to review state and national budgets, last week criticized the government for increasingly resorting to "off-budget financing here" - such as asking banks to fund subsidy gaps - and said such arrangements had "fiscal implications".
A spokesman for the Ministry of Finance declined to comment. The fertiliser ministry did not immediately respond to an email seeking comment.
In the past, too, India has rolled over subsidy requirements by using special arrangements with banks such as State Bank of India or by delaying payments to companies.
"Considering the poor tax collections, we don't think the government would pay the entire subsidy this year," said a senior official with a co-operative fertiliser company, declining to be named or to identify his employer.
"Like last year, it will be rolled over to the next year."
Monthly goods and services tax collection have been averaging below expectation at 967.8 billion rupees since April, compared with an average target of over 1.2 trillion rupees.
For the next fiscal year, the fertiliser ministry has asked for 1 trillion in subsidies from the finance ministry, which will present an interim budget for next fiscal year on Feb. 1, ahead of a general election due by May.
The Indian government compensates state and private fertiliser companies such as Coromandel International Ltd, Chambal Fertilisers and Chemicals Ltd, Gujarat Narmada Valley fertilisers & Chemicals Ltd and Rashtriya Chemicals and fertilisers Ltd for selling crop nutrients to the country's millions of farmers at discounted rates.