Centre's fertiliser subsidy bill in FY23 may shoot up to Rs 2.3 trillion

The Centre’s fertiliser subsidy outlay for the current fiscal year could be as high as Rs 2.10-2.30 trillion because of sustained high commodity and oil prices due to the war in Ukraine, Business Standard has learnt. This will be the highest-ever spending on fertiliser subsidy in a year by a considerable margin; the FY23 Budget estimate is at Rs 1.05 trillion.

Also, the Cabinet is soon expected to take up a proposal to increase the subsidy for urea-based fertilisers to Rs 1.20 trillion, from the current Rs 67,000 crore. “The Cabinet may take up the proposal within the next two weeks,” a top official said.

Although the fiscal year has just begun, the estimates provided in the 2022 Union Budget do not hold any more because they were presented much before Russia’s attack on Ukraine. Officials have not revised the Budget estimates, saying that additional amounts would be provided in the upcoming Supplementary Demand of Grants, wherever necessary.

“Commodity prices are expected to remain volatile for some more time. Fertiliser subsidy may cross Rs 2 trillion and reach as high as Rs 2.30 trillion,” said the official quoted above.

Since the start of the Russia-Ukraine war, urea production cost has jumped because of high gas rates; prices of non-urea fertilisers, too, have been impacted due to a shortage of key raw materials and also finished products. 

According to ratings agency ICRA, for every $1/mmBtu rise in pooled gas price, the subsidy requirement for the urea sector may rise by around Rs 4,500-5,000 crore.

Between FY22 and FY23, rough estimates show that pooled gas price has risen by almost 75 per cent due to supply shortage. The gas price comprises over 70 per cent of the raw material cost of producing urea. India also imports almost 30 per cent of its annual urea consumption.

“Over 85 per cent of the subsidy arrears could be contributed by urea. This is because pooled gas prices ― a blend of domestic gas and imported LNG considered for billing to fertiliser plants ― shot up more than 75 per cent last fiscal year, and are expected to remain elevated for the most part of this fiscal year because of the Russia-Ukraine conflict,” rating agency CRISIL said in a recent report, quoting its director Nitesh Jain.

For non-urea fertilisers, though companies have raised prices in the retail markets recently, the move is not enough to cover their high production cost. These fertilisers are covered under the nutrient-based subsidy regime.

Industry officials said fertiliser demand in the coming kharif season is expected to be robust because of the likelihood of a normal monsoon and increase in acreage of major crops due to better price realisation in the preceding rabi season.

India imports almost all of its potassium chloride (MOP) fertiliser requirements, while the import component in di-ammonium phosphate (DAP) is around half the annual consumption.

In the case of nitrogen-phosphorus-potassium (NPK) fertilisers, the country produces around 80 per cent of the annual requirement; in the case of urea, a third of its annual demand needs to be imported.

According to trade and industry sources, Russia, Ukraine, and Belarus account for almost 20 per cent of phosphoric acid imported into India. Russia is also one of the world’s largest exporters of ammonia and 10-15 per cent of India’s annual ammonia supplies come from that country. That apart, almost 20 per cent of the finished MOP supplies come from neighbouring Belarus.

Since the start of the Russia-Ukraine war, the landed price of finished DAP in India has gone up from around $900 per tonne to almost $1,050-$1,100 per tonne, an increase of 17-22 per cent. The landed price of phosphoric acid, which is fixed on a quarterly basis, was pegged at $1,530 per tonne for the January to March quarter, up from $1,330 per tonne for the quarter before that, an increase of almost 15 per cent.

As far as the availability of fertilisers is concerned, the data from official websites shows that in February 2022 around 10.05 million tonnes of fertilisers were available in the country -- 39.38 per cent less than the same period last year. Reports said several companies have stopped importing fertilisers as their costs have gone up sharply in the absence of commensurate subsidy support. This may have a severe impact on their availability in the next few months just ahead of the kharif sowing season.