Subsidy on ‘decontrolled’ fertilisers to be hiked again

India has managed to bring down its explicit fuel subsidies to very low levels over the last couple of years, but these gains seem to be offset by a spike in fertiliser and food subsidies. If statutorily-guaranteed rationing of foodgrains at highly subsidised rates to the bulk of the population is keeping the subsidy on food at very high levels, elevated global commodities prices are jacking up subsidy expenditure on fertilisers.

With retail prices of di-ammonium phosphate (DAP) and muriate of potash (MoP) rising steeply since November 2021, the government may soon announce another sharp increase in the subsidy on these fertilisers in order to reduce the cost of the key farming inputs to farmers, ahead of the kharif sowing season. In FY22, the government had hiked the nutrient-based subsidy (NBS) rates for phosphatic fertilisers by a massive 197%. Another sharp hike in the subsidy would amount to an unravelling of the ‘decontrol’ of the two soil nutrients effected more than a deade ago.

While farmers in the country continue to be insulated from the relentless rise in global prices of urea and natural gas, as the retail prices of the nitrogenous fertiliser are capped and subsidy on it is open-ended, the surge in DAP and MoP prices in the global markets inflates the farmers’ costs as the subsidy on the two products, although high, are capped.

Retail prices of phosphatic and potassic (P&K) fertilisers, including DAP were ‘decontrolled’ in 2010 with the introduction of a ‘fixed-subsidy’ regime as part of NBS mechanism. The subsidy on DAP saw a increase to 60% of cost in FY22, from a little over 30% previously. However, the prices has continued to rise in the global markets even after the subsidy hike. As a result, from a level of 18,000/tonne in November, the retail price of MoP has risen to the current level of32,000/tonne. Similarly, the DAP now costs Rs 27,000/tonne to Indian farmers as against Rs 24,000/tonne in November last year.

Absent in the increase of subsidy, domestic producers of DAP may have to increase its retail prices sharply, industry sources said. Since the prices of the two fertilisers in the global markets may not come down anytime soon given the uncertain geopolitical situation, the government would have no option but to raise the subsidies which are Rs 33,000/tonne on DAP and Rs 6,100/tonne on MoP at present.

It would be the third year in a row in 2022-23 that the annual budget spending on fertiliser subsidy will be much above the Rs 1-trillion mark, as against a lower range of about Rs 70,000-80,000 crore prevailed for a few years in the past. The subsidy bill rose 57% on year to Rs 1.27 trillion in FY21 as the government cleared arrears of about Rs 65,000 crore as part of the Covid-related packages. The surge in the international prices of fertilisers, as well as key ingredients, inflated the subsidy on fertilisers to Rs 1.4 trillion in FY22. Given the elevated global prices of key fertilisers and inputs, the subsidy could be in the range of Rs 1.7-2 trillion in FY23, an all-time high.

India meets nearly half of its DAP requirement via imports (mainly from West Asia and Jordan) while the domestic MoP demand is met solely through imports (from Belarus, Canada and Jordan, etc.). The current landed cost of MoP is nearly double the level a year ago; the rise in cost of DAP imports has been even steeper (see chart).

“The government and the fertiliser manufacturers are virtually back to the drawing board to deal with the situation. The focus is to avoid a further rise in the prices to the farmers,” industry sources told FE.

In the case of urea, farmers pay a fixed price of Rs 242 per bag (45 kg) which covers about 20% of cost of production, the balance is provided by the government as subsidy to fertiliser units. The Centre’s fertiliser subsidy expenditure is expected to be around Rs 1.6 trillion in 2022-23, up from about Rs 1.5 trillion in 2021-22, owing to rise in global prices of fertilisers and natural gas (LNG), the feedstock of urea industry. While there are some concerns about fertiliser shortage in some pockets of the country, an agriculture ministry official told FE the stocks are ‘sufficient’ as of now. “We are constantly assessing the (supply) situation in collaboration with other departments,” he added.

Another price hike in fertilisers ahead of kharif sowing of crops such as paddy, oilseeds, pulses and coarse cereals which will start by June-end could hit farm output in 2021-22 marketing year. The government will soon hold a national kharif conference to draw up a strategy for boosting production, the official quoted above said.

Officials associated with the fertiliser industry, however, said that the fast-changing geo-political situation is likely to impact the fertiliser supplies and prices in the current fiscal. India meets about 75-80% of the volume of consumption of urea from domestic production while the rest is imported from mostly Oman, Egypt, UAE, South African and Ukraine.

India imports small amounts of DAP from Russia. Since the western sanctions on Russia are unlikely to impact that country’s supplies of DAP to Europe and South America, Moscow is unlikely to sell DAP at a discount to India. DAP is used widely along with urea for rabi crops such as wheat, pulses and oilseeds.

An official associated with a fertiliser unit said that in the current volatile scenario the government must have long contracts with countries for importing fertiliers. “We are talking to several countries to make sure that adequate imports are available before the commencement of the sowing season,” a government official said.

Last month, state-owned Indian Potash (IPL) signed an MoU with Israel Chemicals for the annual supply of around 0.6–0.65 million tonne of MoP during 2022- 2027. India has been discussing with Jordan for supplying phosphatic and potassic fertiliser.Under the fertiliser DBT system, subsidies on various fertiliser grades are released to the fertiliser companies on the basis of actual sales made to farmers/buyers through Point of Sale (PoS) devices installed at each retail shop. More than 6.6 crore farmers with Aadhaar authentication have purchased fertiliser using PoS machines in 2021-22.

In a recent reply to a question raised in Parliament, the department of fertilisers stated that “there is no shortage of fertiliser in the country.”
“However, in between the seasons, some states highlighted the shortfall of DAP, particularly in a few districts. Accordingly, based on the requests of the state government, DAP rakes were moved to meet the requirement,” the department said.

According to industry sources, India has an opening stock (as on April 1) of around 9 mt of urea for the current fiscal year, while 8 mt are being to be imported. “There is nothing much to worry about urea availability,” an industry representative said. The opening stock of DAP is around 0.9 mt and it is widely used for rabi crops and estimated requirement for both the seasons is around 4 mt, which will be made available through domestic production as well as imports.