Subsidies On Decontrolled Fertilisers To Be Increased Again

Over the past few years, India has managed to reduce its explicit fuel subsidies to extremely low levels, but these improvements appear to have been countered by an increase in fertiliser and food subsidies. If statutorily-guaranteed rationing of food grains at heavily subsidised rates to the majority of the population keeps the food subsidy high, rising global commodity costs are driving up fertiliser subsidy spending.

With retail prices of di-ammonium phosphate (DAP) and muriate of potash (MoP) having risen sharply since November 2021, the government may soon announce another large hike in the subsidy on these fertilisers to help farmers save money ahead of the kharif planting season. In FY22, the government increased the phosphatic fertiliser nutrient-based subsidy (NBS) rates by a staggering 197 percent. Another substantial increase in the subsidy would undo the 'decontrol' of two soil nutrients that began more than a decade ago.

While farmers in the country remain protected from the relentless rise in global urea and natural gas prices because retail prices of the nitrogenous fertiliser are capped and the subsidy on it is open-ended, the rise in DAP and MoP prices in the global markets inflates farmers' costs because the subsidy on the two products, while high, is capped.

With the implementation of a 'fixed-subsidy' regime as part of the NBS mechanism in 2010, retail prices of phosphatic and potassium (P&K) fertilisers, including DAP, were 'decontrolled.' The DAP subsidy increased to 60% of the cost in FY22, up from a little more than 30% earlier. However, even after the subsidy increase, prices in worldwide markets have continued to grow. As a result, the retail price of MoP has climbed from 18,000/tonne in November to the present amount of 32,000/tonne. Similarly, the DAP now costs Indian farmers Rs 27,000 per tonne, up from Rs 24,000 per tonne in November last year.

Domestic manufacturers of DAP may be forced to raise retail prices considerably if the subsidy is not increased, according to industry sources. Given the unpredictable geopolitical environment, the government would have no choice but to increase the subsidies, which are now Rs 33,000 per tonne for DAP and Rs 6,100 per tonne for MoP.

In 2022-23, the annual budget spending on fertiliser subsidy would be well over the Rs 1-trillion threshold for the third year in a row, compared to a lower range of roughly Rs 70,000-80,000 crore for a few years in the past. The government paid arrears of nearly Rs 65,000 crore as part of the Covid-related packages, bringing the subsidy cost up 57 percent year on year to Rs 1.27 trillion in FY21. The rise in worldwide fertiliser costs, as well as crucial components, pushed the fertiliser subsidy to Rs 1.4 trillion in FY22. The subsidy might be in the region of Rs 1.7-2 trillion in FY23, an all-time high, due to rising worldwide costs of essential fertilisers and inputs.

Imports account for roughly half of India's DAP requirement (mostly from West Asia and Jordan), whereas imports account for all of India's MoP demand (from Belarus, Canada and Jordan, etc.). The current landing cost of MoP is approximately double what it was a year ago; the cost of DAP imports has risen even more dramatically (see chart).

"To cope with the problem, the government and fertiliser makers have essentially gone back to square one." "The goal is to avert a further increase in farmer prices," industry insiders told.

Farmers pay a set price of Rs 242 per bag (45 kg) for urea, which covers around 20% of the cost of production; the government provides the rest as a subsidy to fertiliser companies. Due to rising worldwide costs of fertilisers and natural gas (LNG), the feedstock for the urea sector, the Centre's fertiliser subsidy expenditure is estimated to be over Rs 1.6 trillion in 2022-23, up from around Rs 1.5 trillion in 2021-22. While there are some concerns about fertiliser shortages in specific areas of the nation, an agricultural ministry source told FE that the country's inventories are currently'sufficient.' "In collaboration with other departments, we are continually reviewing the (supply) situation," he added.

DAP is imported in limited quantities from Russia by India. Because Russia's supply of DAP to Europe and South America are unlikely to be affected by Western sanctions, Moscow is unlikely to sell DAP at a discount to India. DAP is commonly used in rabi crops including wheat, pulses, and oilseeds, coupled with urea.

According to a representative from a fertiliser company, the government needs long-term contracts with nations to import fertilisers in the current uncertain environment. "We're in talks with a number of nations to ensure that appropriate imports are available before the planting season begins," a ministry official said.

Indian Potash (IPL), a state-owned company, inked an MoU with Israel Chemicals last month for an annual supply of 0.6–0.65 million tonne of MoP from 2022 to 2027. India and Jordan have been considering the provision of phosphatic and potassic fertiliser. Subsidies on various fertiliser grades are distributed to fertiliser businesses under the fertiliser DBT system based on actual sales to farmers/buyers using Point of Sale (PoS) devices installed at each retail outlet. In 2021-22, more than 6.6 crore farmers with Aadhaar identification used PoS devices to buy fertiliser.

The department of fertilisers recently claimed in response to a question addressed in Parliament that "there is no scarcity of fertiliser in the country."

"However, in the interim, certain states, notably in a few districts, emphasised the DAP deficiency." DAP rakes were shifted to satisfy the criteria as a result of the state government's demands," the agency stated.

According to industry sources, India has an opening stock of roughly 9 million tonnes of urea for the current fiscal year (as of April 1), with another 8 million tonnes expected to be imported. "There isn't much to be concerned about in terms of urea supply," a spokesman from the sector stated. DAP's opening stock is approximately 0.9 million tonnes, and it's widely utilised for rabi crops. The expected demand for both seasons is over 4 million tonnes, which will be met by local production and imports.