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Published on: Nov. 7, 2022, 4:11 p.m.
Fertiliser subsidy jumps
  • Ballooning subsidy burden: preempting farmer anger?

By Rakesh Joshi. Executive Editor, Business India

Fertiliser prices have risen nearly 30 per cent in the global market since the beginning of 2022. The price rise is driven by factors like surging input costs, supply disruptions due to sanctions (Belarus and Russia) as well as export restrictions in China.  Domestic prices are rising because of continued surge in the prices of pooled natural gas, the key raw material for manufacturing urea. Worried that the increased prices would burden the farmers and extract a political price in the ongoing assembly elections, the Modi government has doubled the fertiliser subsidy to prices to almost Rs52,000 crore for this rabi season. 

A meeting of the Union cabinet has approved a subsidy of Rs51,875 crore to nitrogen (N), phosphorus (P), potash (K) and sulphur (S), used in the making of phosphatic and potassic (P&K) fertilisers for the ongoing rabi season.

According to Mansukh Mandaviya, Union minister for fertilisers & chemicals, the total fertiliser subsidy for the rabi season, including Rs80,000 crore for urea, would be Rs1,38,875 crore. For both the rabi and kharif, the subsidy amount would be Rs2.25 lakh crore. “This is the highest subsidy so far. Last year, it was Rs1.65 lakh crore. We have ensured that there will not be any increase in the fertiliser prices in the next six months,” he said.

According to Mandaviya, a bag of di-ammonium phosphate cost Rs1,350 now, but it would have cost Rs2,650 without the subsidy. On urea, the subsidy was about Rs2,400 per bag and a bag was being sold for about Rs266, instead of the market price of Rs2,700. The Centre had taken up measures to increase production of urea in the country, he added.

While the requirement was 35 million tonnes (mt), the production in the country was 250 mt. Four new plants were coming up and nano urea would also replace the use of urea slowly. Allaying fears, he said the country had enough stock of fertilisers for this season and reports about farmers queue-ing up to buy fertilisers were blown out of proportion.

Major challenges

While the government has been proactive in addressing the subsidy requirements of the industry, Finance Minister Nirmala Sitharaman has indicated that both energy and fertiliser prices, as well as their availability, are the major challenges to the economy in the near term.

The retail selling price of urea is fixed by the government. It is kept as low as 85 per cent below the market prices to encourage farmers to use fertilisers for better crop yield. Urea makers are compensated through subsidy payments.

However, amid the Russia-Ukraine conflict, the price of pooled gas has risen about 10 per cent quarter on quarter in September 2022. “Each dollar’s increase in the price of pooled gas raises the government’s subsidy burden by Rs7,000 crore on domestically produced urea, which accounts for 85 per cent of the production volume,” says Naveen Vaidyanathan, director, Crisil Ratings.

  • With the uptrend in input prices, the current budget allocated could get exhausted in the next 1-2 months

The price of imported urea, which accounts for the balance 15 per cent volume, remains elevated at over about $650 per mt, almost double the historical levels, says Vaidyanathan. This could mean that, overall, subsidies would be rising this fiscal, he adds. 

Notably, this estimate has not factored any revision in the nutrient-based subsidy (NBS) rates for the second half of this fiscal, which comprises the rabi season. For non-urea fertiliser makers, the government pays subsidy as per the NBS rates, which are reviewed in April and October every year.

While prices of phosphoric acid and rock phosphate, key ingredients for non-urea fertilisers, have risen 12 per cent and 37 per cent, respectively, in the six months through September 2022, NBS rates were hiked steeply in the first half of this fiscal.

“With the uptrend in input prices, the current budget allocated could get exhausted in the next 1-2 months,” says Joanne Gonsalves, team leader, Crisil Ratings. “The sector is already seeing a build-up in receivables and therefore, higher working capital debt. Subsidy receivables have more than doubled in August 2022 from about Rs14,000 crore in March 2022, indicates an analysis of the Crisil-rated manufacturers. Hence, increased government allocation and timely disbursement are crucial”.

The government believes the move would help the farmers and pre-empt any anger against it on this count, never mind the pressure on the fisc. “This will enable smooth availability of all P&K fertilisers to the farmers during rabi 2022-23 at the subsidised/affordable prices and support the agriculture sector. The volatility in the international prices of fertilisers and raw materials has been primarily absorbed by the Union government,” a government release said.

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