Fertilizer subsidies may touch all-time high this year: Crisil

India’s fertilizer subsidy bill could hit a record high this year, in the range of ₹1.65 lakh crore to ₹1.9 lakh crore, warranting a reworking of the Centre’s fiscal math outlined in the Budget, rating agency Crisil said on Thursday.

The government has budgeted for a fertilizer subsidy bill of ₹1.05 lakh crore for 2022-23, but that was prior to the unprecedented rise in raw material costs and global fertilizer prices following the Russian invasion of Ukraine. If the Centre doesn’t step in with a fiscal intervention, fertilizer subsidy arrears could touch an all-time high of more than ₹75,000 crore by March 2023, the agency said.

“Our assessment assumes approximately 3% growth in demand for fertilizers and a moderation of raw material and fertilizer prices in the second half of this fiscal. If the demand is higher than expected, or input prices do not soften even in the second half, the subsidy bill may inch up to ₹1.8-₹1.9 lakh crore,” Crisil said in a note.

Subsidies for urea, whose retail selling price is fixed by the government, are expected to be the largest contributor to the subsidy bill. The government keeps the urea price lower than market rates to nudge farmers to enhance their crop yields by using fertilizers, and goes on to remit subsidies to urea producers.

“While this protects the profitability of urea makers to a large extent, the retail price remaining unchanged despite rising costs will mean the government will have to foot a bigger subsidy bill,” the rating agency pointed out.

In the case of non-urea fertilizers, where input costs have almost doubled, the government pays subsidy linked to nutrient-based rates that are yet to be announced for this year. Prices of phosphoric acid and rock phosphate, for instance, had increased by 92% and 99%, respectively, over the 12-month period till March 2022.

“Given that Russia, Belarus and Ukraine are the major suppliers of non-urea fertilizer ingredients, the ongoing conflict will only exacerbate the situation,” Crisil said. Though producers have hiked prices for such fertilizers, they may not be adequate to cover the higher input costs.